Pricing Strategies Quiz

Pricing Strategies: Advanced Topics

• This chapter explores advanced pricing strategies, including those for new products, managing a portfolio of prices, adjusting prices for various customer segments and situations, responding to price changes, and the impact of public policy.

Learning Objectives

• 11.1: Describes major strategies for pricing new products.
• 11.2: Explains how companies select a range of prices to maximize profits from their entire product portfolio.
• 11.3: Discusses how companies adapt prices based on diverse customer groups and specific circumstances.
• 11.4: Discusses initiating and responding to price changes.
• 11.5: Explains public policy concerns and laws influencing pricing decisions.

New Product Pricing Strategies

• Market-skimming pricing: Sets high initial prices to extract revenue from different market segments.
  • Product quality and image must support the high price.
  • Consumers need to desire the product at the stated price.
• Market-penetration pricing: Establishes a low initial price to capture a large market share.
  • Gillette's Fusion ProGlide starter pack is an example.

Product Mix Pricing Strategies

• Product line pricing: Sets prices considering the cost variations between different products in a line, customer value perceptions, and competitor prices.
• Optional product pricing: Includes prices for accessory products alongside the main product.
• Captive product pricing: Establishes prices for products used with the main product (e.g., printer ink).
• By-product pricing: Sets prices for byproducts to enhance profitability of the main product. (E.g., chicken feet.)
• Product bundle pricing: Combines multiple products into a single package deal to incentivize purchasing.

Price Adjustment Strategies

• Discount and allowance pricing: Reduces prices for volume purchases, early payments, or promotions.
  • Includes trade-in and promotional allowances.
• Segmented pricing: Adjusts prices for different customer groups, product forms, locations, and time periods.
  • Effectiveness hinges on market segmentation, varying demand levels, and avoiding exceeding extra revenue from segmentation costs.
  • Examples include discounts for military or veteran customers.
• Psychological pricing: Sets prices based on psychological factors rather than just economics.
  • Reference prices are considered.
  • Dunkin's Sip coffee experiment highlights the impact of price and context on brand perception.
• Promotional pricing: Temporarily reduces prices to boost short-term sales.
  • Techniques include special events, limited-time offers, cash rebates, and financing options.
• Geographical pricing: Adjusts prices based on different locations.
  • Types include FOB pricing (free on board), uniform pricing, zone pricing, basing-point pricing, and freight-absorption pricing.
• Dynamic and personalized pricing: Continuously adjusts prices based on individual customer characteristics and circumstances.
  • Online apps facilitate price comparisons.
• International pricing: Adjusts prices across international markets.
  • Companies adapt strategies to different countries depending on customer wealth levels and the specific market segment.

Price Changes

• Initiating price changes: Price cuts are often driven by excess capacity or aiming for greater market share. Price increases may be due to cost inflation or scarcity. WaveStorm is an example.
• Buyer reactions to price changes: Price increases might be perceived as "hot" products or greed by the company. Price cuts may be attributed to new model releases or quality/value issues.
• Competitor reactions to price changes: Determining why competitors made adjustments. Identifying whether changes are permanent or temporary. Assessing competitive responses.
• Responding to competitor price changes: Companies may either maintain their price or reduce their price.

Public Policy and Pricing

• Pricing practices are subject to public policy.
  • Price fixing concerns collusion.
  • Predatory pricing prohibits selling below cost intending to diminish competitors. Amazon is a publicized example.
• Pricing across different channels: Legislation, such as the Robinson-Patman Act, mandates ensuring equal pricing of products across market segments. Price discrimination is allowed if supported by cost variations or differences in product quality. Retail price maintenance is illegal.
• Pharmaceutical Pricing issues: Consumers want fairness and value in their medication processes.

Discussion Questions

• How should a company respond to a competitor's price changes?

• Describe the major public policy issues influencing pricing.