Chapter 14 Strategic Pricing Methods based on the five Cs o Pricing Strategies long term approach to setting prices broadly in an integrative effort Cost based pricing methods determine the final price to charge by starting with the cost Cost based methods do not recognize the role that consumers or competitors prices play in the marketplace Although relatively simple compared with other methods used to set prices cost based pricing requires that all costs can be identified and calculated on per unit bases Assumes that these costs will not vary much for different levels of production Competitor based pricing method set their prices to reflect the way they want consumers to interpret their own prices realative to the competitiors offerings Value based pricing methods include approaches to setting prices that focus on the overall value of the product offering as perceived by the consumer Improvement value an estimate of how much more or less consumers are willing to pay for a product relative to other comparable products Cost of ownership method consumers may be willing to pay more for a particular product because over its entire lifetime it will eventually cost less to own than a cheaper alternative o Psychological factors affecting value based pricing strategies Consumers use of reference prices Reference price price against which buyers compare the actual selling price of the product and that facilitates their evaluation process o External reference price higher price to which the consumer can compare the selling price to evaluate the deal o Internal reference price memory last price they paid of what they expect to pay Everyday Low Pricing EDLP versus High Low pricing Everyday low pricing street the continuity of their retail prices at a level somewhere between the regular no sale price and the deep discount sale prices their competitors may offer Adds value by reducing consumers search costs High low pricing relies on the promotion of sales during which prices are temporarily reduced to encourage purchases Odd prices Odd prices most marketers believe that odd pricing got its start as a way to prevent sales from just pocketing money Signals the price is low o New Product Pricing Price skimming innovators and early adopters are willing to pay a higher price to obtain the new product or service Product must be perceived as ground breaking in some way Market Penetration pricing Market penetration strategy set the initial price low for the introduction of the new product or service To build sales market share and profits quickly Experience curve effect sales continue to grow costs continue to drop allowing further reductions in price o Pricing Tactics Pricing tactics short term methods to focus on select components of the five Cs Generally a pricing tactic represents either a short term response to a competitive threat or a broadly accepted method of calculating a final price for the customer that is short term in nature Business to Business Pricing tactics and discounts Season discount additional reduction offered as an incentive to retailers to order merchandise in advance of the normal buying season Cash discount reduces the invoice cost if the buyer pays the invoice prior to the end of the discount period Advertising allowance offers a price reduction to channel members if they agree to feature the manufacturer s product in their advertising and promotional efforts Slotting allowances are fees paid to retails simply to get new products into stores or to gain more or better shelf space for their products Quantity discount provides a reduced price according to the amount purchased Cumulative quantity discount amount purchased over a specified time period and usually involved several transactions Particularly encourages resellers to maintain their current supplier because the cost to witch must include the loss of the discount Noncumulative quantity discount based only on the amount purchased in a single order Inventive to purchase more merchandise immediately Uniform delivered pricing shipper charges one rate no matter where the buyer is located makes things very simple for both the seller and the buyer Zone pricing sets different prices depending on a geographical division of the delivery areas Pricing tactics aimed at consumers Price lining establish a price floor and a price ceiling for an entire line of similar products and then set a few other price points in between to represent distinct differences in quality Price bundling the practice of selling more than one product for a single lower price Leader pricing attempts to build store traffic by aggressively pricing and advertising a regularly purchased item often priced at or just above the store s cost While getting leader price sale consumer will pick up other products Consumer Price Reductions Markdowns reductions retailers take on the initial selling price of the product or service Enable retailers to get rid of slow moving or obsolete merchandise sell seasonal items after the appropriate season and match competitors prices on specific merchandise Size discount most common Larger quantities are less per ounce Seasonal discounts price reductions offered on products and services to stimulate demand during off peak seasons Coupons offer a discount on the price of specific items when they re purchased Issued by manufacturers and retailers in newspapers on products on the shelf at the cash register over the internet and through the mail Thought to induce customers to try products for the first time convert those first time users to regular users encourage large purchases increase usage and protect market share against competition Rebates manufacture instead of the retailer issues the refund as a portion of the purchase price returned to the buyer in the form of cash Lease consumers pay a fee to purchase the right to use a product for a specific amount of time Never own the product just renting o Legal and Ethical Aspects of Pricing Deceptive or illegal Price Advertising Loss leader pricing lowers price below the store s cost Bait and switch deceptive practice because the store lures customers in with a very low price on an item only to aggressively pressure these customers into purchasing a higher price model by disparaging the low priced item comparing it unfavorably with the higher priced model or professing an inadequate supply of the lower price item Price Discrimination when firms sell the same product to different
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