Chapter Eleven
Pricing Strategies
What Is a Price?
Price is the amount of money charged for a
product or service. It is the sum of all the
values that consumers give up in order to
gain the benefits of having or using a
product or service.
Price is the only element in the marketing
mix that produces revenue; all other
elements represent costs
Major Pricing Strategies
Major Pricing Strategies
Customer Value-Based Pricing
Value-based pricing uses the
buyers’ perceptions of value,
not the sellers cost, as the key
to pricing
• Value-based pricing is
customer driven
• Cost-based pricing is product
driven
• Price is considered before the
marketing program is set
Major Pricing Strategies
Cost-Based Pricing
Cost-based pricing setting prices based on the
costs for producing, distributing, and selling
the product plus a fair rate of return for
effort and risk
Cost-based pricing adds a standard markup to
the cost of the product
New-Product Pricing Strategies
Market-skimming pricing is a strategy with high
initial prices to “skim” revenue layers from the
market
• Product quality and image must support the price
• Buyers must want the product at the price
• Costs of producing the product in small volume
should not cancel the advantage of higher prices
• Competitors should not be able to enter the market
easily
New-Product Pricing Strategies
Market-penetration pricing sets a low initial
price in order to penetrate the market quickly
and deeply to attract a large number of buyers
quickly to gain market share
• Price sensitive market
• Inverse relationship of production and
distribution cost to sales growth
• Low prices must keep competition out of the
market
Product Mix Pricing Strategies
Product Mix Pricing Strategies
Product line pricing takes into account the cost
differences between products in the line, customer
evaluation of their features, and competitors’
prices
Optional-product pricing takes into account optional
or accessory products along with the main product
Product bundle pricing combines several products at
a reduced price
Product Mix Pricing Strategies
Captive-product pricing involves products
that must be used along with the main
product
By-product pricing refers to products with
little or no value produced as a result of
the main product. Producers will seek
little or no profit other than the cost to
cover storage and delivery.
Price-Adjustment Strategies
Price-Adjustment Strategies
Discount and allowance pricing reduces
prices to reward customer responses such
as paying early or promoting the product
• Discounts—cash, quantity, trade, seasonal
• Allowances—trade-in, promotional
Price-Adjustment Strategies
Segmented pricing is used when a company
sells a product at two or more prices even
though the difference is not based on cost
Price-Adjustment Strategies
Segmented Pricing
• Customer-segment pricing
• Product-form pricing
• Location-based pricing
• Time-based pricing
Price-Adjustment Strategies
Segmented Pricing
To be effective:
• Market must be segment able
• Segments must show different degrees of
demand
• Costs of segmenting and reaching the
market cannot exceed the extra revenue
obtained from the price difference
• Must be legal
Price-Adjustment Strategies
Psychological pricing occurs when sellers
consider the psychology of prices and not
simply the economics
Reference prices are prices that buyers carry in
their minds and refer to when looking at a
given product
– Noting current prices
– Remembering past prices
– Assessing the buying situations
Price-Adjustment Strategies
Promotional pricing is when prices are
temporarily priced below list price or
cost to increase demand
• Discount
• Special event pricing
• Limited time offers
• Low-interest financing
Price-Adjustment Strategies
Risks of promotional pricing
• Used too frequently, and copied by
competitors, can create “deal-prone”
customers who will wait for promotions
and avoid buying at regular price
• Can erode brand value in eyes of customers
• Creates price wars
Price-Adjustment Strategies
Geographical pricing is used for customers in
different parts of the country or the world
• FOB-origin pricing
• Uniform-delivered pricing
• Zone pricing
• Basing-point pricing
• Freight-absorption pricing
Price-Adjustment Strategies
• FOB-origin (free on board) pricing means
that the goods are delivered to the carrier
and the title and responsibility passes to
the customer
• Uniform-delivered pricing means the
company charges the same price plus
freight to all customers, regardless of
location
Price-Adjustment Strategies
• Zone pricing means that the company sets
up two or more zones where customers
within a given zone pay a single total price
• Basing-point pricing means that a seller
selects a given city as a “basing point” and
charges all customers the freight cost
associated from that city to the customer
location, regardless of the city from which
the goods are actually shipped
Price-Adjustment Strategies
• Freight-absorption pricing means the seller
absorbs all or part of the actual freight
charge as an incentive to attract business in
competitive markets
Public Policy and Pricing
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
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