Pricing Strategies in Marketing

Captive Product Pricing

• Companies use captive product pricing when a product needs to be used along with a main product, such as razor blades or games for a console.
• Often, the main product is priced low, while the "captive" product has a high markup.
• Sony's PS3 console was initially sold at a loss, hoping to recoup the money through game sales.
• However, companies need to find the right balance between the main product and captive product price, as consumers might resent the brand for the high cost of captive products.

By-Product Pricing

• By-products are generated alongside the main product.
• They can be sold to offset the cost of disposing of them, making the main product more competitive or profitable.
• Woodland Park Zoo turned animal waste into a source of extra revenue.

Product Bundle Pricing

• Companies offer bundles of products at a discounted price.
• Examples include fast-food "combos," bath and body stores offering multiple items at a reduced price, and telecommunication companies bundling services.

Promotional Pricing

• Products are priced below the list price, sometimes even below cost, to increase sales.
• This can be used to reduce inventory levels or attract customers during specific seasons.
• Examples include discounts, event-specific pricing, cash rebates, low-interest financing, extended warranties, and free maintenance.

Geographical Pricing

• Different prices are set for customers depending on their location, such as in different regions or countries.
• This can involve factors like shipping costs, taxes, and local competition.

The Three Cs Model of Price Setting

• This model looks at:
  • Costs: Sets the floor price.
  • Competitors: Provide an orienting point.
  • Customers: Establish the price ceiling, based on their perception of the product's uniqueness.

Price Setting Methods

• Markup pricing: Calculating a fixed percentage markup on costs.
• Target-return pricing: Setting prices to achieve a specific target rate of return on investment.
• Perceived-value pricing: Setting prices based on the value customers perceive in the product, even if it exceeds costs.
• Value pricing: Setting prices to reflect the value delivered to customers, such as superior quality or service.
• Going-rate pricing: Setting prices based on competitors' prices.
• Auction-type pricing: Allowing buyers to bid for products, with the highest bid winning.

Additional Factors in Final Price Determination

• Impact of other marketing activities: The final price must be consistent with the brand's quality and advertising.
• Company pricing policies: The price must align with company-wide pricing policies.
• Gain-and-risk-sharing pricing: The seller may absorb part or all of the risk if the product doesn't deliver the promised value to the buyer.

Pricing Above Competitors

• This can be successful if the company has a clear advantage in non-price elements like quality, brand image, or service.
• It's important to justify the higher price to customers.

Pricing Below Competitors

• The goal is to achieve high sales volume with lower profit margins.
• This works if there's a price-sensitive market and lower costs compared to competitors.
• It can lead to price wars, which are often counterproductive.

Computing Discount Amounts

• Trade discounts: Reductions from the list price, typically offered to different tiers of the supply chain.
• Net price: The price after the trade discount is applied.
• Discount rate: The percentage reduction from the list price.

Key Formulae

• Discount Amount = List Price x Discount Rate
• Net Price = List Price - Discount Amount
• List Price = Discount Amount / Discount Rate
• Discount Rate = Discount Amount / List Price