Poma PPT Slides-Chapter 11-171871

Principles of Marketing: An Asian
Perspective
Instructor Supplements
Created by Geoffrey da Silva
Pricing Products: Pricing Strategies
2012 Principles of Marketing: An Asian Perspective
11
Chapter 11 Outline
11.1
11.2
11.3
11.4
11.5
New-Product Pricing Strategies

Product Mix Pricing Strategies
Price-Adjustment Strategies
Price Changes
Public Policy and Pricing
Opening Case
FairPrice Supermarket
FairPrice
Supermarket:
Consumers, Link to
Low-Priced
Products.
Initiatives like Stretch Your

Dollar and Everyday Low
Price items allow FairPrice to
stay true to its name and
offer value for money to its
customers
11.1
New-Product Pricing Strategies
11.1
11.1 New-Product Pricing Strategies
Companies bringing out a new product face the challenge of setting

prices for the first time.
They can choose between
two broad strategies:
SKIM
PENETRATE
New product pricing strategies
Market-skimming pricing
Many companies that invent new products set high initial prices to
skim revenues layer-by-layer from the market. This is called marketskimming pricing.
Market skimming makes sense only under certain conditions:

The products quality and image must support its higher price, and
enough buyers must want the product at that price.
The costs of producing a smaller volume cannot be so high that they
cancel the advantage of charging more.
Competitors should not be able to enter the market easily and
undercut the high price.
Market-skimming pricing
When Apple first introduced
the iPhone, its initial price
was as high as $599 per
phone. The phones were
purchased only by customers
who really wanted the sleek
new gadget and could afford
to pay a high price for it. Six
months later, Apple reduced
the price to $399 for an 8 GB
model and $499 for the 16
GB model to attract new
buyers. Within a year, its
prices dropped again to $199
and $299 respectively.
10 2012 Principles of Marketing: An Asian Perspective
Market-penetration pricing
Rather than setting a high price to skim off small but profitable
market segments, some companies use market-penetration
pricing.
They set a low initial price in order to penetrate the market quickly
and deeplyto attract a large number of buyers quickly and win a
large market share.
To lure the famously frugal

Chinese customers, IKEA
slashed its prices. The strategy
worked. Weekend crowds at its
Beijing store are so big that
employees need to use
megaphones to keep them
under control.
Low initial prices help the

company to attract a large
number of buyers quickly
and win a large market
share. In Singapore, QB
House met with so much
success that it has
attracted copycats.
Conditions favoring market-penetration pricing:

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 pricier must maintain its low-price positionotherwise,
the price advantage may be only temporary.
Reviewing the Key Concepts

Describe the major strategies for pricing new products.
11.2
Product Mix Pricing Strategies
11.2
11.2 Product Mix Pricing Strategies
Product line pricing
Companies usually develop product lines rather than single

products.
In product line pricing, management must decide on the price

steps to set between the various products in a line.
Product line pricing
The price steps should take into account cost differences between
the products in the line. More importantly, they should account for
differences in customer perceptions of the value of different
features.
The sellers task is to establish perceived quality differences that

support the price differences.
Optional product pricing
Many companies use optional product pricingoffering to sell

optional or accessory products along with their main product.
Pricing these options is a sticky problem. The company has to

decide which items to include in the base price and which to offer as
options
Optional product pricing
Tune Hotels adopts an optional-product

pricing by charging guests for add-ons
that they desire. These add-ons include
air-conditioning, towel and toiletries kit,
and television access.
Captive product pricing
Companies that make products that must be used along with a

main product are using captive product pricing. Producers of the
main products often price them low and set high markups on the
supplies.
In the case of services, this strategy is called two-part pricing. The

price of the service is broken into a fixed fee plus a variable usage
rate
Two part pricing
Two-part pricing Theme parks

such as universal Studios charge a
fixed fee for entrance and a
variable usage fee for food and
activities such as wall climbing.
By-product pricing
Using by-product pricing, a company will seek a market for byproducts and should accept any price that covers more than the
cost of storing and delivering them.
By-products may even turn out to be profitable.
Product bundle pricing
Using product bundle pricing, sellers often combine several of

their products and offer the bundle at a reduced price.
Price bundling can promote the sales of products consumers might

not otherwise buy, but the combined price must be low enough to
get them to buy the bundle.
Product bundle pricing
Telecommunication companies,
such as SingTel in Singapore, offer
bundle pricing by giving discounted
rates when customers subscribe to
several of its servicesmobile
phone, cable, and Internet
connections.

Explain how companies find a set of prices that maximizes the profits
from the total product mix.
11.3
Price-Adjustment Strategies
11.3
11.3 Price-Adjustment Strategies

Discount and
allowance pricing
Segmented
pricing
Psychological
pricing
Promotional
pricing
Geographic
pricing
Dynamic pricing
International
pricing
Discounts and Allowances: Discounts
Most companies adjust their basic price to reward customers for

certain responses, such as early payment of bills, volume
purchases, and off-season buying.
The many forms of discounts include a cash discount, a price

reduction to buyers who pay their bills promptly. A typical example
is 2/10, net 30, which means that although payment is due within
30 days, the buyer can deduct 2 percent if the bill is paid within 10
days.
Discounts and Allowances: Discounts
A quantity discount is a price reduction to buyers who buy large

volumes.
A functional discount (trade discount) is offered by the seller to

trade-channel members who perform certain functions, such as
selling, storing, and record keeping.
A seasonal discount is a price reduction to buyers who buy

merchandise or services out of season
Discounts and Allowances: Allowances
Allowances are another type of reduction from 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
Trade-in allowances
Trade-in allowances are common in

the telecommunications industry to
encourage customers to upgrade
their handsets as well as switch to
new services.
Segmented pricing
Companies
will often adjust their basic prices to allow for differences

in customers, products, and locations.
In
segmented pricing, the company sells a product or service at

two or more prices, even though the difference in price is not based
on differences in costs
Segmented pricing
Under
customer-segment pricing, different customers pay different

prices for the same product or service.
Under
product-form pricing, different versions of the product are

priced differently but not according to differences in their costs.
Product-form pricing
Evian water in a 1-liter bottle might cost you 5

cents an ounce at your local supermarket,
whereas the same water might run $2.28 an
ounce when sold in 5-ounce aerosol cans as
Evian Brumisateur Mineral Water Spray
moisturizer. (www.evian.com)
Segmented Pricing
Under
location pricing, a company charges different prices for

different locations, even though the cost of offering each location is
the same.
Using
time-based pricing, a firm varies its prices by the season, the

month, the day, and even the hour.
Conditions favoring segmented pricing

For
segmented pricing to be an effective strategy, certain conditions

must exist:
The market must be segmentable, and the segments must show

different degrees of demand.
The costs of segmenting and watching the market cannot exceed
the extra revenue obtained from the price difference.
The segmented pricing must be legal.
Psychological pricing
Price
says something about the product. Many consumers use price

to judge quality.
In
using psychological pricing, sellers consider the psychology of

prices, not simply the economics.
Psychological pricing
What do the prices marked on this tag suggest

about the product and buying solution?
Reference pricing
Another
aspect of psychological pricing is reference pricesprices

that buyers carry in their minds and refer to when looking at a given
product.
The
reference price might be formed by noting current prices,

remembering past prices, or assessing the buying situation.
Reference pricing
Sellers
can influence or use these consumers reference prices when

setting price.
For
most purchases, consumers dont have all the skill or information

they need to figure out whether they are paying a good price. They
may rely on certain cues that signal whether a price is high or low.
Even
small differences in price can signal product differences.
Reference pricing
8 is an auspicious number to the Chinese. It

sounds like prosperity. Hence, set dinners are
priced at $288, $388, $888 to suggest good
fortune for diners.
Promotional pricing
Promotional pricing
With
promotional pricing, companies will temporarily price their

products below list price and sometimes even below cost to create
buying excitement and urgency.
Promotional pricing
Promotional
pricing takes several forms:

The seller may simply offer discounts from normal prices to
increase sales and reduce inventories.
Sellers will also use special-event pricing in certain seasons to
draw more customers.
Manufacturers sometimes offer cash rebates to consumers who
buy the product from dealers within a specified time.
Some manufacturers offer low-interest financing, longer
warranties, or free maintenance to reduce the consumers
price.
Special-event pricing
When the new school year is about to

start, retailers will begin promoting
school shoes, socks, and school bags.
Adverse effects of promotional pricing

Promotional
pricing can have adverse effects.
If used too frequently and copied by competitors, price promotions can

create deal-prone customers who wait until brands go on sale before
buying them.
Constantly reduced prices can erode a brands value in the eyes of
customers.
Marketers sometimes use price promotions as a quick fix instead of
sweating through the difficult process of developing effective longerterm strategies for building their brands.
Adverse effects of promotional pricing

Promotional
pricing can be an effective means of generating sales in

certain circumstances, but it can be damaging for other companies if
used too often.
Geographic pricing
A
company also must decide how to price its products for customers located in different
parts of the country or world.
FOB Origin
Uniform delivered
Zone
Basing point
Freight absorption
Geographic pricing
FOB-origin
pricing is a practice that means 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. The freight charge is set at the average
freight cost.
Geographic pricing
Zone
pricing falls between FOB-origin pricing and uniform-delivered pricing.

The company sets up two or more zones. All customers within a given zone
pay a single total price; the more distant the zone, the higher the price.
Using
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.
Geographic pricing
The
seller who is anxious to do business with a certain customer or

geographical area might use 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 pricing
Case example: Alaska airlines Web banner promotes fly Alaska Airlines to
Honolulu for $200 round trip.
Dynamic pricing
Alaska Airlines is introducing a system that creates unique prices and
advertisements for people as they surf the Web. The system identifies
consumers by their computers, using a small piece of code known as a cookie. It
then combines detailed data from several sources to paint a picture of whos
sitting on the other side of the screen.
When the person clicks on an ad, the system quickly analyzes the data to assess
how price-sensitive customers seem to be.
Dynamic pricing
Dynamic
pricing offers many advantages for marketers.
Internet
sellers can mine their databases to gauge a specific shoppers

desires, measure his or her means, and instantaneously tailor products
to fit that shoppers behavior, and price products accordingly.
Buyers
also benefit from the Web and dynamic pricing.
Dynamic pricing
Buyers benefit from the Web and dynamic

pricing. Sites like Yahoo! Shopping give instant
product and price comparisons from thousands of
vendors, arming customers with price
information they need to get the lowest prices.
(www.shopping.yahoo.com)
International pricing
Companies
that market their products internationally must decide what

prices to charge in the different countries in which they operate.
In
some cases, a company can set a uniform worldwide price. However,

most companies adjust their prices to reflect local market conditions and
cost considerations.
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
Smart pricing plays a key role in Dells

marketing in China and other emerging
markets
Consumer
perceptions and preferences also may vary from country

to country, calling for different prices. Or the company may have
different marketing objectives in various world markets that require
changes in pricing strategy.
Costs
play an important role in setting international prices. Travelers

abroad are often surprised to find that goods that are relatively
inexpensive at home may carry outrageously higher price tags in
other countries.
In
some cases, such price escalation may result from differences in

selling strategies or market conditions.
In
most instances, however, it is simply a result of the higher costs of

selling in another countrythe additional costs of product
modifications, shipping and insurance, import tariffs and taxes,
exchange rate fluctuations, and physical distribution.
11.4
Price Changes
11.4
11.4 Price Changes
Companies often face situations in which they must

initiate price changes or respond to price changes by
competitors
11.4 Price Changes

Discuss how companies adjust their prices to take into account
different types of customers and situations
11.4 Price Changes
Price Cuts
Price Increase
11.4 Price Changes
Initiating and reacting to price cuts and price increases
11.4 Price Changes
Initiating price cuts

Several
situations may lead a firm to consider cutting its price.
One such circumstance is excess capacity.

Another situation leading to price changes is falling market share
in the face of strong price competition or a weakened economy.
A company may also cut prices in a drive to dominate the market
through lower costs. Either the company starts with lower costs
than its competitors, or it cuts prices in the hope of gaining
market share that will further cut costs through larger volume.
11.4 Price Changes
Initiating price increases

A
successful price increase can greatly increase profits.
major factor in price increases is cost inflation. Rising costs

squeeze profit margins and lead companies to pass cost increases
along to customers.
Another
factor leading to price increases is over demand. When a

company cannot supply all that its customers need, it can raise
prices, ration products to customers, or both.
11.4 Price Changes
Initiating price increases

In
passing price increases on to customers, the company must avoid

being perceived as a price gouger.
Price
increases should be supported by company communications

telling customers why prices are being increased. Whenever possible,
the company should consider ways to meet higher costs or demand
without raising prices.
11.4 Price Changes
Price change reactions-consumers
11.4 Price Changes
Buyer reaction to price changes

Customers
do not always interpret price changes in a straightforward
way.
A
brands price and image are often closely linked.
A price change, especially a drop in price, can adversely affect how

consumers view the brand.
11.4 Price Changes
Price Changes- customer reaction
A brands price and image are often

closely linked, and a change in price can
adversely affect how consumers view the
brand. Tiffany found this out when it
attempted to broaden its appeal by
offering a line of more affordable jewelry.
11.4 Price Changes
Price change reactions-competitors
11.4 Price Changes
Competitor Reactions to Price Changes

Competitors
are most likely to react when the number of firms

involved is small, when the product is uniform, and when the buyers
are well informed about products and prices.
The
company must guess each competitors likely reaction.
If
all competitors behave alike, this amounts to analyzing only a

typical competitor. In contrast, if the competitors do not behave alike,
then separate analyses are necessary.
11.4 Price Changes
Responding to Price Changes
Price
Change
Reduce price to
match competition
Maintain price but
raise the perceived
value
Improve quality and
increase price
Launch a lower-price
brand
11.4 Price Changes
Assessing and responding to competitor price changes
11.4 Price Changes

If
a company decides that effective action can and should be taken, it

might make any of four responses.
1.
2.
It could reduce its price to match the competitors price. The

company should try to maintain its quality as it cuts prices.
The company might maintain its price but raise the perceived
value of its offer. It could improve its communications,
stressing the relative quality of its product over that of the
lower-price competitor.
11.4 Price Changes

3.
4.
The company might improve quality and increase price,

moving its brand into a higher-price position. The higher
quality justifies the higher price that in turn preserves the
companys higher margins.
The company might launch a low-price fighting brand
adding a lower-price item to the line or creating a separate
lower-price brand. This is necessary if the particular market
segment being lost is price sensitive and will not respond to
arguments of higher quality.
11.4 Price Changes
Low-price fighting brand
In response to the entry of budget

airlines such as AirAsia and
Jetstar, Singapore Airlines
invested in Tiger Airways.
(www.tigerairways.com)
11.4 Price Changes

Discuss the key issues related to initiating and responding to price
changes.
11.5
Public Policy and Pricing
11.5
11.5 Public Policy and Pricing
Price competition is a core element of a free-market economy.
In setting prices, companies are usually not free to charge whatever

prices they wish. There may be laws governing the rules of fair play
in pricing.
In addition, companies must consider broader societal pricing

concerns.
Figure 11.4 shows the major public policy issues in pricing. These
include potentially damaging pricing practices within a given level of
the channel (price-fixing and predatory pricing) and across levels of
the channel (retail price maintenance, discriminatory pricing, and
deceptive pricing)
Public policy issues in pricing
Pricing within channels
Price Fixing
Predatory
Pricing
Pricing within channels

In
many countries there could be legislation against price-fixing

which states that sellers must set prices without talking to
competitors. Otherwise, price collusion is suspected.
Sellers
are also prohibited from using predatory pricingselling

below cost with the intention of punishing a competitor or gaining
higher long-run profits by putting competitors out of business. This
protects small sellers from larger ones who might sell items below
cost temporarily or in a specific locale to drive them out of business.

Pricing across channel levels
Price
Discrimination
Price
Maintenance
Deceptive pricing
93
Pricing Across Channel Levels

Laws
in certain countries seeks to prevent unfair price discrimination

by ensuring that sellers offer the same price terms to customers at a
given level of trade.
Price
discrimination is allowed if the seller can prove that its costs are
different when selling to different retailers. Or the seller can
discriminate in its pricing if the seller manufactures different qualities
of the same product for different retailers. The seller has to prove
that these differences are proportional.

Retail
(or resale) price maintenance is prohibiteda manufacturer

cannot require dealers to charge a specified retail price for its
product. Although the seller can propose a manufacturers suggested
retail price to dealers, it cannot refuse to sell to a dealer who takes
independent pricing action, nor can it punish the dealer by shipping
late or denying advertising allowances.

Deceptive
pricing occurs when a seller states prices or price savings

that mislead consumers or are not actually available to consumers.
This might involve bogus reference or comparison prices, as when a
retailer sets artificially high regular prices then announces sale
prices close to its previous everyday prices.
Deceptive
pricing issues include scanner fraud and price confusion.

The widespread use of scanner-based computer checkouts has led to
increasing complaints of retailers overcharging their customers.

Price
confusion results when firms employ pricing methods that make

it difficult for consumers to understand just what price they are really
paying.
Treating
customers fairly and making certain that they fully

understand prices and pricing terms is an important part of building
strong and lasting customer relationships.
Deceptive pricing
The widespread use of checkout

scanners has led to increasing
complaints of retailers
overcharging their customers.
Thank
you

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Principles of Marketing: An Asian

Pricing Products: Pricing Strategies

2012 Principles of Marketing: An Asian Perspective

New-Product Pricing Strategies

2012 Principles of Marketing: An Asian Perspective

Initiatives like Stretch Your

2012 Principles of Marketing: An Asian Perspective

2012 Principles of Marketing: An Asian Perspective

11.1 New-Product Pricing Strategies

Companies bringing out a new product face the challenge of setting

2012 Principles of Marketing: An Asian Perspective

11.1 New-Product Pricing Strategies

New product pricing strategies

2012 Principles of Marketing: An Asian Perspective

11.1 New-Product Pricing Strategies

Market skimming makes sense only under certain conditions:

11.1 New-Product Pricing Strategies

10 2012 Principles of Marketing: An Asian Perspective

11.1 New-Product Pricing Strategies

11 2012 Principles of Marketing: An Asian Perspective

11.1 New-Product Pricing Strategies

To lure the famously frugal

12 2012 Principles of Marketing: An Asian Perspective

11.1 New-Product Pricing Strategies

Low initial prices help the

11.1 New-Product Pricing Strategies

Conditions favoring market-penetration pricing:

market must be highly price sensitive so that a low price

14 2012 Principles of Marketing: An Asian Perspective

11.1 New-Product Pricing Strategies

15 2012 Principles of Marketing: An Asian Perspective

11.1 New-Product Pricing Strategies

Reviewing the Key Concepts

16 2012 Principles of Marketing: An Asian Perspective

17 2012 Principles of Marketing: An Asian Perspective

11.2 Product Mix Pricing Strategies

18 2012 Principles of Marketing: An Asian Perspective

11.2 Product Mix Pricing Strategies

19 2012 Principles of Marketing: An Asian Perspective

11.2 Product Mix Pricing Strategies

20 2012 Principles of Marketing: An Asian Perspective

11.2 Product Mix Pricing Strategies

Product line pricing

Companies usually develop product lines rather than single

In product line pricing, management must decide on the price

21 2012 Principles of Marketing: An Asian Perspective

11.2 Product Mix Pricing Strategies

Product line pricing

The sellers task is to establish perceived quality differences that

22 2012 Principles of Marketing: An Asian Perspective

11.2 Product Mix Pricing Strategies

Optional product pricing

Many companies use optional product pricingoffering to sell

Pricing these options is a sticky problem. The company has to

23 2012 Principles of Marketing: An Asian Perspective

11.2 Product Mix Pricing Strategies

Optional product pricing

Tune Hotels adopts an optional-product

11.2 Product Mix Pricing Strategies

Captive product pricing

Companies that make products that must be used along with a

In the case of services, this strategy is called two-part pricing. The

25 2012 Principles of Marketing: An Asian Perspective