PRICE ADJUSTMENT STRATEGIES
Use Chapter Objective 5 here.
Use Table 9.2 here.
Discounts include:
Cash discount is a price reduction to buyers who pay their bills promptly.
Quantity discount is a price reduction to buyers who buy large volumes.
Functional discount (also called a trade discount) is offered by the seller to
trade-channel members who perform certain functions.
Seasonal discount is a price reduction to buyers who buy merchandise or services out of
season.
Allowances are a reduction from the list price.
Trade- in allowances are price reductions given for turning in an old item when buying a
new one.
Promotional allowances are payments or price reductions to reward dealers for
participating in advertising and sales support programs.
Use Key Terms Discount and Allowance here.
Segmented pricing occurs when the company sells a product or service at two or more prices,
even though the difference in prices is not based on differences in costs.
Customer-segment pricing: different customers pay different prices for the same product
or service.
Product-form pricing: Different versions of the product are priced differently but not
according to differences in their costs.
Location-based pricing: A company charges different prices for different locations, even
though the cost of offering each location is the same.
Time-based pricing: A firm varies its price by the season, the month, the day, and even
the hour.
Use Marketing Ethics here.
Use Key Term Segmented Pricing here.
Psychological pricing occurs when sellers consider the psychology of prices and not simply the
economics.
One aspect of psychological pricing is reference prices—prices that buyers carry in their
minds and refer to when looking at a given product.
Use Key Terms Psychological Pricing and Reference Prices here.
Use Discussion Question 9-5 here.
With promotional pricing, companies will temporarily price their products below list price
and sometimes even below cost to create buying excitement and urgency.
Discounts: A reduction from normal prices to increase sales and reduce inventories.
Special-event pricing: Pricing differently in certain seasons to draw more customers.
Limited-time offers (flash sales): Create buying urgency and make buyers feel lucky to
have gotten in on the deal.
Cash rebates: Offered to consumers who buy the product from dealers within a specified
time; the manufacturer sends the rebate directly to the customer.
Promotional pricing can have adverse effects.
1. Price promotions can create “deal-prone” customers who wait until brands go on sale
before buying them.
2. Constantly reduced prices can erode a brand’s value in the eyes of customers.
3. Promotional pricing can lead to industry price wars.
Use Key Term Promotional Pricing here.
Geographical Pricing involves deciding how to price products for customers located in different
parts of the country or world.
FOB-origin pricing: The goods are placed free on board (hence, FOB) a carrier. At
that point the title and responsibility pass to the customer, who pays the freight from the
factory to the destination.
Uniform-delivered pricing is the opposite of FOB pricing. Here, the company charges
the same price plus freight to all customers, regardless of their location.
Zone pricing falls between FOB-origin pricing and uniform-delivered pricing. All
customers within a given zone pay a single total price; the more distant the zone, the
higher the price.
Basing-point pricing: The seller selects a given city as a “basing point” and charges all
customers the freight cost from that city to the customer location, regardless of the city
from which the goods are actually shipped.
Freight-absorption pricing. Using this strategy, the seller absorbs all or part of the
actual freight charges in order to get the desired business.
Dynamic and Online Pricing
Dynamic Pricing is adjusting prices continually to meet the characteristics and needs of
individual customers and situations.
Dynamic pricing is extremely prevalent online where the Internet seems to be taking us back to a
new age of fluid pricing.
Dynamic pricing offers many advantages:
Online sellers can mine their databases to gauge a specific shopper’s desires, measure his
or her means, and instantaneously tailor products to fit that shopper’s behavior, and price
products accordingly.
Buyers can also negotiate prices at online auction sites and exchanges.
Online buyers benefit from the Web and dynamic pricing. A wealth of price comparison
sites—such as Yahoo! Shopping and PriceGrabber—offer instant product and price
comparisons from thousands of vendors.
Use Critical Thinking Exercise 9-7 here.
Use Key Term Dynamic Pricing here.
Use Online, Mobile, and Social Media Marketing here.
Use Marketing at Work 9.2 here.
International Pricing
The price that a company should charge in a specific country depends on many factors, including
economic conditions, competitive situations, laws and regulations, and development of the
wholesaling and retailing system.
Costs play an important role in setting international prices.
Use Critical Thinking Exercise 9-6 here.
PRICE CHANGES
Initiating Price Changes
Initiating Price Cuts
Several situations may lead a firm to consider cutting its price.
Excess capacity
Falling demand in the face of strong price competition
Desire to dominate market
Initiating Price Increases
A major factor in price increases is cost inflation.
When raising prices, the company must avoid being perceived as a price gouger.
One technique for avoiding this problem is to maintain a sense of fairness surrounding any price
increase.
Buyer Reactions to Price Changes
Customers do not always view price changes in a straightforward or rational way. They may
view price cuts or price increases in several ways.
Competitor Reactions to Price Changes
Competitors are most likely to react when the number of firms involved is small, when the
product is uniform, and when the buyers are well informed about products and prices.
Responding to Price Changes (Figure 9.5)
The firm needs to consider several issues: Why did the competitor change the price? Is the price
change temporary or permanent? What will happen to the company’s market share and profits if
it does not respond? Are other competitors going to respond?
Figure 9.5 shows the ways a company might assess and respond to a competitor’s price cut.
Use Figure 9.5 here.
1. The company could reduce its price to match the competitor’s price.
2. The company could maintain its price but raise the perceived value of its offer.
3. The company could improve quality and increase price, moving its brand into a higher
price-value position.
4. The company could launch a low-price “fighter brand”—adding a lower-price item to
the line or creating a separate lower-price brand.
Use Chapter Objective 6 here.
Use Figure 9.6 here.
PUBLIC POLICY AND PRICING
Figure 9.6 shows the major public policy issues in pricing.
Pricing Within Channel Levels
Federal legislation on price-fixing states that sellers must set prices without talking to
competitors. Otherwise, price collusion is suspected.
Sellers are prohibited from using predatory pricing—selling below cost with the intention of
punishing a competitor or gaining higher long-run profits by putting competitors out of business.
Pricing Across Channel Levels
The Robinson-Patman Act seeks to prevent unfair price discrimination by ensuring that sellers
offer the same price terms to customers at a given level of trade.
Laws prohibit retail (or resale) price maintenance—a manufacturer cannot require dealers to
charge a specified retail price for its product.
Although the seller can propose a manufacturer’s suggested retail price to dealers, it cannot
refuse to sell to a dealer who takes independent pricing action, nor can it punish the dealer by
shipping late or denying advertising allowances.
Deceptive pricing occurs when a seller states prices or price savings that mislead consumers or
are not actually available to consumers.
Use Critical Thinking Exercise 9-8 here.
Other deceptive pricing issues include scanner fraud and price confusion.
Video Case: Fast-Food Discount Wars
Fast-food chains are locked in a fierce battle that has them practically giving food away.
McDonald’s, Wendy’s, Burger King, and others are constantly trying to lure customers at the low
end of the price spectrum with tempting menu options that can serve as a snack or a meal.
Although this technique is nothing new, it’s more popular today than ever. The tactic has even
found its way into full-service restaurant chains such as Olive Garden.
But are bargain-basement options a sustainable path for restaurant chains? This video takes a
look at the various ways discount menus are executed. It also considers the reasons for using
discount menu tactics as well as the possible negative outcomes.
After viewing the video featuring restaurant discount menu wars, answer the following
questions:
9-15. Can discount menu strategies like those featured in the video be classified as “value
pricing”? Explain.
9-16. Discuss why a restaurant chain might employ a discount menu as a pricing option.
9-17. What are the possible negative outcomes of employing a discount menu strategy?
Company Cases
9 Coach/11 Sears
See Appendix 1 for cases appropriate for this chapter.
Case 9, Coach: Riding the Wave of Premium Pricing. After years of high-growth revenues,
discount tactics are taking a toll on this premium brand.
Case 11, Sears: Why Should You Shop There? Sears is a perfect example of why it takes more
than low prices to succeed in discount retail.
MyMarketingLab
If assigned by your instructor, complete these writing sections from your Assignments in the
MyLab.
9-18. Describe the cost-plus pricing method and discuss why marketers use it even if it is
not the best method for setting prices. (AACSB: Communication)
9-19. Compare and contrast fixed costs and variable costs and discuss their importance in
setting prices. (AACSB: Written and Oral Communication; Reflective Thinking)
GREAT IDEAS
Barriers to Effective Learning
1. Even if a few students have worked in a family business, it is a very safe bet that none of
them have ever set prices on anything. Even if they are a devotee of eBay and have been
buying and selling items for years, they still won’t have set prices because of the auction
environment of that and other sites that have sprung up in the years since the explosion of
the World Wide Web. So, although the “What Is a Price?” section is very short, it is well
worth spending some time talking about the difference between fixed-price policies and
dynamic pricing. A discussion of what it’s like to buy a meal at a restaurant, where you
cannot typically haggle on price, and buying a car, where you are expected to haggle on
price, can drive home the difference between the two. A discussion of what has happened
with auctions and exchanges online will also help.
2. There are so many factors to consider in setting prices that the students might begin to
feel overwhelmed very early in the chapter. It might be easier to discuss this in the
context of a new business the class will launch—say, a laundry service on campus. Most
students hate doing laundry, so they are willing to pay someone to do it for them,
especially with pickup and delivery service. You can easily run through the internal and
external factors that would affect such a service, and even discuss pricing strategy if a
competitor were to develop a similar service.
3. Students may also need further explanation regarding why cost-based pricing isn’t the
right way to price everything. It’s simple, it’s easy to apply a formula, and there is no
guesswork involved. You need to drive home the point that it ignores the customer
completely—cost-based pricing is internally focused, without a thought to the demand
parameters or competitors’ prices. You can talk about this from the perspective of a
high-cost manufacturer—how much would they be able to sell if their product cost 50%
more than the competition simply because the company hadn’t figured out how to
manufacture it effectively?
4. Value-based pricing could engender a considerable amount of conversation, particularly
if someone thinks it is unethical to charge a price for something that yields the company a
very large margin. Why wouldn’t you treat customers “right” by charging them less? A
discussion of the meaning of customer focus and of benefits to the customer will help the
class to understand that if the customer thinks he is getting value, he will happily pay the
price.
5. After this discussion, the students might then be quite confused that value pricing and
everyday low pricing are subsets of value-based pricing. It might be helpful here to
differentiate between value-based pricing in a business market and value or EDLP in the
consumer market. Many businesses will buy based on a value they assign to a product or
service, often in terms of ROI for themselves. Consumers will rarely do that explicitly
and, at least for basic necessities, will often buy based on price. It is still value-based
pricing.
6. Product line pricing can easily be illustrated with the example of gasoline. Virtually every
gas station in this country sets the prices of each of its grades of gas between 8 and 10
cents apart (e.g., regular for $3.25, the next grade for $3.35, and the premium grade for
$3.55). This is an everyday example of price steps with which everyone will have
experience. Captive-product pricing will also be a fairly easy concept to understand with
the example of razors and razor blades. Optional-product pricing could cause some
problems, however. Discussing the example of buying a computer with or without a
service agreement could help explain how this is done.
7. Segmented pricing can easily be explained by using the examples of senior citizen
discounts or the discount you get at the movies for going during the day (matinee prices).
Most students today have traveled, so it is also useful to talk about the airlines’ use of
yield management.
8. Geographical pricing can cause some problems. Although the students might have heard
of FOB pricing, it will not be a common term for them. Explaining that this is basically a
decision between the customer paying the freight and the company paying the freight will
help, especially because the majority of the students will have purchased at least
something online, so they will have experience with freight or delivery charges.
Student Projects
1. Take a drive around town and look at the pricing of gasoline at a variety of different
stations. Use Product Line Pricing to explain what you are seeing.
2. How does Wal-Mart make use of Good-Value Pricing?
3. Explain how companies such as Dell use Cost-Plus Pricing. What are the competitive
disadvantages of such pricing strategies?
4. Take a look at Rolex watches (www.rolex.com/en). What pricing strategy is being
employed here? What message is this pricing strategy sending to potential consumers?
5. Walk though your favorite supermarket or discount store. Make a list of 10 products that
employ Captive-Product Pricing.
Small Group Assignment
Form students into groups of three to five. Each group should read the opening vignette to the
chapter on Amazon versus Walmart. Each group should then answer the following questions:
1. Which company do you believe is utilizing the most effective competitive strategy?
Why?
2. What are the dangers Amazon faces from the power of Walmart?
3. What is the position of both Amazon and Walmart in the mind of the customer?
Each group should share its findings with the class.
Individual Assignment
Product Bundle Pricing has become a very popular pricing strategy. Review and compare the
current pricing strategies being used by your local cable provider and that offered by DirectTV
(www.directtv.com). Are they making the most of product bundle pricing? What suggestions
could you offer to improve their competitive positions against one another?
Think-Pair-Share
Consider the following questions, formulate answers, pair with the student on your right, share
your thoughts with one another, and respond to questions from the instructor.
1. Under what conditions should market-penetration pricing be used?
2. Provide examples of when promotional pricing may be considered unethical.
3. What is predatory pricing and why is its use questionable?
4. When raising prices, care must be taken so that the company does not appear to be a price
gouger. What techniques can be employed to assist in this?
5. Give examples of unfair price discrimination.
Classroom Exercise/Homework Assignment
For the ultimate in Dynamic Pricing, one need only look to the air travel industry. Go online to
Expedia (www.expedia.com), one popular booking engine, and “book” yourself a flight to
Cancun for the Christmas break. Examine the vast differences in prices offered and explain why
this is occurring. Now, “book” this same trip to Cancun, and add in a hotel stay for six nights.
Again, examine and explain the vast differences in prices offered.
Classroom Management Strategies
This is a very long chapter, and it might be best to break it into two class periods. It is noted
below where a reasonable break would be if you are able to do so.
1. Discussing the history of pricing, and the differences between fixed prices and dynamic
prices is worthy of at least 5 minutes. You can also tie dynamic pricing back into the
individual markets that were discussed in a previous chapter to drive home the value of
dynamic pricing.
2. If you are breaking the chapter into two class sessions, spend 20 minutes on Factors to
Consider when Setting Prices. If you do not have that luxury, 10 minutes will suffice. In
this case, you will want to hit the major factors of marketing objectives and marketing
mix strategy for internal factors, and the market and demand for the external factors.
3. Another 20 minutes should be spent on General Pricing Approaches in a two-session
approach to this chapter. If covering the material in one session, spend 10 minutes on this.
In this approach, focus on the differences among the three pricing approaches.
4. New Product Pricing Strategies should be covered in 15 minutes. In one class session,
spend about 5 minutes covering the differences between market skimming and market
penetration. This would also be where you should break for the session if you are going
to continue with the chapter in the next class.
5. Product Mix Pricing Strategies covers a lot of information. In the second class session,
spend 20 minutes on this topic, being sure to cover each of the five subsections. In one
class period, you can cover this in 10 minutes by focusing on the three pricing strategies,
briefly explaining the last two.
6. Price-Adjustment Strategies also covers a lot of material. In a second class section, 20
minutes should also be spent on this topic. Again you can cover this in 10 minutes by
focusing on the first three subsections.
7. Regardless of whether you are presenting this material in one class or two, spend 15
minutes on Price Changes. This is an important element to understanding pricing, and this
is the area where many marketing managers make their money when it comes to pricing.
PROFESSORS ON THE GO
Pricing: Understanding and Capturing Customer Value
Key Concepts
Internal factors affecting pricing
External factors affecting pricing
Cost-based pricing
Value-based pricing
Competition-based pricing
•The chapter points out many companies do not handle pricing well. Beyond focusing
too much on cost, what are some of the other difficulties that marketers have in
setting prices?
•Interview a local business about their pricing philosophy and/or strategy. Use their
terms and then apply what you have learned from them to assess their approach to
those described in the text. What are the similarities and differences? How successful
do the strategies appear to be? How did you make this judgment?
•Explain why the elasticity of demand is such an important concept to marketers who
market a “commodity-type” product.
•Cost-plus-pricing and target-profit-pricing are two different types of cost-based
pricing. Which of these methods is a better tool for marketers?
•What are the primary methods of competition-based pricing?
Key Concepts
Market-skimming and market-penetration pricing
Product mix pricing strategies
•What market conditions would discourage a company from using a
market-penetration pricing strategy to enter a market?
•Cell phone companies use a two-part pricing strategy. From a consumer’s perspective,
is there a better pricing strategy? What is it? Explain.
Key Concepts
Pricing within channel levels
Pricing across channel levels
•Lawful price discrimination by sellers is a common practice. Discuss the conditions
under which this price discrimination practice becomes unlawful.
•Find several examples where a retail outlet charges less than the manufacturer’s
suggested price. Why would they do that? Can you find any examples of retailers
charging more than the suggested price? How would a manufacturer react to each of
these scenarios?