Pricing Strategies

Pricing Strategies

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Pricing Strategies (graphics not included)

One of the four major elements of the marketing mix is price. Pricing is an important strategic issue because it is related to product positioning. Pricing also affects other marketing mix elements as well, such as product features, channel decisions, and promotion. A pricing strategy is a course of action designed to achieve pricing objectives. This strategy helps marketers set prices. There are many ways to price a product. The following, figure 1.1, shows a list of five major types of pricing strategies. (Business, 8th Ed., pg 421)

Figure 1.1

New-Product Pricing
There are two primary types of new product pricing strategies, price skimming and penetration pricing. An organization can use one or both of them over a calculated period of time.

Price Skimming involves charging the highest price possible for a short time where a new, innovative, or much-improved product is launched onto a market. The objective with skimming is to “skim the cream” off customers who are willing to pay more to have the product sooner. Prices are lowered once demand falls. (Business, 8th Ed., pg 422)

Penetration Pricing is the opposite extreme; it involves the setting of lower, rather than higher price for a new product. The main purpose is to build market share quickly. The seller wants to discourage competitors from entering the market by building a large market share quickly. (Business, 8th Ed., pg 422)

Differential Pricing
Differential pricing occurs when a company attempts to charge different prices to two different customers for what is essentially the same product. For this to be effective, the market must have multiple segments with different price sensitivities. Differential pricing can happen in several ways: negotiated pricing, secondary-market pricing, periodic discounting, and random discounting. The following describes two of the ways.

Negotiated Pricing happens when the final price is established through bargaining between the seller and the buyer. This occurs in various industries and at all levels of distribution. Prices are normally negotiated for houses, cars and used merchandise. (Business, 8th Ed., pg 423)

Periodic Discounting is the temporary reduction of prices. This normally happens when retailers have holiday sales or seasonal sales. The downside of this is that customers can predict when the price reductions will occur and hold off on buying until the sales take place. (Business, 8th Ed., pg 423)

Psychological Pricing
Psychological pricing is a marketing practice based on the theory that certain prices have a psychological impact.

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This method is designed to encourage purchases that are based on emotional rather then rational responses. The following describes two of the methods.

Reference Pricing happens when a product is priced at a moderate level and placed next to a more expensive model/brand in hopes that the customer will use the higher price as a reference. The seller hopes that the comparison will cause the customer to view the moderate price favorably. (Business, 8th Ed., pg 424)

Bundle Pricing is the packaging of two or more products to be sold for a single price. This is designed to increase sales, offering discounted pricing when customers purchase several different products at the same time. The technique is often used to sell products that are complementary to a main product while showing a savings compared to purchasing each product individually. (Business, 8th Ed., pg 424)

Product-Line Pricing
Instead of pricing products on an item-by-item basis, some marketers use Product-line pricing. This means establishing and adjusting the prices of multiple products with in a product line. In doing this marketers can set prices so that one product can be very profitable which another increases market share by simply having a lower price. There are several strategies to choose from, they are captive pricing, premium pricing, and price lining.

Captive Pricing is the pricing of supplies which cannot be used without a companion product. The supply product is priced low but the price on the item required to operate it can be at a much higher level. (Business, 8th Ed., pg 425)

Premium Pricing is the practice of keeping the price of a product or service artificially high in order to encourage favorable perceptions among buyers, based solely on the price. This is intended to exploit the tendency for buyers to assume that expensive items represent exceptional quality and distinction. Other products in the line are priced lower to attract the price-sensitive shoppers. (Business, 8th Ed., pg 425)

Promotional Pricing
With this, price is often coordinated with promotion. Promotional pricing is an approach to pricing that is often used to clear excess stocks or to generate high-volume sales in short periods of time. Examples of promotional pricing include price leaders, special-event pricing, and comparison discounting.

Special-event Pricing is meant to increase sales volume. Many sellers coordinate price with advertising for seasonal or special situations. It involves advertised sales or price cutting linked to holiday, season, or event. (Business, 8th Ed., pg 425)

Comparison Discounting sets the price of a product at a specific price and at the same time compares it with a higher price. Customers may find comparative discounting informative, having a significant impact on them. However, because this type of strategy on occasion has led to deceptive pricing practices, the Federal Trade Commission (FTC) has established guidelines for comparison discounting. (Business, 8th Ed., pgs 425-426)

Sales Promotion

Sales promotion plays a vital role in inducing the consumer to buy your product. This includes all the activities, which are directed towards promoting sales. In a nutshell, sales promotion is any activity which improves the effectiveness of personal selling and advertising. Sales promotion takes into consideration the communication gaps that always exist between the producer and the consumer and should therefore be closely coordinated with advertising the personal selling. (Business, 8th Ed., pg 482)

Sales promotion activities may be used solely or in combination to achieve a goal or set of goals. Marketers use these promotion activities and materials for numerous purposes, which include:

← Attract new customers
← Encourage trial for a new product
← Invigorate the sales of a mature brand
← Boost sales to current customers
← Reinforce advertising
← Increase traffic in retail stores
← Steady irregular sales patterns
← Build up reseller inventories
← Neutralize competitive promotional efforts
← Improve shelf space and displays

Sales promotion objectives should be consistent with the organization’s general goals and with its marketing and promotional objectives. (Business, 8th Ed., pg 482)

Sales promotion methods can be classified as promotional techniques for both consumer and trade sales. The consumer sales method attracts consumers to particular retail stores and motivates them to purchase certain new or established products. The trade sales method encourages wholesalers and retailer to stock and promote a certain product. Incentives are commonly awarded to resellers who buy products or positively respond in other ways. Many factors are taken into consideration when deciding which sales promotion methods to use. Let’s look at a few important methods. (Business, 8th Ed., pgs 482-485)

← Rebates return back a part of the purchase price of the product.
← Coupons reduce the retail price of an item by a set amount at the time of purchase.
← Samples are free products given to customers to encourage usage.
← Premium is a gift that a seller offers it’s customers in return for buying a product.
← Frequent-User Incentive is a program developed to reward customers who engage in repeat purchases.
← Point-of-Purchase Displays are promotional materials placed within a retail store.
← Buying Allowance is a temporary price reduction offered to resellers for getting specified quantities of a product.
← Cooperative Advertising is an arrangement between a manufactured and a retailer where the manufactures agrees to pay part of the advertising costs.


What are wholesalers?
Wholesalers provide the primary route for manufacturers’ goods to reach the retail market. The wholesalers buy goods in very large quantities direct from the manufacturers and then sell the goods in bulk to retail businesses at trade prices. Wholesalers may be the most misunderstood of marketing intermediaries. Producers at times try to eliminate them and deal directly with retailers and consumers to save costs but this may or may not cut distribution expenses, see figure 1.2. (Business, 8th Ed., pgs 440-441)

Figure 1.2

For the majority of retailers it is impossible to buy direct from manufacturers especially if they are offering a wide range of product lines even if the goods are offered at lower prices. This is merely because many businesses wouldn't be able buy in bulk and would have to buy from many different manufacturers to obtain the choice of lines they seek, thus the need for wholesalers. (Business, 8th Ed., pgs 440-441)

Retailer Services
Wholesalers help retailers by buying in bulk quantities and then selling in smaller quantities and delivering goods to retailers. Wholesalers also stock a variety of items in one place making it easier for the retailer to purchase various items without having to buy from different producers. They also provide help in three other critical areas: (Business, 8th Ed., pgs 441-443)

← Promotion, some wholesalers help to promote the products they sell to retailers.
← Market Information, wholesalers have numerous contacts with local businesses and distant suppliers.
← Financial Aid, by making timely and frequent deliveries wholesalers allow retailers to keep their inventory low in relation to sales. Some wholesalers provide financial support through loans and delayed billing.

Manufacturer Services
Some services that wholesalers provide to manufactures are the same as the ones provided to retailers. While others are very different, such as: (Business, 8th Ed., pg 443)

← Providing an Instant Sales Force, some wholesalers provide the producers with an instant sales force so that producers’ sales representatives need not call on retailers. This can result in huge savings for producers.
← Reducing Inventory Cost, wholesalers buy goods in large quantity from manufactures and store them for resale.
← Assuming Credit Risks, when producers sell through wholesalers, it’s the wholesaler who extends credit, makes collections, and assumes the risk of nonpayment from retailers. This service reduces producers all-around cost.
← Furnishing Market Information, wholesalers also supply valuable market information to manufactures that includes consumer demand, competition, and buying trends.


Business, 8th Ed., by William M. Pride, Robert J. Hughes, and Jack R. Kapoor.
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