C H A P T E R STRATEGIC PRICING METHODS 14 McGraw-Hill/Irwin Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Strategic Pricing Methods L E A R N I N G O B J E C T I V E S 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. 14-2
http://www.groupon.com How do you move from EDLP to higher prices? Courtesy Groupon Inc. Payless Website 14-3
Pricing Strategies 14-4
Cost-Based Methods Ryan McVay/Getty Images 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 14-5
Competition-Based Methods Set prices to signal information of how product compares with competitors Premium pricing AP Photo/Matthias Rietschel Zillow Website 14-6
Setting prices that focus on the overall value of the product Consumer perceptions Value-Based Methods Mercedes-Benz Commercial Courtesy Rolex USA 14-7
Improvement Value Method 14-8
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 14-9
Check Yourself 1. What are the three different strategies for setting pricing? 2. How can you use value-based strategies for setting prices? 14-10
Pricing Strategies Everyday low pricing (EDLP) High/Low Pricing 14-11
How to Pick the Right Diamond 14-12
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 Everyday low pricing (EDLP) High/low pricing vs.. Photodisc Collection/Getty Images Lars A Niki 14-13
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 Odd Prices Jeff Greenberg/PhotoEdit 14-14
Consumers Use of Reference Prices Internal reference price External reference price Photodisc Collection/Getty Images 14-15
How do consumers use reference pricing when shopping for cars? How does this ad help the consumer? Reference Pricing Courtesy Ford Motor Company 14-16
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 Wine ranges in price from under $5 a bottle to over $100K a bottle. How do you know which to choose? 14-17
Price Lining Marketers establish a price floor and price ceiling and set prices in between Allows for easy comparison M Hruby 14-18
New Product Pricing Strategies Market Penetration Pricing Price skimming 14-19
Check Yourself 1. Explain the difference between EDLP and high/low pricing. 2. What pricing strategies should be considered when introducing a new product? 14-20
Pricing Tactics Digital Vision/Getty Images Digital Vision/Getty Images Pricing strategy Pricing tactics 14-21
Pricing Tactics Aimed at Consumers Leader Pricing Mark downs Quantity Discounts Price Bundling Seasonal Discounts Leasing Coupons Rebates 14-22
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 14-23
Quantity Discounts for Consumers Size discount The more you buy the cheaper the unit cost M Hruby 14-24
Seasonal Discounts Getty Images Brand X Pictures/PunchStock Tomi/PhotoLink/Getty Images Brand X Pictures/PunchStock Encourage consumers to use services or purchase products year round 14-25
Coupons and Rebates Coupons Rebate Retailer handles Manufacturer issues PhotoLink/Getty Images Local Car Dealer Commercial 14-26
Leasing Why is leasing popular for cars? Jaguar Land Rover USA LLC 14-27
Price Bundling Encourage sales of slow moving items Encourage stock up Encourage trial of new brand Incentive to purchase 14-28
Leader Pricing Enticing consumers into the store with popular aggressively priced items and hoping they will pick up other items while shopping M Hruby 14-29
Business Pricing Tactics and Discounts Seasonal discounts Cash discounts Vendor Allowances Quantity discounts Uniform delivered vs. Zone pricing 14-30
PhotoLink/Getty Images Jacobs Stock Photography/Getty Images Seasonal Discounts Designed to spur buyers into purchasing merchandise early 14-31
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 14-32
Ryan McVary/Getty Images McGraw-Hill Companies, Inc/ Gary He, photographer Vendor Allowances Lowers the final cost in return for specific behavior Advertising allowance Slotting allowance 14-33
Quantity Discounts Cumulative quantity discount Noncumulative quantity discount Ryan McVay/Getty Images 14-34
Uniform Delivered vs.. Zone Pricing Chuan Khoo/Getty Images Addresses the impact of shipping, which is often a major cost for manufacturers 14-35
Check Yourself 1. What are some consumer-oriented pricing tactics? 2. What are some business-oriented pricing tactics? 14-36
Legal Aspects and Ethics of Pricing Deceptive or illegal price advertising Price discrimination Legal Aspects and Ethics of Pricing Predatory pricing Price fixing 14-37
Deceptive or Illegal Price Advertising Deceptive reference prices Loss leader pricing Bait and switch Jeff Greenberg/PhotoEdit, Inc. 14-38
Predatory Pricing Prices set low with the intent to drive competitor out of business Illegal Difficult to prove Digital Vision/Getty Images 14-39
Price Discrimination Is not always illegal Tom Prettyman/PhotoEdit Different rules in the B2B and B2C markets Federal law does not apply to sales to end consumers 14-40
Jacobs Stock Photography/Getty Images Stockbyte/Punchstock Images Price Fixing Horizontal price fixing Vertical price fixing 14-41
Fraud on ebay 14-42
Check Yourself 1. What common pricing practices are considered to be illegal or unethical? 14-43