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Chapter 15
Strategic Pricing Methods
Tools For Instructors
Brief Chapter Outline
Learning Objectives
Chapter Overview (“Summing Up”)
Extended Chapter Outline with Teaching Tips
PowerPoint Slides with Teaching Notes
Answers to End of Chapter Learning Aids
Chapter Case Study
Additional Teaching Tips
Brief Chapter Outline
Considerations for Setting Price Strategies
Pricing Strategies
Pricing Tactics
Legal and Ethical Aspects of Pricing
Summing Up
End of Chapter Learning Aids
Chapter Case Study: Price Wars in The Cellular Market
Learning Objectives
LO1 Identify three methods that firms use to set their prices.
LO2 Describe the difference between an everyday low price strategy (EDLP) and a high/low
strategy.
LO3 Explain the difference between a price skimming and a market penetration pricing
strategy.
LO4 Identify tactics used to reduce prices to consumers.
LO5 Identify tactics used to reduce prices to businesses.
LO6 List pricing practices that have the potential to deceive customers.
Chapter Overview (“Summing Up”)
LO1 Identify three methods that firms use to set their prices.
The various methods of setting prices have their advantages and disadvantages. The three
primary methods are cost-based, competitor-based, and value-based. The cost-based techniques
are quick and easy but fail to reflect the competitive environment or consumer demand. Although
it is always advisable to be aware of what competitors are doing, using competitor-based pricing
should not occur in isolation without considering cost considerations and consumer reactions.
Taking a value-based approach to pricing, whether the improvement value or the total cost of
ownership approach, in conjunction with these other methods provides a nicely balanced method
of setting prices.
LO2 Describe the difference between an everyday low price strategy (EDLP) and a
high/low strategy.
An everyday low pricing strategy is maintained when a product’s price stays relatively constant
at a level that is slightly lower than the regular price from competitors using a high/low
¬strategy, and is less frequently discounted. -Customers enjoy an everyday low pricing strategy
because they know that the price will always be the about the same and a better price than the
competition. High/low pricing strategy starts out with a product at one (higher) price, and then
discounts the product. This strategy first attracts a less price sensitive customer that pays the
regular price, and then a very price sensitive customer that pays the low price.
LO3 Explain the difference between a price ¬skimming and a market penetration pricing
strategy.
When firms use a price skimming strategy, the product or service must be perceived as breaking
new ground or customers will not pay more than what they pay for other products. Firms use
price skimming to signal high quality, limit demand, recoup their investment quickly, and/or test
people’s price sensitivity. Moreover, it is easier to price high initially and then lower the price
than vice versa. Market penetration, in contrast, helps firms build sales and market share quickly,
which may discourage other firms from entering the market. Building demand quickly also
typically results in lowered costs as the firm gains experience making the product or delivering
the service.
LO4 Identify tactics used to reduce prices to ¬consumers.
Marketers use a variety of tactics to provide lower prices to consumers. The tactics include
markdowns, quantity dis-counts, seasonal discounts, coupons, rebates, leasing, price bundling,
leader pricing, and price lining. For example, leader pricing involves retailers pricing certain
products or services at very low prices, with the hope that these same customers will also buy
other, more profitable items.
LO5 Identify tactics used to reduce prices to businesses.
Seasonal discounts give retailers an incentive to buy prior to the normal selling season, cash
discounts prompt them to pay their invoices early, and allowances attempt to get retailers to
advertise the manufacturer’s product or stock a new product. In addition, quantity discounts can
cause retailers to purchase a larger quantity over a specific period of time or with a particular
order. Finally, zone pricing bases the cost of shipping the merchandise on the distance be-tween
the retailer and the manufacturer—the farther away, the more it costs.
LO6 List pricing practices that have the potential to deceive customers.
There are almost as many ways to get into trouble by setting or changing a price as there are
pricing strategies and tactics. Some common legal issues pertain to advertising deceptive prices.
Specifically, if a firm compares a reduced price with a “regular” or reference price, it must
actually have sold that product or service at the regular price. Bait and switch is another form of
deceptive price advertising, where sellers advertise items for a very low price with-out the intent
to really sell any at that price. Collusion among firms to fix prices is always illegal.
Extended Chapter Outline With Teaching Tips
Considerations For Setting Price Strategies (PPT slide 15-4)
Cost-Based Methods (PPT slide 15-5)
Competition-Based Methods (PPT slide 15-6)
Value-Based Pricing Methods (PPT slide 15-7)
Improvement Value Method (PPT slide 15-8)
Cost of Ownership Method (PPT slide 15-9)
Check Yourself: Several questions are offered for students to check their understanding of core
concepts. (PPT slide 15-10)
1What are the three different strategies for setting pricing?
Answer: The three different strategies for setting pricing are cost-based,
competitor-based, and value-based.
2How can you use value-based strategies for setting prices?
Answer: You can use value-based strategies for setting prices with two different methods:
with the improvement value method, the manager must estimate the improvement value
Pricing Strategies (PPT slide 15-11)
Everyday Low Pricing (EDLP) (PPT slide 15-13)
High/Low Pricing
Reference Pricing (PPT slide 15-14, 15)
New Product Pricing (PPT slide 15-16)
Market Penetration Pricing
Price Skimming
Check Yourself: Several questions are offered for students to check their understanding of core
concepts. (PPT slide 15-17)
3Explain the difference between EDLP and High/Low Pricing?
Answer: With an everyday low pricing (EDLP) strategy, companies stress the continuity
of their retail prices at a level somewhere between the regular, nonsale price and the
deep-discount sale prices their competitors may offer. 15 By reducing consumers’ search
costs, EDLP adds value; consumers can spend less of their valuable time comparing
4What are alternative pricing strategies to consider in introducing a new product?
Answer: Some new product pricing strategies include price skimming, which is offering a
Pricing Tactics (PPT slide 15-18)
Pricing Tactics Aimed at Consumers (PPT slide 15-19)
Markdowns (PPT slide 15-20)
Quantity Discounts for Consumers (PPT slide 15-21)
Seasonal Discounts (PPT slide 15-22)
Coupons (PPT slide 15-23)
Rebates (PPT slide 15-23)
Leasing (PPT slide 15-24)
Price Bundling (PPT slide 15-25)
Leader Pricing (PPT slide 15-26)
Price Lining (PPT slide 15-27)
Business Pricing Tactics and Discounts (PPT slide 15-28)
Seasonal Discounts (PPT slide 15-29)
Cash Discounts (PPT slide 15-30)
Allowances (PPT slide 15-31)
Quantity Discounts (PPT slide 15-32)
Uniform Delivered versus Zone Pricing (PPT slide 15-33)
Check Yourself: Several questions are offered for students to check their understanding of core
concepts. (PPT slide 15-34)
1What are some consumer-oriented pricing tactics?
2What are some business-oriented pricing tactics?
Legal And Ethical Aspects Of Pricing (PPT slide 15-35)
Deceptive or Illegal Price Advertising (PPT slide 15-36)
Deceptive Reference Prices
Loss Leader Pricing
Bait and Switch
Predatory Pricing (PPT slide 15-37)
Price Discrimination (PPT slide 15-38)
Price Fixing (PPT slide 15-39)
Check Yourself: Several questions are offered for students to check their understanding of core
concepts. (PPT slide 15-41)
1What common pricing practices are considered to be illegal or unethical?
Answer: Some common illegal or unethical pricing practices include deceptive reference
