Principles of Marketing

Seventeenth Edition

Chapter 11

Pricing Strategies:
Additional Considerations

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Learning Objectives
11-1 Describe the major strategies for pricing new products.
11-2 Explain how companies find a set of prices that maximizes the profits
from the total product mix.
11-3 Discuss how companies adjust their prices to take into account different
types of customers and situations.
11-4 Discuss the key issues related to initiating and responding to price
changes.
11-5 Overview the social and legal issues that affect pricing decisions.

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Learning Objective 1

Describe the major strategies for pricing new products.

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New Pricing Strategies
Market-skimming pricing strategy sets high initial prices to “skim”
revenue layers from the market.
• Product quality and image must support the price.
• Buyers must want the product at the price.
• How Does Price Skimming Work?
-Price skimming works by tapping customers having the “must-
have” mindset – can be simply put as the customers who have
the purchasing power and eagerness to obtain bleeding edge
versions of the products/services as soon as it’s available on the
market. Apple releases new iPhone models every year
and prices of the newer iPhones are quite high

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New Pricing Strategies
Market-penetration pricing involves setting a low
price for a new product in order to attract a large
number of buyers and a large market share.
Penetration pricing is an acquisition strategy
businesses use to attract new customers by
offering lower prices than their competitors.
Discount: daily or Monthly

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Learning Objective 2
Explain how companies find a set of prices that maximizes the profits from the
total product mix.

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 Product Mix Pricing Strategies

Optional Captive
Product
product product
line pricing
pricing pricing

Product
By-product
bundle
pricing
pricing

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Product Mix Pricing Strategies
Product Line and Optional Product Pricing
Product line pricing refers to the practice of reviewing and setting prices for
multiple products in coordination with one another.
Product line pricing takes into account the cost differences between products
in the line, customer evaluations of their features, and competitors’ prices.
A common example of product line pricing would be a company that makes
smartphones. Taking Apple that makes iPhones, the main product line is a
smartphone but each iPhone such as, iphone5, 5s,6, 6s, etc each is priced
differently showing that they offer different features within a certain product line.

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• Optional product pricing is when a company sells a base product at
a relatively low price, but sells complementary accessories at a
higher price.
• Optional product pricing takes into account optional or accessory
products along with the main product. For example when you order a
new laptop, you can select hard drives, software options.
• For example, car buyer may choose to order a global positioning
system (GPS) and Bluetooth wireless communication. Refrigerators
come with optional ice makers. And when you order a new PC, you
can select from array of processors, hard drives, docking systems,
software options, and service plans.

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 Product Mix Pricing Strategies
Captive product pricing is a pricing
strategy to attract a large volume of
customers to purchase a core product once
that has accessories.
Captive product pricing sets prices of
products that must be used along with the
main product.
for example Amazon makes little or no
profit on its Kindle readers and tablets
Printers are sold at a low price because the
printer manufacturer knows that you cannot
use the printer unless you buy ink for it.
Since ink cartridges for printers are often
proprietary, you must buy them from the
manufacturer.
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Product Mix Pricing Strategies

Product Line and Optional Product Pricing

By-product pricing sets a price for by-products in order to make the
main product’s price more competitive.
Product bundle pricing combines several products at a reduced price.
For example, fast-food restaurants bundle a burger, fries, and a soft
drink at a “combo” price.
Microsoft Office is sold as a bundle of computer software, including
Word, Excel, PowerPoint

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Learning Objective 3
Discuss how companies adjust their prices to take into account different types
of customers and situations.

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Price Adjustment Strategies

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Price Adjustment Strategies
Discount and allowance pricing reduces prices to reward customer responses
such as making volume purchases, paying early, or promoting the product.

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Price Adjustment Strategies
Segmented pricing involves selling a
product or service at two or more prices,
where the difference in prices is not
based on differences in costs.

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 Price Adjustment Strategies
Segmented Pricing
• Customer-segment pricing: different customers pay different prices for the
same product or service. Museums and movie theaters, for example, may
charge a lower admission for students and senior citizens.
• Product-form pricing: different versions of the product are priced differently
but not according to differences in their costs
• Location-based pricing: a company charges different prices for different
locations, even though the cost of offering each location is the same
• Time-based pricing: a firm varies its price by the season, the month, the day,
and even the hour

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Price Adjustment Strategies

Segmented Pricing
For segmented pricing to be effective:
• Market must be segmentable
• Segments must show different degrees of demand
• Costs of segmenting cannot exceed the extra revenue
• Must be legal

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Price Adjustment Strategies
Psychological Pricing
Psychological pricing considers the psychology of prices and not simply the
economics; the price is used to say something about the product.
For example, consumers usually perceive higher-priced products as having
higher quality
Reference prices are prices that buyers carry in their minds and refer to when
they look at a given product.
The reference price might be formed by noting current prices, remembering
past prices, or assessing the buying situation.

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Price Adjustment Strategies
Promotional Pricing
Promotional pricing is characterized by temporarily pricing products below the
list price, and sometimes even below cost, to increase short-run sales. Examples
include:
• special-event pricing
• limited-time offers
• cash rebates
• low-interest financing, extended warranties, or free maintenance

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Price Adjustment Strategies
Geographical pricing is used for customers in different parts of the country
or the world.

• FOB-origin pricing (means the buyer is at risk once the seller

ships the product. The purchaser pays the shipping)
• Uniform-delivered pricing (price plus freight to all customers)
• Zone pricing
• Basing-point pricing
• Freight-absorption pricing

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 Price Adjustment Strategies
Geographical Pricing
FOB-origin (free on board) pricing is a geographical pricing strategy in
which goods are placed free on board a carrier; the customer pays the freight
from the factory to the destination.
All three customers would pay the same factory price of $10,000, with
Customer A paying, say, $100 for shipping; Customer B, $150; and Customer
C, $250.
Uniform-delivered pricing is a geographical pricing strategy in which the
company charges the same price plus freight to all customers, regardless of
their location.

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Price Adjustment Strategies
Geographical Pricing
Zone pricing is a strategy in which the company sets up two or more zones
where customers within a given zone pay the same price.
For example East Zone and charge $100 freight to all customers in this zone, a
Midwest Zone in which it charges $150, and a West Zone in which it charges
$250.
Basing-point pricing means that a seller selects a given city as a “basing point”
and charges all customers the freight cost from that city to the customer.

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Price Adjustment Strategies

Geographical Pricing
Freight-absorption pricing is a strategy in which the seller absorbs all or part
of the freight charges in order to get the desired business.
Freight-absorption pricing is used for market penetration and to
hold on to increasingly competitive markets.

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Price Adjustment Strategies
Dynamic pricing involves adjusting prices
continually to meet the characteristics and
needs of individual customers and
situations.

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Price Adjustment Strategies
International pricing involves adjusting
prices continually to meet the
characteristics and needs of individual
customers and situations.
Companies that market their products
internationally must decide what prices to
charge in different countries.

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Learning Objective 4

Discuss the key issues related to initiating and responding to price changes.

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Price Changes
Initiating Price Changes
Price cuts occur due to:
• Excess capacity
• Increased market share
Price increases occur due to:
• Cost inflation
• Increased demand
• Lack of supply

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 Price Changes
Buyer Reactions to Pricing Changes

Price Price cuts

increases
• Product is • New models
“hot” will be
• Company available
greed • Models are not
selling well
• Quality issues

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Price Changes

Competitor Reactions to Pricing Changes

• Why did the competitor change the price?
• Is the price cut permanent or temporary?
• Is the company trying to grab market share?
• Is the company doing poorly and trying to increase sales?
• Is it a signal to decrease industry prices to stimulate demand?

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Price Changes

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Price Changes

Responding to Pricing Changes

Effective Action Responses
• Reduce price to match competition
• Maintain price but raise the perceived value through
communications
• Improve quality and increase price
• Launch a lower-price “fighting” brand

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Learning Objective 5
Overview the social and legal issues that affect pricing decisions.

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Public Policy and Pricing

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Public Policy and Pricing

Pricing Within Channel Levels

Price fixing legislation requires sellers to set prices without talking to competitors.
Predatory pricing legislation prohibits selling below cost with the intention of
punishing a competitor or gaining higher long-term profits by putting competitors
out of business.

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Public Policy and Pricing

Pricing Across Channel Levels

Robinson-Patman Act prevents unfair price discrimination by ensuring that
the seller offer the 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 to different retailers
• manufactures different qualities of the same product for different retailers

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Public Policy and Pricing
Pricing Across Channel Levels
Retail (or resale) price maintenance is when a manufacturer requires a
dealer to charge a specific retail price for its product, which is prohibited by law.

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Public Policy and Pricing

Pricing Across Channel Levels

Deceptive pricing occurs when a seller states prices or price savings that
mislead consumers or are not actually available to consumers.
• Bogus reference or comparison prices
• Scanner fraud and price confusion

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