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Pricing Strategies andTactics
Copyright 2001 by McGraw-Hill Ryerson Limited
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Chapter Goals
To gain an understanding of:
Price competition and value pricing
Pricing strategies for market entry:
skimming and penetration pricing Price discounts and allowances
Geographic pricing strategies
Special strategies including one-price,
flexible-price, price lining, resale pricemaintenance, leader pricing, everyday lowprice, odd pricing
Legal issues associated with pricing
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Pricing Strategy
how does a company decide what price tocharge for its products and services?
what is the price anyway? doesnt price
vary across situations and over time? some firms have to decide what to charge
different customers and in differentsituations
they must decide whether discounts are tobe offered, to whom, when, and for whatreason
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Price vs. NonpriceCompetition In price competition,price competition, a seller regularly offers
products priced as low as possible andaccompanied by a minimum of services.
In nonprice competitionnonprice competition, a seller has stableprices and stresses other aspects ofmarketing.
With value pricingvalue pricing, firms strive for morebenefits at lower costs to consumer.
With relationship pricing,relationship pricing, customers haveincentives to be loyal-- get price incentive ifyou do more business with one firm.
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Nonprice Competition
some firms feel price is the main competitivetool, that customers always want low prices
other firms are looking for ways to add value,
thereby being able to avoid low prices sometimes prices have to be changed in
response to competitive actions
many firms would prefer to engage innonprice competitionnonprice competition by building brandequity and relationships with customers
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Relationship Pricing
Uses price as a method to buildlong-term relationships with thebest customers
Focuses on giving better deals tobetter customers
Goal is to price relative to the value
of the customer to the firm, whilebuilding loyalty and stimulatingrepeat buying
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The Price DeterminationProcess In pricing, an organization first must decide on its
pricing goal.
The next step is to set the base price for a product.
The final step involves designing pricingstrategies that are compatible with the rest of themarketing mix.
Many strategic questions must be answered:
Will our company compete on the basis ofprice or other factors?
What kind of discount schedule (if any) shouldbe adopted?
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SELECT PRICING OBJECTIVE
SELECT METHOD OF DETERMINING THE BASE PRICE:
Cost-plus
pricing
Price based on
both demand
and costs
Price set in
relation to
market alone
DESIGN APPROPRIATE STRATEGIES:
Price vs. nonpricecompetition
Skimming vs.
penetration
Discounts and allowances
Freight paymentsOne price vs.
flexible price
Psychological pricing
Leader pricingEveryday low vs.
high-low pricing
Resale price
maintenance
The Process: An Illustration
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Market EntryPricing Strategies MarketMarket--Skimming PricingSkimming Pricing: Setting a high initial
price for a new product.
Works if product is new, distinctive and desired
Early in Product Life Cycle, when demandinelastic
Protected by entry barriers, e.g. patents
MarketMarket--Penetration PricingPenetration Pricing: Setting a low initialprice for a new product.
Works if large market, elastic demand
Economies of scale are possible
Fierce competition
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Discounts and Allowances
Quantity discount:Quantity discount: The more you buy,the cheaper it becomes-- cumulative andnon-cumulative.
Trade discountsTrade discounts:: Reductions from listfor functions performed-- storage,promotion.
Cash discountCash discount:: A deduction granted to
buyers for paying their bills within aspecified period of time, (after firstdeducting trade and quantity discountsfrom the base price)
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3/10, NET 303/10, NET 30
1/7, NET 301/7, NET 30
Percentage to be
deducted if bill ispaid within specified
time
Percentage to be
deducted if bill ispaid within specified
time
Number of days from
date of invoice in
which bill must be
paid to receive cash
discount
Number of days from
date of invoice in
which bill must be
paid to receive cash
discount
Number of days from
date of invoice after
which bill is overdue
Number of days from
date of invoice after
which bill is overdue
Calculating a Cash Discount
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Other Discounts and Allowances
Seasonal Discounts
Forward DatingPromotional Allowances
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The Competition Act
Predatory pricing:Predatory pricing: Selling at unreasonablylow prices to lessen competition.
Price discrimination:Price discrimination: The use of different
prices for different customers. It is illegal if a price advantage is granted to
one, but not another, where both compete andthe articles are similar.
Granting promotional allowances must bedone on a proportionate basis to allcustomers.
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Geographic PricingStrategies F.O.B. PointF.O.B. Point--ofof--Production pricing:Production pricing: Price
quoted at factory-- buyer paystransportation.
Uniform delivered pricing:Uniform delivered pricing: Same deliveredprice quoted to all; works if transportationcosts small.
ZoneZone--delivered pricing:delivered pricing: Set same price
within several zones, e.g. Maritimes,Quebec.
FreightFreight--absorption pricing:absorption pricing: Seller absorbstransport cost to penetrate market.
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Special Pricing Strategies
firms may adopt a oneone--price strategyprice strategy orcharge different prices to differentcustomers
flexible pricing strategies:flexible pricing strategies: shoppers maypay different prices if they buy the samequantity
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Psychology of Pricing the psychologypsychology of pricing suggests that price
will convey a message about the product orservice being sold
leader pricing bait pricing
prestige pricing
price liningprice lining involves setting prices at a small
number of fixed levels within a retail store odd pricingodd pricing is often used to suggest a
bargain, while even pricing is used more inprestige, fashion stores
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Questionable Pricing Practices
resale price maintenanceresale price maintenance involves asupplier requiring that intermediaries sella product at a certain price: illegal inCanada, firms are allowed to specify asuggested retail price
some firms reduce prices, possibly evenbelow cost, to attract customers; this formof lossloss--leaderleader pricing is not illegal unlessit persists for a long time with the goal ofeliminating competition (predatorypricing)
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In EDLP pricingEDLP pricing, a retailer charges aconstant, low price with no temporary
discounts. For example: Wal-Mart, PriceClub, and Saturn.
In highhigh--low pricinglow pricing, a retailer charges higher
prices but then runs frequent promotions inwhich prices are temporarily lowered.
Everyday Low Price (EDLP)vs. High/Low Pricing