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1 Chapter 10
2 Managing Pricing Decisions
1.1 ETHICAL DIMENSION 10
Ethical Perspective
1. Intel: Is it unethical for Intel to pursue the Classmate project if its primary purpose is to
target a new market? Should the company be encouraged to develop the Classmate computer
without a profit incentive; that is, should it offer the project only at cost?
2. Governments: Should governments support the OLPC project with its nonprofit perspective
and low-cost computer over Intel’s for-profit Classmate project?
1.2 KEY TERMS
cost leadership A marketing strategy in which a firm utilizes its core cost advantages to gain an
advantage over competitors due to flexibility in pricing strategies as well as its ability to translate
cost savings to the bottom line.
pricing objectives The desired or expected results associated with a pricing strategy that is
consistent with other marketing-related objectives.
market share The percentage of total category sales accounted for by a firm.
penetration pricing A pricing strategy in which a firm’s objective is to gain as much market
share as possible.
price skimming A pricing strategy in which a firm enters a market at a relatively high price
point, usually in an effort to create a strong price-quality relationship for the product.
target return on investment (ROI) A pricing strategy in which a bottom-line profit is
established first and then pricing is set to achieve that target.
price elasticity of demand The measure of customers’ price sensitivity estimated by dividing
relative changes in quantity sold by relative changes in price.
competitor-based pricing A pricing strategy in which a firm decides to price at some market
average price in context with prices of competitors.
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price war When a company purposefully makes pricing decisions to undercut one or more
competitors and gain sales and net market share.
stability pricing A pricing strategy n which a firm attempts to find a neutral set point for price
that is neither low enough to raise the ire of competition nor high enough to put the value
proposition at risk with customers.
value pricing A pricing strategy in which a firm attempts to take into account the role of price as
it reflects the bundle of benefits sought by the customer.
product line pricing (price lining) A pricing tactic in which a firm affords the marketing
manager an opportunity to develop a rational pricing approach across a complete line of related
items.
price points Prices established to convey the differences in benefits offered as the customer
moves up and down the product line.
captive pricing (complementary pricing) A pricing tactic of gaining a commitment from a
customer to a basic product or system that requires continual purchase of peripherals to operate.
price bundling A pricing tactic in which customers are given the opportunity to purchase a
package deal at a reduced price compared to what the individual components of the package
would cost separately.
reference pricing A pricing strategy in which a firm gives customers comparative prices when
considering purchase of a product so they are not viewing a price in isolation from prices of
other choices.
prestige pricing A pricing tactic that lends prestige to a product or brand by virtue of a price
relatively higher than the competition.
odd pricing A pricing tactic in which the price is not expressed in whole dollar increments.
even pricing A pricing tactic in which the price is expressed in whole dollar increments.
psychological pricing Creating a perception about price merely from the image the numbers
provide the customer.
one-price strategy A pricing tactic in which the price marked on a good is what it typically sells
for.
variable pricing A pricing tactic in which customers are allowed or encouraged to haggle about
prices.
every day low pricing (EDLP) A pricing tactic that entails relatively low, constant prices and
minimal spending on promotional efforts.
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high/low pricing A pricing strategy in which the retailer offers frequent discounts, primarily
through sales promotions to stated regular prices.
auction pricing A pricing tactic in which individuals competitively bid against each other and
the purchase goes to the highest bidder.
reverse auctions When sellers bid prices to buyers and the purchase typically goes to the lowest
bidder.
cost-plus pricing Building a price by adding standardized markup on top of the costs associated
with the offering.
markup on cost The addition to the price of an offering after costs have been considered.
markup on sales price Using the sales price as a basis for calculating the markup percentage.
average-cost pricing A pricing decision made by identifying all costs associated with an
offering to come up with what the average cost of a single unit might be.
target return pricing A pricing decision made by considering fixed and variable costs and then
demand forecasting to determine the price per unit.
discounts Direct, immediate reductions in price provided to purchasers.
allowances A remittance of monies to the consumer after the purchase of the product.
cash discounts A percentage discount off invoice to elicit quicker payment by the customer.
trade discounts An incentive to a channel member for performing some function in the channel
that benefits the seller.
quantity discounts Discounts taken off an invoice price based on different levels of product
purchased.
seasonal discounts Discounts that reward the purchaser for shifting part of the inventory storage
function away from the manufacturer.
promotional allowances Sales promotions initiated by the manufacturer and carried out by the
retailer, which is then compensated by the manufacturer.
FOB (free on board) Determination of title transfer and freight payment based on shipping
location.
uniform delivered pricing When the same delivery fee is charged to customers regardless of
geographic location within a set area.
zone pricing When shippers set up geographic pricing zones based on the distance from the
shipping location.
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just noticeable difference (JND) The amount of price increase that can be taken without
impacting customer demand.
price fixing When companies collude to set prices at a mutually beneficial high level.
price discrimination When a seller offers different prices to different customers without a
substantive basis, such that competition is reduced.
deceptive pricing Knowingly stating prices in a manner that gives a false impression to
customers.
bait and switch When a seller advertises a low price but has no intent to actually make the lower
priced item available for sale.
fair trade laws Laws designed to allow manufacturers to establish artificially high prices by
limiting the ability of wholesalers and retailers to offer reduced or discounted prices.
minimum markup laws Laws that require retailers to apply a certain percentage of markup to
their products for sale.
loss leader products Products sacrificed at prices below costs in an effort to attract shoppers to
the retail location.
1.3 APPLICATION QUESTIONS
1 Why might penetration pricing potentially negatively impact brand image and product
positioning in the long run? Given this risk, why would a marketing manager use penetration
pricing? Identify a brand (other than the examples in the chapter) that you believe is engaged
in penetration pricing.
3. Pricing against competitors is common. Yet, the approach carries some significant problems.
a. What are the advantages of competitor-based pricing?
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b. What are the risks of using competitor-based pricing exclusive of other
approaches?
c. Identify a few industries in which taking competitor-based pricing into account
might be especially beneficial when developing an overall pricing strategy. What caused
you to select the industries you did?
4. Review Exhibit 10.3 on price-quality positioning along with the accompanying discussion.
a. Consider the low quality/high price quadrant. Identify a brand (other than the examples
in the chapter) that you believe presently resides in this quadrant. How is it able to
command a high price? Do you believe the pricing strategy is sustainable for that brand?
Why or why not?
b. Consider the high quality/low price quadrant. Identify a brand (other than the examples
in the chapter) that you believe presently resides in this quadrant. In your opinion, why
has the brand undertaken this pricing strategy? Do you believe there are risks to the
brand in remaining too long in that quadrant? Why or why not?
5. Select any three of the pricing tactics identified in the chapter. For each tactic:
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a. Identify a brand (other than the examples in the chapter) that you believe is currently
employing that tactic.
b. Provide evidence to support their use of that tactic.
c. Is their use of the tactic effective? Why or why not?
d. What factors might cause a need to abandon this tactic in favor of another?
6. Assume that you are a marketing manager for Pantene Shampoo and Conditioner, two of
Proctor & Gamble’s star products. Several competitors have recently begun to cut prices to
retailers and also to offer more aggressive channel allowances in order to boost sales and
market share.
a. What options do you have as a response to the competitive price declines?
b. What are the risks associated with each of the options?
c. Assuming Pantene is the market leader in its category, what response to the price cuts do
you recommend?
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MANAGEMENT DECISION CASE: Price Unbundling: An Uncommon Word Leading to
Very Nice Financial Returns
Questions for Consideration:
1. What type of pricing strategies and tactics are airlines using given their base ticket price for
the seat plus additional fees for everything else? What other creative additional fees might
they charge in the future?
2. Southwest Airlines prides itself on allowing passengers to check bags for free. Given that
virtually all of Southwest’s competitors have started charging these extra fees, do you think
they will continue to hold out before it too has to charge extra fees? Why should they? How
does the pricing strategy that Southwest Airlines employ differ from its competitors and what
competitive advantage does Southwest enjoy by not charging extra fees?
3. What kind of unbundled pricing strategies or fees would you recommend for other service
industries like hotels, restaurants, or cruise lines given the relative success of such fees in the
air travel industry?
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1.4 SUGGESTED VIDEO
Walmart vs Target (5:00 minutes)
Description: BusinessWeek story in competitive pricing between Walmart and Target. Walmart
tries to maintain its low cost image by aggressively competing with Target.
1. How can Walmart change its image with consumers?
2. Will a change in image allow Walmart to charge a price premium?
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