C H A P T E R

STRATEGIC PRICING METHODS

14

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

14-2

L E A R N I N G O B J E C T I V E S

Strategic Pricing Methods

LO1 Identify three methods that firms use to set their prices.

LO2 Describe the difference between an everyday low price strategy (EDLP) and a high/low strategy.

LO3 Explain the difference between a price skimming and a market penetration pricing strategy.

LO4 Identify tactics used to reduce prices to consumers.

LO5 Identify tactics used to reduce prices to businesses.

LO6 List pricing practices that have the potential to deceive customers.

14-3

http://www.Groupon.com

How do you move from EDLP to higher prices?

Payless Website

Courtesy Groupon Inc.

14-4

Pricing Strategies

14-5

Cost-Based Methods

• Cost-base pricing

methods start with cost

• All costs calculated on a per unit basis

• Assumes costs don’t

vary for different levels of production

Ryan McVay/Getty Images

14-6

Competition-Based Methods

• Set prices to signal information of how product compares with competitors

• Premium pricing

Zillow Website AP Photo/Matthias Rietschel

14-7

Value-Based Methods

• Setting prices that focus on the overall value of the product

• Consumer perceptions

Mercedes-Benz Commercial Courtesy Rolex USA

14-8

Improvement Value Method

14-9

Costs of Ownership Method

• Consumers may be willing to spend more initially if, over the lifetime, the product will eventually cost less to own

• How do marketers justify the high cost of solar energy panels to homeowners?

Courtesy Citizen Watch Company

14-10

1. What are the three different strategies for setting pricing?

2. How can you use value-based strategies for setting prices?

Check Yourself

14-11

Pricing Strategies

Everyday low

pricing (EDLP)

High/Low Pricing

14-12

How to Pick the Right Diamond

14-13

vs..

Everyday low pricing (EDLP)

High/low pricing

Everyday Low Pricing vs.. High/Low Pricing

Create value in different ways

EDLP saves search costs of finding lowest overall prices

High/low provides the thrill of the chase for the lowest price

Photodisc Collection/Getty Images

©Lars A Niki

14-14

Odd Prices

• Odd prices may be so traditional that sellers are afraid to round them off

• They may suggest a good deal

• They may also suggest low quality

©Jeff Greenberg/PhotoEdit

14-15

Consumers’ Use of Reference Prices

External reference

price

Internal reference

price

Photodisc Collection/Getty Images

14-16

Reference Pricing

• How do consumers use reference pricing when shopping for cars?

• How does this ad help the consumer?

Courtesy Ford Motor Company

14-17

Wine ranges in price from under $5 a bottle to over $100K a bottle. How do you know which to choose?

The Price-Quality Relationship

• Most inexperienced consumers use price as an indicator of quality

• Price becomes crucial when consumers have little knowledge about certain products/brands

Steve Mason/Getty Images

14-18

Price Lining

• Marketers establish a price floor and price ceiling and set prices in between

• Allows for easy comparison

©M Hruby

14-19

New Product Pricing Strategies

Market Penetration Pricing

Price skimming

14-20

1. Explain the difference between EDLP and high/low pricing.

2. What pricing strategies should be considered when introducing a new product?

Check Yourself

14-21

Pricing strategy Pricing tactics

Pricing Tactics

Digital Vision/Getty Images

Digital Vision/Getty Images

14-22

Pricing Tactics Aimed at Consumers

Mark downs

Quantity Discounts

Seasonal Discounts

Coupons

Rebates

Leasing

Price Bundling

Leader Pricing

14-23

Markdowns

• An integral component of high/low pricing strategy

• Enables retailers to get rid of slow moving or obsolete merchandise

• Used to generate store traffic

14-24

Quantity Discounts for Consumers

Size discount

The more you buy the cheaper the

unit cost

©M Hruby

14-25

Seasonal Discounts

Encourage consumers to use services or purchase products year round

Getty Images ©Brand X Pictures/PunchStock Tomi/PhotoLink/Getty Images ©Brand X Pictures/PunchStock

14-26

Coupons and Rebates

Coupons

Retailer handles

Rebate

Manufacturer issues

Local Car Dealer Commercial

PhotoLink/Getty Images

14-27

Leasing

Why is leasing

popular for cars?

Jaguar Land Rover USA LLC

14-28

Price Bundling

Encourage sales of slow moving items

Encourage stock up

Encourage trial of new brand

Incentive to purchase

14-29

Leader Pricing

Enticing consumers into the store with popular aggressively priced items and hoping they will pick up other items while shopping

©M Hruby

14-30

Business Pricing Tactics and Discounts

Seasonal discounts

Cash discounts

Vendor Allowances

Quantity discounts

Uniform delivered vs. Zone pricing

14-31

Seasonal Discounts

Designed to spur buyers into purchasing merchandise early

Ph

oto

Lin

k/G

ett

y Im

age

s

Jaco

bs

Sto

ck P

ho

tog

rap

hy/

Ge

tty

Imag

es

14-32

Cash Discounts

• Reduced invoice cost if buyer pays prior to the end of the discount period

• Encourages buyers to pay before the discount period ends

• Seller benefits either way

©Corbis – All Rights Reserved

14-33

Vendor Allowances

• Lowers the final cost in return for specific behavior

• Advertising allowance

• Slotting allowance

McG

raw

-Hill

Co

mp

anie

s, I

nc/

G

ary

He

, ph

oto

gra

ph

er

Rya

n M

cVar

y/G

ett

y Im

age

s

14-34

Quantity Discounts

Cumulative quantity discount

Noncumulative quantity discount

Ryan McVay/Getty Images

14-35

Uniform Delivered vs.. Zone Pricing

Addresses the impact of shipping, which is often a major cost for manufacturers

Chuan Khoo/Getty Images

14-36

1. What are some consumer-oriented pricing tactics?

2. What are some business-oriented pricing tactics?

Check Yourself

14-37

Legal Aspects and Ethics of Pricing

Deceptive or illegal price advertising

Predatory pricing

Price discrimination

Price fixing

Legal Aspects and Ethics of

Pricing

14-38

Deceptive or Illegal Price Advertising

Deceptive reference prices

Loss leader pricing

Bait and switch

©Jeff Greenberg/PhotoEdit, Inc.

14-39

Predatory Pricing

Prices set low with the intent to drive competitor out of

business

Illegal

Difficult to prove

©Digital Vision/Getty Images

14-40

Price Discrimination

Federal law does not apply to sales to end consumers

Different rules in the B2B and B2C markets

Is not always illegal ©Tom Prettyman/PhotoEdit

14-41

Price Fixing

Horizontal price fixing

Vertical price fixing

Jaco

bs

Sto

ck P

ho

tog

rap

hy/

Ge

tty

Imag

es

Sto

ckb

yte

/Pu

nch

sto

ck I

mag

es

14-42

Fraud on eBay

14-43

1. What common pricing practices are considered to be illegal or unethical?

Check Yourself