CHAPTER 11: PRICING AND PRICING STRATEGIES

Marketing Mix
 The marketing mix is the set of controllable tactical marketing tools – product, price,
place, and promotion – that the firm blends to produce the response it wants in the
target market.

What is Price?
 The amount of money expected or required, or given in payment for a product or
service.

Pricing strategies
 A business can use a variety of pricing strategies when selling a product or service. The
price can be set to maximize profitability for each unit sold or from the market overall. It
can be used to defend an existing market from new entrants, to increase market share
within a market or to enter a new market.

The "4Ps" of Pricing

 Pricing is one of the most vital and highly demanded component within the theory of
marketing mix.
 It helps consumers to have an image of the standards the firm has to offer through their
products, creating firms to have an exceptional reputation in the market. The firm's
decision on the price of the product and the pricing strategy impacts the consumer's
decision on whether or not to purchase the product.
 When firms are deciding to consider applying any type of pricing strategy they must be
aware of the following reasons in order to make an appropriate choice which will
benefit their business. The competition within the market today is extremely high, for
this reason, businesses must be attentive to their opponent's actions in order to have
the comparative advantage in the market.
 The technology of internet usage has increased and developed dramatically therefore,
price comparisons can be done by customers through online access. Consumers are very
selective regarding the purchases they make due to their knowledge of the monetary
value. Firms must be mindful of these factor and price their products accordingly.
Nine laws of price sensitivity and consumer psychology
In their book, The Strategy and Tactics of Pricing, Thomas Nagle and Reed Holden outline nine
"laws" or factors that influence how a consumer perceives a given price and how price-sensitive
they are likely to be with respect to different purchase decisions.
They are:
1. Reference Price Effect – buyer's price sensitivity for a given product increases the higher the
product's price relative to perceived alternatives. Perceived alternatives can vary by buyer
segment, by occasion, and other factors.
2. Difficult Comparison Effect – buyers are less sensitive to the price of a known or more
reputable product when they have difficulty comparing it to potential alternatives.
3. Switching Costs Effect – the higher the product-specific investment a buyer must make to
switch suppliers, the less price sensitive that buyer is when choosing between alternatives.
4. Price-Quality Effect – buyers are less sensitive to price the more that higher prices signal
higher quality. Products for which this effect is particularly relevant include: image products,
exclusive products, and products with minimal cues for quality.
5. Expenditure Effect – buyers are more price-sensitive when the expense accounts for a large
percentage of buyers' available income or budget.
6. End-Benefit Effect – the effect refers to the relationship a given purchase has to a larger
overall benefit, and is divided into two parts:
Derived demand: The more sensitive buyers are to the price of the end benefit, the more
sensitive they will be to the prices of those products that contribute to that benefit.
Price proportion cost: The price proportion cost refers to the percent of the total cost of the end
benefit accounted for by a given component that helps to produce the end benefit (e.g., think
CPU and PCs). The smaller the given components share of the total cost of the end benefit, the
less sensitive buyers will be to the components' price.
7. Shared-cost Effect – the smaller the portion of the purchase price buyers must pay for
themselves, the less price sensitive they will be.
8. Fairness Effect – buyers are more sensitive to the price of a product when the price is outside
the range they perceive as "fair" or "reasonable" given the purchase context.
9. The Framing Effect – buyers are more price sensitive when they perceive the price as a loss
rather than a forgone gain, and they have greater price sensitivity when the price is paid
separately rather than as part of a bundle.
5 Major Pricing Strategies
1. Cost-plus pricing - simply calculating your costs and adding a mark-up
2. Competitive pricing - setting a price based on what the competition charges
3. Price skimming - setting a high price and lowering it as the market evolves. Price skimming
sees a company charge a higher price because it has a substantial competitive advantage.
However, the advantage tends not to be sustainable. The high price attracts new competitors
into the market, and the price inevitably falls due to increased supply.
4. Penetration pricing - setting a price low to enter a competitive market and raising it later.
The price charged for products and services is set artificially low in order to gain market share.
Once this is achieved, the price is increased. This approach was commonly used by
Telecommunication companies. These companies need to land grab large numbers of
consumers to make it worth their while, so they offer free telephones or satellite dishes at
discounted rates in order to get people to sign up for their services. Once there is a large
number of subscribers prices gradually creep up.
5. Price bundling - combining products and/or services to increase value, and therefore price.
Here sellers combine several products in the same package. This also serves to move old stock.
Blu-ray and videogames are often sold using the bundle approach once they reach the end of
their product life cycle. You might also see product bundle pricing with the sale of items at
auction, where an attractive item may be included in a lot with a box of less interesting things
so that you must bid for the entire lot. It’s a good way of moving slow selling products, and in a
way is another form of promotional pricing.

Pricing Strategies Objectives

 Long Run Profits
 Short Run Profits
 Increase Sales Volume
 Company Growth
 Match Competitor Price
 Create Interest & Excitement about the Product
 Discourage Competitors from cutting Price
 Social, Ideological, and Ethical Objectives
 Discourage New Entrants
 Survival
Decisions in Pricing Strategy
 Fixed & Variable Costs
 Competition
 Company Objectives
 Proposed Positioning Strategies
 Target Market & Willingness to pay
 External Market Demand
 Internal Factors ; Product Cost & Objectives of the company

Price Adjustment Strategies

Companies usually adjust their basic prices to account for various customer differences and
changing situations. Here are the seven price adjustment strategies:
1. Discount Allowance Pricing - Most companies adjust their basic price to reward
customers for certain responses, such as paying bills early, volume purchases, and off-
season buying. These price adjustments— called discounts and allowances—can take
many forms. One form of discount is a cash discount, a price reduction to buyers who
pay their bills promptly. A typical example is “2/10, net 30,” which means that although
payment is due within 30 days, the buyer can deduct 2 percent if the bill is paid within 10
days. A quantity discount is a price reduction to buyers who buy large volumes. A seller
offers a functional discount (also called a trade discount) to trade-channel members who
perform certain functions, such as selling, storing, and record keeping. A seasonal
discount is a price reduction to buyers who buy merchandise or services out of season.
 Discount - A straight reduction in price on purchases during a stated period of
time or of larger quantities.
 Allowances - are another type of reduction from the list price. For example,
trade-in allowances are price reductions given for turning in an old item when
buying a new one. Trade-in allowances are most common in the automobile
industry, but they are also given for other durable goods.
 Promotional allowances - are payments or price reductions that reward
2. Segmented Pricing- Selling a product or service at two or more prices, where the
difference in prices is not based on differences in costs.
 Customer-segment pricing - different customers pay different prices for the same
product or service. For example, museums, movie theaters, and retail stores may
charge lower prices for students and senior citizens.
 Product form pricing - different versions of the product are priced differently but
not according to differences in their costs. For instance, a round-trip economy
seat on a flight from New York to London might cost $1,100, whereas a business-
class seat on the same flight might cost $3,400 or more.
  Location-based pricing - a company charges different prices for different
locations, even though the cost of offering each location is the same. For
instance, state universities charge higher tuition for out-of-state students, and
theaters vary their seat prices because of audience preferences for certain
locations.
 Time-based pricing - a firm varies its price by the season, the month, the day,
and even the hour. For example, movie theaters charge matinee pricing during
the daytime, and resorts give weekend and seasonal discounts.
3. Psychological Pricing- Pricing that considers the psychology of prices and not simply the
economics; the price is used to say something about the product.
4. Promotional Pricing - Temporarily pricing products below the list price, and sometimes
even below cost, to increase short-run sales.
5. Geographical Pricing- Setting prices for customers located in different parts of the
country or world.
 FOB-origin pricing - Pricing in which goods are placed free on board a carrier; the
customer pays the freight from the factory to the destination.
 Uniform-delivered pricing - Pricing in which the company charges the same price
plus freight to all customers, regardless of their location.
 Zone pricing - Pricing in which the company sets up two or more zones. All
customers within a zone pay the same total price; the more distant the zone, the
higher the price.
 Basing-point pricing - Pricing in which the seller designates some city as a basing
point and charges all customers the freight cost from that city to the customer.
 Basing-point pricing - Pricing in which the seller designates some city as a basing
point and charges all customers the freight cost from that city to the customer.
6. Dynamic and Online Pricing - Adjusting prices continually to meet the characteristics and
needs of individual customers and situations.
7. International Pricing - in different countries. In some cases, a company can set a uniform
worldwide price.

Price Changes
 After developing their pricing structures and strategies, companies often face situations
in which they must initiate price changes or respond to price changes by competitors.
Initiating Price Changes - In some cases, the company may find it desirable to initiate either a
price cut or a price increase. In both cases, it must anticipate possible buyer and competitor
reactions.
 Initiating Price Cuts - Several situations may lead a firm to consider cutting its price. One
such circumstance is excess capacity. Another is falling demand in the face of strong
 price competition or a weakened economy. In such cases, the firm may aggressively cut
prices to boost sales and market share. A company may also cut prices in a drive to
dominate the market through lower costs. Either the company starts with lower costs
than its competitors, or it cuts prices in the hope of gaining market share that will
further cut costs through larger volume.
 Initiating Price Increases - A successful price increase can greatly improve profits. For
example, if the company’s profit margin is 3 percent of sales, a 1 percent price increase
will boost profits by 33 percent if sales volume is unaffected. A major factor in price
increases is cost inflation. Rising costs squeeze profit margins and lead companies to
pass cost increases along to customers. Another factor leading to price increases is over-
demand: When a company cannot supply all that its customers need, it may raise its
prices, ration products to customers, or both—consider today’s worldwide oil and gas
industry.

Public Policy and Pricing

Pricing within Channel levels
 Price-fixing - Federal legislation on price-fixing states that sellers must set prices without
talking to competitors. Otherwise, price collusion is suspected. Price-fixing is illegal per
se—that is, the government does not accept any excuses for price-fixing.
 Predatory pricing - selling below cost with the intention of punishing a competitor or
gaining higher long-run profits by putting competitors out of business. This protects
small sellers from larger ones that might sell items below cost temporarily or in a specific
locale to drive them out of business. The biggest problem is determining just what
constitutes predatory pricing behavior. Selling below cost to unload excess inventory is
not considered predatory; selling below cost to drive out competitors is. Thus, a given
action may or may not be predatory depending on intent, and intent can be very difficult
to determine or prove.
Pricing across Channel levels
 Deceptive Pricing - Occurs when a seller states prices or price savings that mislead
consumers or are not actually available to consumers. This might involve bogus
reference or comparison prices, as when a retailer sets artificially high “regular” prices
and then announces “sale” prices close to its previous everyday prices.
 Scanner Fraud - The widespread use of scanner-based computer checkouts has led to
increasing complaints of retailers overcharging their customers. Most of these
overcharges result from poor management, such as a failure to enter current or sale
prices into the system. Other cases, however, involve intentional overcharges.