Priciples of Marketing

by Philip Kotler and Gary Armstrong

Chapter 11
Pricing Strategies
Additional Considerations

PEARSON

Objective Outline
New-Product Pricing Strategies
1

Describe the major strategies for pricing new

products.

Product Mix Pricing Strategies

2

Explain how companies find a set of prices that

maximizes the profits from the total product mix.

Objective Outline

Price-Adjustment Strategies
Discuss how companies adjust their prices to take into
account different types of customers and situations.

Price Changes
4

Discuss the key issues related to initiating and

responding to price changes.

Objective Outline

Public Policy and Marketing

5

Overview the social and legal issues that affect

pricing decisions.

New-Product Pricing Strategies

Pricing strategies usually change as the product passes thr
ough its life cycle.
The introductory stage is especially challenging.
Companies bringing out a new product face the challenge
of setting prices for the first time.
They can choose between two broad strategies: market-sk
imming pricing and market-penetration pricing.

Market-Skimming Pricing
Market-skimming pricing (or price skimming)
set a high price for a new product to skim maxim
um revenues layer by layer from the segments wi
lling to pay the high price; the company makes fe
wer but more profitable sales.

Market-Penetration Pricing
Market-penetration pricing sets a low price for
a new product in order to attract a large number o
f buyers and a large market share.

Product Mix Pricing Strategies

The strategy for setting a products price often has to be c
hanged when the product is part of a product mix.
In this case, the firm looks for a set of prices that maximi
zes its profits on the total product mix.
Pricing is difficult because the various products have relat
ed demand and costs and face different degrees of compet
ition.

Product Line Pricing

Product line pricing sets the price steps between various
products in a product line based on cost differences betwe
en the products, customer evaluations of different feature
s, and competitors prices.
In product line pricing, management must determine the p
rice steps to set between the various products in a line.
The price steps should take into account cost differences
between products in the line.
More importantly, they should account for differences in
customer perceptions of the value of different features.

Optional Product Pricing

Many companies use optional product pricing
offering to sell optional or accessory products
along with the main product.
And when you order a new computer, you can sel
ect from a bewildering array of processors, hard
drives, docking systems, software options, and se
rvice plans.

Captive Product Pricing

Captive-product pricing sets a price for product
s that must be used along with a main product, su
ch as blades for razor and games for a video-gam
es console.

By-Product Pricing
Using by-product pricing, the company seeks a
market for these by-products to help offset the co
sts of disposing of them and help make the price
of the main product more competitive.
The by-products themselves can even turn to be p
rofitable turning trash into cash.

Product Bundle Pricing

Using product bundle pricing, sellers often seve
ral products and offer the bundle at a reduced pric
e.

Price Adjustment Strategies

Companies usually adjust their basic prices to acc
ount for various customer differences and changi
ng situations.

Discount and Allowance Pricing

Cash Discount

Functional Discount
(Trade
Discount)
reduction
in price
on purch

Discount is a straight
ases
during
a stated
in larger
qu to tradeA price
reduction
to buyers
whoperiod
pay ofAtime
sellersor
offers
a discount
their bills
promptly.
antities.
channel members who perform
Discount has many forms. certain functions, such as selling,
storing, and record keeping.

Quantity Discount

A price reduction to buyers who buy

large volumes.

Seasonal Discount

A price reduction to buyers who

buy merchandise or services out
of season.

Discount and Allowance Pricing

Trade-in
allowanceis promotional money paid by manuf

Allowance
acturers to retailers in return for an agreement to f
A price reduction given for turning in an old
eature
manufacturers
products in some way.
item
whenthe
buying
a new one.

Its
in the automobile industry
It most
has common
two types.

but are also given for other durable goods.

Promotional allowance

Its the payments or price reductions that

reward dealers for participating in
advertising and sales support programs.

Customer-segment
Customer-segment pricing
pricing

Segmented
Pricing
Different customers pay different prices for the same product or

Different customers pay different prices for the same product or

service.
service.

In segmented pricing, the company sells a produ

Product-form
Product-form
pricing
ct
or servicepricing
at two or more prices, even though t
versions
the
priced
differently
but
heDifferent
difference
in of
prices
is notare
based
differences
Different
versions
of
the product
product
are
pricedon
differently
but not
not
according
differences in
in their
their costs.
costs.
inaccording
costs. toto differences
It takes several forms.
Location
Location pricing
pricing

A
Acompany
company charges
charges different
different prices
prices for
for different
different locations,
locations, even
even
though
though the
the cost
cost of
of offering
offering each
each location
location isis the
the same.
same.
Time
Time pricing
pricing
A
Afirm
firm varies
varies its
its price
price by
by the
the season,
season, the
the month,
month, the
the day,
day, and
and
even
even the
the hour.
hour.

Psychological Pricing
In using psychological pricing, sellers consider the psyc
hology of prices, not simply the economics.
Another aspect of psychological pricing is reference pric
es prices that buyers carry in their minds and refer to w
hen looking at a given product.
The reference price might be formed by noting current pri
ces, remembering past prices, or assessing the buying situ
ation.

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 takes several forms.
A seller may simply offer discounts from normal prices to
increase sales and reduce inventories.
Sellers 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; the
manufacturer sends the rebate directly to the customer.
Some manufacturers offer low-interest financing, longer
warranties, or free maintenance to reduce the consumers price.

Geographical Pricing
Using
strategy,
seller absorbs
Geographical pricing
setsthis
prices
forthe
customers
l all
It falls between
or part ofFOB-origin
the actual freight
pricingcharges
and to get
This
practice
means
that
the
goods
are
placed
ocated in different
parts
of the business.
country or
world.
Using
pricing,
the seller
the
desiredbasing-point
uniform-delivered
pricing.
free on board a carrier.
selects
given
city
asthat
astrategi
basing

At

The
seller
reason
if it canpoint
get

company
setsamight
up
two
or more
We
look
atofThe
five
geographical
pricing
Itswill
the
opposite
FOB
pricing.

that
point
the title
and
responsibility
pass
andbusiness,
charges
allplus
customers
thewill
freight
more
its
average
costs

zones.
Here,
the
company
charges
the
same
price
es
for
the
following
hypothetical
situation.
to the customer, who pays the freight from the

cost within
from
that
city
to
the pay
customerfor its
All customers
decrease
and
more
than
compensate
a given
zone
freight
to all
customers,
regardless
of their
location.
factory
to the
destination.
location,
of the the
city from
freight
cost.
The freight chargea is
single
price; regardless
the
more cost.
distant
set extra
attotal
the
average
freight
which the
the price.
goods are actually shipped.
zone, the higher

FOBorigin
pricing

Uniformdelivered
pricing

Zone
pricing

Basingpoint
pricing

Freightabsorption
pricing

Dynamic and Internet Pricing

They are using dynamic pricing adjusting pric
es continually to meet the characteristics and nee
ds of individual customers and situations.
For example, Amazon.com can mine their databa
ses to gauge a specific shoppers behavior, and pr
ice products accordingly.

International Pricing
Companies that market their products internationally mus
t decide what prices to charge in different countries.
The price that a company should charge in a specific cou
ntry depends on many factors, including economic condit
ions, competitive situations, laws and regulations, and the
nature of the wholesaling and retailing system.

Price Changes
After developing their pricing structures and strat
egies, companies often face situations in which th
ey must initiate price changes or respond to price
changes by competitors.

Initiating Price Changes

In some cases, the company may find it desirable
to initiate either a price cut or a price increase.
In both cases, it must anticipate possible buyer an
d competitor reactions.

Initiating Price Cuts

Several situations may lead a firm to consider cut
ting its price.
One such circumstance is excess capacity.
Another is falling demand in the face of strong pr
ice competition or a weakened economy.

Initiating Price Increases

A successful price increase can greatly improve p
rofits.
There are two factors that influences price increa
ses.
Reason 12

Another factor leading to price increases is over-demand.

A major factor in price increases is cost inflation.
When a company cannot supply all that its customers need, it may
Rising costs squeeze profit margins and lead companies to pass
raise its prices, ration products to customers, or both.
cost increases along to customers.
Consider todays worldwide oil and gas industry.

Buyer Reactions to Price Changes

A price increase, which would normally lower sales, may
have some positive meanings for buyers.
A brands price and image are often closely linked.
A price change, especially a drop in price, can adversely a
ffect how consumers view the brand.

Competitor Reactions to Price Changes

The competitor can interpret a company price cut
in many ways.
It might think the company is trying to grab a larger mar
ket share or that its doing poorly and trying to boost its
sales.
Or it might think that the company wants the whole indu
stry to cut prices to increase total demand.

Responding to Price Changes

Responding to Price Changes

If the company decides that effective action can a
Company could reduce its price to match the competitors
First
nd should
price. be taken, it might make any of four res
ponses.
Second

Company might maintain its price but raise the perceived

value of its offer.

Third

Company might improve quality and increase price, moving

its brand into a higher price-value position.

Fourth

Company might launch a low-price fighter brand

adding a lower-price item to the line or creating a separate
lower-price brand.

Public Policy and Pricing

Pricing within Channel Levels

Price-fixing states that sellers must set prices wit
hout talking to competitors.
Sellers are also prohibited from using predatory
pricing selling below cost with the intention of
punishing a competitor or gaining higher long-ru
n profits by putting competitors out of business.

Pricing across Channel Levels

Robinson-Patman Act seeks to prevents unfair pr
ice discrimination by ensuring that sellers offer t
he same price terms to customers at a given level
of trade.
Price discrimination is allowed:

If the seller can prove that costs differ when selling t

o different retailers
If the seller manufactures different qualities of the s
ame product for different retailers

Pricing across Channel Levels

Laws also prohibit retail (or resale) price mainte
nance a manufacturer cannot require dealers to
charge a specified retail price for its product.
Deceptive pricing occurs when a seller states pric
es or price savings that mislead consumers or are
not actually available to consumers.

The End