Market-Skimming Pricing
Market-skimming pricing (or price skimming) is setting high initial prices to “skim” revenues layer by layer from the market.
Market skimming makes sense under certain conditions.
1. The product’s quality and image must support its higher price and enough buyers must want the product at that price.
2. The costs of producing a smaller volume cannot be so high that they cancel the advantage of charging more.
3. Competitors should not be able to enter the market easily and undercut the high price.
Use Key Term Market-Skimming Pricing (Price Skimming) here.
Use Chapter Objective 3 here.
Market-Penetration Pricing
Market-penetration pricing is setting a low initial price in order to penetrate the market quickly and deeply—to attract a large number of buyers quickly and win a large market share.
Several conditions must be met for this strategy to work.
1. The market must be highly price sensitive so that a low price produces more market growth.
2. Production and distribution costs must fall as sales volume increases.
3. The low price must help keep out the competition, and the penetration pricer must maintain its low-price position.
Use Discussion Question 9-4 here.
Use Key Term Market-Penetration Pricing here.
PRODUCT MIX PRICING STRATEGIES (Table 9.1)
In product line pricing, management must decide on the price steps to set between the various products in a line.
Use Table 9.1 here.
The price steps should take into account cost differences between the products in the line.
Use Key Term Product Line Pricing here.
Use Chapter Objective 4 here.
Optional product pricing is offering to sell optional or accessory products along with a main product.
Use Key Term Optional Product Pricing here.
In captive product pricing, companies make products that must be used along with a main product.
Use Key Term Captive Product Pricing here.
In the case of services, captive-product pricing is called two-part pricing. The price of the service is broken into a fixed fee plus a variable usage rate.
Using by-product pricing, the company seeks a market for the by products produced in the generation of some products and services.
Use Key Term By-Product Pricing here.
Using product bundle pricing, sellers often combine several of their products and offer the bundle at a reduced price.
Use Key Term Product Bundle Pricing here.
Use Marketing Ethics here.
PRICE-ADJUSTMENT (Table 9.2)
Use Chapter Objective 5 here.
Use Table 9.2 here.
Discounts include:
· Cash discount is a price reduction to buyers who pay their bills promptly.
· Quantity discount is a price reduction to buyers who buy large volumes.
· Functional discount (also called a trade discount) is offered by the seller to trade-channel members who perform certain functions.
· Seasonal discount is a price reduction to buyers who buy merchandise or services out of season.
Allowances are a reduction from the list price.
· Trade in allowances are price reductions given for turning in an old item when buying a new one.
· Promotional allowances are payments or price reductions to reward dealers for participating in advertising and sales support programs.
Use Key Terms Discount and Allowance here.
Segmented pricing occurs when the company sells a product or service at two or more prices, even though 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.
· Product form pricing: Different versions of the product are priced differently but not according to differences in their costs.
· Location-based pricing: A company charges different prices for different locations, even though the cost of offering each location is the same.
· Time-based pricing: A firm varies its price by the season, the month, the day, and even the hour.
Use Key Term Segmented Pricing here.
Psychological pricing occurs when sellers consider the psychology of prices and not simply the economics.
One aspect of psychological pricing is reference prices—prices that buyers carry in their minds and refer to when looking at a given product.
Use Key Terms Psychological Pricing and Reference Prices here.
Use Discussion Question 9-5 here.
With promotional pricing, companies will temporarily price their products below list price and sometimes even below cost to create buying excitement and urgency.
· Discounts: A reduction from normal prices to increase sales and reduce inventories.
· Special event pricing: Pricing differently in certain seasons to draw more customers.
· Limited-time offers (flash sales): Create buying urgency and make buyers feel lucky to have gotten in on the deal.
· Cash rebates: Offered to consumers who buy the product from dealers within a specified time; the manufacturer sends the rebate directly to the customer.
Promotional pricing can have adverse effects.
1. Price promotions can create “deal-prone” customers who wait until brands go on sale before buying them.
2. Constantly reduced prices can erode a brand’s value in the eyes of customers.
3. Promotional pricing can lead to industry price wars.
Use Key Term Promotional Pricing here.
Geographical Pricing involves deciding how to price products for customers located in different parts of the country or world.
· FOB-origin pricing: The goods are placed free on board (hence, FOB) a carrier. At that point the title and responsibility pass to the customer, who pays the freight from the factory to the destination.
· Uniform-delivered pricing is the opposite of FOB pricing. Here, the company charges the same price plus freight to all customers, regardless of their location.
· Zone pricing falls between FOB-origin pricing and uniform-delivered pricing. All customers within a given zone pay a single total price; the more distant the zone, the higher the price.
· Basing-point pricing: The seller selects a given city as a “basing point” and charges all customers the freight cost from that city to the customer location, regardless of the city from which the goods are actually shipped.
· Freight-absorption pricing. Using this strategy, the seller absorbs all or part of the actual freight charges in order to get the desired business.
Dynamic and Internet Pricing
Dynamic Pricing is adjusting prices continually to meet the characteristics and needs of individual customers and situations.
Dynamic pricing is extremely prevalent online where the Internet seems to be taking us back to a new age of fluid pricing.
Dynamic pricing offers many advantages:
· Internet sellers can mine their databases to gauge a specific shopper’s desires, measure his or her means, and instantaneously tailor products to fit that shopper’s behavior, and price products accordingly.
· Buyers can also negotiate prices at online auction sites and exchanges.
· Internet buyers benefit from the Web and dynamic pricing. A wealth of price comparison sites—such as Yahoo! Shopping and PriceGrabber—offer instant product and price comparisons from thousands of vendors.
Use Critical Thinking Exercise 9-6 here.
Use Key Term Dynamic Pricing here.
Use Online, Mobile, and Social Media Marketing here.
Use Marketing at Work 9.2 here.
International Pricing
The price that a company should charge in a specific country depends on many factors, including economic conditions, competitive situations, laws and regulations, and development of the wholesaling and retailing system.
Costs play an important role in setting international prices.
