pdt's strg mix, change, adj.)-28

8/8/2019 Pdt's Strg Mix, Change, Adj.)-28

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Pricing Products:

Pricing Strategies

A Global PerspectiveA Global Perspective

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Philip KotlerPhilip KotlerGary ArmstrongGary ArmstrongSwee Hoon AngSwee Hoon Ang

Siew Meng LeongSiew Meng LeongChin Tiong TanChin Tiong Tan

Oliver Yau HonOliver Yau Hon--MingMing

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Video Case: Song Airlines

Discussion Questions:

1. How did Song lower fixed costs? How did the companylower variable costs?

2. Which of the external factors do you believe had the

largest impact on Songs pricing decisions?

3. What pricing approach did Delta use when settingprices for passenger tickets on Song flights?

4. Can Delta successfully employ the lessons learned

from Song?


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Learning Objectives

After studying this chapter, you should be able to:

1. Describe the major strategies for pricing initiativeand new products

2. Explain how companies find a set of prices thatmaximize the profits from the total product mix

3. Discuss how companies adjust their prices to takeinto account different types of customers andsituations

4. Discuss the key issues related to initiating andresponding to price changes


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Chapter Outline

1. New-Product Pricing Strategies

2. Product Mix Pricing Strategies

3. Price Adjustment Strategies4. Price Changes

5. Public Policy and Pricing


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New-Product Pricing Strategies

Two Broad Strategies

Market skimming pricing set a high initial price

Market penetration pricing set a low initial price


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Market skimming pricing is a strategy with high initialprices to skim revenues layer-by-layer from themarket.

Product quality and image must support the price.

Buyers must want the product at the price.

The costs of producing a smaller volume cannot be sohigh that they cancel the advantage of higher prices.

Competitors should not be able to enter the marketeasily and undercut the high price.


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Market penetration pricing sets a low initial price inorder to penetrate the market quickly and deeply toattract a large number of buyers quickly to gainmarket share.

Price sensitive market

Production and distribution costs must fall as salesvolume increases

Low prices must keep competition out of the market.


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The firm looks for a set of prices that maximizes theprofits on the total product mix.

Five product mix pricing situations

Product line pricing the products in the product line

Optional product pricing optional or accessory products

Captive product pricing - complementary products

By-product pricing by-products

Product bundle pricing several products

Product-Mix Pricing Strategies


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Normal Hair$3.90

Anti-dandruff$4.90

Hair Fall Defense$4.90

Oily Hair$3.90

Product line pricing takes into account the costdifference between products in the line, customerevaluation of their features, and competitorsprices. the price differences represent the perceived

quality differences


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New car with ordinary rims$59,000

New car with sports rims$60,000


Optional product pricing takes into accountoptional or accessory products along with themain product. Decide which items to include in thebase price and which to offer as options


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Captive product pricing involves products thatmust be used along with the main product.

Price the main, or driver product low and seek highmargins on the supplies

For services: two-part pricing is where theprice is broken into fixed fee and variable usagefee.

Decide how much to charge for the basic service and

how much for the variable usage The fixed amount should be low enough to induce

usage of the service; profit can be made on thevariable fees


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By-product pricing refers to products with little orno value produced as a result of the mainproduct.

Producers will seek little or no profit

Producers should accept any price that coversmore than the cost to cover storage and delivery.


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Product bundle pricing combines severalproducts and offer the bundle at a reduced price.

Price bundling can promote the sales of products

1 bottle: $2.70 Bundled 2 bottles: $4.90



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Price Adjustment Strategies

Companies adjust basic prices to account for variouscustomer differences and changing situations.

Discount and allowance pricing

Segmented pricing

Psychological pricing

Promotional pricing

Geographical pricing

Dynamic pricing

International pricing


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Discount and allowance pricing reduces prices to reward customerfor certain responses such as paying early, volume purchases, andoff-season buying.

Discounts

Cash discount for paying promptly

Quantity discount for buying in large volume

Functional (trade) discount for selling, storing, distribution, and recordkeeping

Allowances

Trade-in allowance for turning in an old item when buying anew one

Promotional allowance to reward dealers for participating inadvertising or sales support programs


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Segmented pricing is used when a company sells aproduct at two or more prices even though the differenceis not based on cost.

Adjust basic prices to allow for differences in customers, products,and locations

Airlines, hotels and restaurants revenue management or yieldmanagement

To be effective:

Market must be segmentable

Segments must show different degrees of demand

Watching the market cannot exceed the extra revenue obtainedfrom the price difference

Must be legal


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Customer segment pricing is when different customerpay for different prices for the same product or service.

Product form segment pricing is when differentversions of the product are priced differently but not

according to differences in cost. Location pricing is when the product is sold in different

geographic areas and priced differently in those areaseven though the cost is the same.

Time pricing is when a firm varies its prices by theseason, the month, the day, and even the hour.


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Psychological pricing occurs when sellers consider thepsychology of prices and not simply the economics.

Reference prices are prices that buyers carry in theirminds and refer to when looking at a given product.

Noting current prices

Remembering past prices

Assessing the buying situations


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Promotional pricing is when prices are temporarily pricedbelow list price or cost to increase demand.

Loss leaders

Special event pricing

Cash rebates

Low interest financing Longer warrantees

Free maintenance

Risks of promotional pricing

Used too frequently

Copies by competitors can create deal-prone customers whowill wait for promotions and avoid buying at regular price.

Creates price wars.



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Promotional Pricing

Loss leaders are products sold below cost to attractcustomers in the hope they will buy other items at normalmarkups.

Special event pricing is used to attract customersduring certain seasons or periods.

Cash rebates are given to consumers who buy productswithin a specified time.

Low interest financing, longer warrantees, and freemaintenance lower the consumers total price.


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Geographical pricing is used for customers indifferent parts of the country or the world.

FOB pricing

Uniformed delivery pricing

Zone pricing

Basing point pricing

Freight absorption pricing



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FOB (free on board) pricing means that the goods areplaced free on board a carrier. At that point the title andresponsibility passes to the customer, who pays the freightfrom the factory to the destination.

Uniformed delivery pricing means the company charges thesame price plus freight to all customers, regardless of location.

Zone pricing means that the company sets up two or morezones where customers within a given zone pay a single totalprice.

Basing point pricing means that a seller selects a given cityas basing point and charges all customers the freight costassociated from that city to the customer location regardless of

the city from which the goods are actually shipped. Freight absorption pricing means that the seller absorbs all

or part of the actual freight charge as an incentive to attractbusiness in competitive markets.


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Dynamic pricing is when prices are adjusted continuallyto meet the characteristics and needs of the individualcustomer and situations.

International pricing is when prices are set in a specific

country based on country-specific factors. Economic conditions

Competitive conditions

Laws and regulations

Infrastructure

Company marketing objectives


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Price Changes

Initiating Pricing Changes Price cuts is a reduction in selling price.

Excess capacity

Increase market share

Price increases is an increase in selling price

Cost inflation Increased demand and lack of supply

Buyers Interpretation to Price Changes

Price cuts

New models will be available

Models are not selling well Quality issues

Price increases

Product is hot

Company greed


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Price Changes

Responding to Price Changes

Questions

Why did the competitor change the price?

Is the price cut permanent or temporary?

What is the effect on market share and profits? Will competitors respond?

Solutions

Reduce price to match competition

Maintain price but raise the perceived value throughcommunications

Improve quality and increase price

Launch a lower-price fighting brand


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Public Policy and Pricing

Pricing Within Channel Levels

Price fixing: Sellers must set prices without talking tocompetitors.

Predatory pricing: Selling below cost with the intention

of punishing a competitor or gaining higher long-termprofits by putting competitors out of business.


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Public Policy and Pricing

Pricing Across Channel Levels

Retail (resale) price maintenance is when amanufacturer requires a dealer to charge a specific retailprice for its products.

Deceptive pricing occurs when a seller states prices orprice savings that mislead consumers or are not actuallyavailable to consumers.

Scanner fraud: Failure of the seller to enter current or sale pricesinto the computer system.

Price confusion results when firms employ pricing methods thatmake it difficult for consumers to understand what price they arereally paying.

pdt's strg mix, change, adj.)-28

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