Chapter 11
PRICING STRATEGIES
MARKETING STARTER: CHAPTER 11
APPLE: Premium Priced and Worth It
Synopsis
Apple is known for its innovative products and for being the leader in selling us products we did not know
we needed or wanted. It is also known for its pricing. While an Android smartphone sold for $185 on
average, the average price for an iPhone was $624. What allows Apple to charge so much more? The
answer is its focus on the Apple user experience. Apple users swear that their products work better and are
easier to use. They love the style. And Apple ensures that customers know they are the focus, and that its
customers are at the front of the crowd. All this leads people to feel so strongly about Apple and its
products and their quality that they are willing to pay a premium.
Discussion Objective
A focused 10-minute discussion of the chapter-opening Apple story will show students that a proper
price/value equation will ring true with customers and produce strong sales and profits. Apple does not
focus on pricing in the traditional sense; it does not try to justify its pricing. The company has worked to
create the aura that its products are “cool” and well built and intuitive to use. Customers are then persuaded
that the value of the Apple product is worth the higher price in comparison to competing products. The
sense of belonging to a community of product users who feel the same way reinforces the perception of
quality and “coolness.” For Apple, the ability to define value as being cool, innovative, and easy-to-use
works. Premium products earn premium prices.
Starting the Discussion
Start by asking what students know about Apple, and how their experiences with the company and its
products align with the opening vignette. How many have an iPhone or a MacBook or an iPad? Next, give
the students a feel for the company by visiting www.apple.com. You can also enter the company name on
www.YouTube.com and check out several of its videos. Once you’ve captured the essence of the online
experience for the company, you can explore the personality of the firm and how it impacts customers.
Discussion Questions
1. Is Apple still innovative? Explain.
The perceptions regarding Apple are in a state of flux. People still line up for the newest products.
At the same time, many people are watching and waiting for the next “Wow!” product, since
Apple has mostly focused on improvements rather than truly new products in recent years.
2. Is Apple’s image of “cool” sustainable? How does this image and its focus on the customer
experience allow the company to earn premium prices on its products?
It’s likely that Apple’s image is sustainable for a number of years. Apple loyalists will not easily be
swayed to other companies’ products, even if the cost is favorable.
3. In the battle for dominance in consumer electronics, what does Apple have to do to hold its
position? Will pricing become a factor at some point?
Other companies sell more products than Apple. For example, Apple owns a 20 percent share of
the smartphone market, and Android phones control far more than that. Personal computers are
similar; Apple has about a 15 percent share of the personal computer market. However, Apple
succeeds by attracting buyers looking for, and willing to pay for, premium products, such as the
newest iPhone, and MacBook Pro laptops. It earns 92 percent of the total smartphone profits made
by the top eight manufacturers, and almost 50 percent of the profits in the personal computer
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market. At some point, if Apple continues issuing updates to products rather than introducing truly
new products, it will feel an impact. However, given the loyalty of its customers, Apple may keep
its position indefinitely.
4. How does the Apple story relate to the concepts presented later in Chapter 11? (The story provides
a nice bridge between Chapter 10 [Pricing Strategies] and Chapter 11 [Additional Pricing
Considerations]. Once again, it demonstrates the importance of price in creating value for
customers and illustrates the many factors that affect pricing decisions. But it also suggests that
price, on its own, is only one part of a broader price/value equation.)
CHAPTER OVERVIEW
Use Power Point Slide 11-1 Here
In this chapter, we’ll explore pricing considerations including: new product pricing,
product mix pricing, price adjustments, and initiating and reacting to prices changes. We
close the chapter with a discussion of public policy and pricing.
A company does not set a single price, but rather a pricing structure that covers different
items in its line. This pricing structure changes over time as products move through their
life cycles. The company adjusts its prices to reflect changes in costs and demand and to
account for variations in buyers and situations. As the competitive environment changes,
the company considers when to initiate price changes and when to respond to them.
This chapter examines additional pricing approaches used in special pricing situations
and price adjustments implemented to meet changing conditions. The chapter covers new
product pricing for products in the introductory stage of the PLC, product mix pricing for
related products in the product mix, price-adjustment tactics that account for customer
differences and changing situations, and strategies for initiating and responding to price
changes.
CHAPTER OBJECTIVES
Use Power Point Slide 11-2 here
1. Describe the major strategies for pricing new products.
2. Explain how companies find a set of prices that maximizes the profits from the
total product mix.
3. Discuss how companies adjust their prices to take into account different types of
customers and situations.
4. Discuss the key issues related to initiating and responding to price changes.
5. Overview the social and legal issues that affect pricing decisions.
CHAPTER OUTLINE
p. 306 INTRODUCTION
Apple is known for its innovative products and for being the
leader in selling us products we did not know we needed or
wanted. It is also known for its pricing. While an Android
smartphone sold for $185 on average, the average price for
an iPhone was $624.
p. 307
Photo: Apple
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What allows Apple to charge so much more? The answer is
its focus on the Apple user experience. Apple users swear
that their products work better and are easier to use. They
love the style. Apple ensures that customers know they are
the focus, and that its customers are at the front of the crowd.
All this leads people to feel so strongly about Apple products
and Apple quality that they are willing to pay a premium.
It must be working because Apple sold more than 231 million
iPhones in one year. It introduced the Apple Watch Sport at
$349, twice the average industry price for such a product.
Analysts estimate that it will sell 21 million Apple Watches a
year. Competitors sold 6.8 million in a year at an average
price of $189.
Apple’s sales have more than doubled to a record 234 billion,
and its stock prices have made the company one of the most
valuable in the world. However, its premium pricing strategy
is not risk-free. In some markets, especially the world’s
rapidly growing emerging markets, its prices make Apple
vulnerable to low-priced competitors. But so far, its image,
its focus on the customer experience, and its “cool” factor
remain a winning strategy.
Opening Vignette Questions
1. Is Apple still innovative?
2. Is Apple’s image of “cool” sustainable? How does
this image and its focus on the customer experience
allow it to earn premium prices on its products?
3. In the battle for dominance in consumer electronics,
what does Apple have to do to hold its position? Will
pricing become a factor at some point?
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p. 308
PPT 11-3
PPT 11-4
Describe the major strategies for pricing new products.
NEW PRODUCT PRICING STRATEGIES
Companies bringing out a new product face the challenge of
setting prices for the first time. They can choose between two
broad strategies.
Market-Skimming Pricing
Many companies that invent new products set high initial
prices to “skim” revenues layer-by-layer from the market.
This is called market-skimming pricing.
Market skimming makes sense only under certain conditions.
Learning Objective 1
p. 308
Key Term:
Market-skimming
pricing (price
skimming)
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p. 309
PPT 11-5
1. The product’s quality and image must support its
higher price, and enough buyers must want the
product at that price.
2. The costs of producing a smaller volume cannot be so
high that they cancel the advantage of charging more.
3. Competitors should not be able to enter the market
easily and undercut the high price.
Market-Penetration Pricing
Rather than setting a high price to skim off small but
profitable market segments, some companies use
market-penetration pricing. They set a low initial price to
penetrate the market quickly and deeply—to attract a large
number of buyers quickly and win a large market share.
Several conditions must be met for this low-price strategy to
work.
1. The market must be highly price sensitive so that a
low price produces more market growth.
2. Production and distribution costs must fall as sales
volume increases.
3. The low price must help keep out the competition,
and the penetration price must maintain its low-price
position—otherwise, the price advantage may be only
temporary.
Review Learning Objective 1: Describe the major strategies
for pricing new products.
p. 309
Key Term:
Market-penetration
pricing
p. 309
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Assignments, Resources
Use Discussion Question 11-1 here
Use Additional Project 1 here
Use Individual Assignment 1 here
Use Think-Pair-Share 1 here
Use Outside Example 1 here
Troubleshooting Tip
The students should not have any trouble with the
material on market-skimming or market-penetration
pricing if the material was covered in the product
life-cycle chapter. Reinforcement here, however, is
useful (especially if time did not permit earlier
coverage). The techniques are best discussed with
examples. A useful method is to divide the students
into small groups and give them two or three products
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and have them (one group takes market skimming and
another takes market penetration) create separate
strategies and then debate between the groups. Have
each group explain why their method was superior.
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PPT 11-6
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PPT 11-7
PPT 11-8
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PPT 11-9
Explain how companies find a set of prices that
maximizes the profits from the total product mix.
PRODUCT MIX PRICING STRATEGIES
Table 11.1 introduces the five product mix pricing situations.
Product Line Pricing
Companies usually develop product lines rather than single
products.
In product line pricing, management must determine the
price steps to set between the various products in a line.
The price steps should consider cost differences between the
products in the line. More importantly, they should account
for differences in customer perceptions of the value of
different features.
The seller’s task is to establish perceived quality differences
that support the price differences.
Optional-Product Pricing
Many companies use optional-product pricing—offering to
sell optional or accessory products along with the main
product.
Pricing these options is a sticky problem. The company has
to decide which items to include in the base price and which
to offer as options.
Captive-Product Pricing
Companies that make products that must be used along with
a main product are using captive-product pricing. Producers
of the main products often price them low and set high
markups on the supplies.
In the case of services, this strategy is called two-part pricing.
The price of the service is broken into a fixed fee plus a
Learning Objective 2
p. 309
Table 11.1: Product
Mix Pricing
p. 310
Key Term: Product
line pricing
p. 310
Key Terms:
Optional-product
pricing,
Captive-product
pricing
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PPT 11-10
variable usage rate.
By-Product Pricing
Using by-product pricing, a company will seek a market for
by-products and should accept any price that covers more
than the cost of storing and delivering them.
By-products can even turn out to be profitable.
Product Bundle Pricing
Using product bundle pricing, sellers often combine several
of their products and offer the bundle at a reduced price.
Price bundling can promote the sales of products consumers
might not otherwise buy, but the combined price must be low
enough to get them to buy the bundle.
Review Learning Objective 2: Explain how companies find
a set of prices that maximizes the profits from the total
product mix.
p. 311
Key Term: By-product
pricing, Product
bundle pricing
Assignments, Resources
Use Discussion Question 11-2 here
Use Additional Projects 2, 3, and 4 here
Use Individual Assignment 2 here
Troubleshooting Tip
The next barrier the students may encounter is dealing
with the various product mix pricing strategies (see
Table 11.1). Through in-class discussion, have
students construct examples for each of the categories
in this subsection of the chapter. Once students
understand the definitional nature of the strategies,
expand the discussion to when the strategies are best
used. The chapter supplies information that will aid
this explanation process.
p. 311
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PPT 11-12
p. 312
Discuss how companies adjust their prices to take into
account different types of customers and situations.
PRICE ADJUSTMENT STRATEGIES
Companies usually adjust their basic prices to account for
various customer differences and changing situations.
The seven price-adjustment strategies are summarized in
Learning Objective 3
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PPT 11-13
p. 312
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PPT 11-14
Table 11.2.
Discount and Allowance Pricing
Most companies adjust their basic price to reward customers
for certain responses, such as early payment of bills, volume
purchases, and off-season buying.
One form of discount is a cash discount, a price reduction to
buyers who pay their bills promptly. A typical example is
“2/10, net 30,” which means that although payment is due
within 30 days, the buyer can deduct 2 percent if the bill is
paid within 10 days.
A quantity discount is a price reduction to buyers who buy
large volumes.
A functional discount (trade discount) is offered by the seller
to trade-channel members who perform certain functions,
such as selling, storing, and record keeping.
A seasonal discount is a price reduction to buyers who buy
merchandise or services out of season.
Allowances are another type of 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.
Segmented Pricing
Companies will often adjust their basic prices to allow for
differences in customers, products, and locations.
In segmented pricing, the company sells a product or service
at two or more prices, even though the difference in price is
not based on differences in costs.
Under customer-segment pricing, different customers pay
different prices for the same product or service.
Under product-form pricing, different versions of the product
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Key Term: Discount
p. 312
Table 11.2:
Price-Adjustment
Strategies
p. 312
Key Term: Allowance
p. 312
Key Term: Segmented
pricing
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PPT 11-15
PPT 11-16
are priced differently but not according to differences in their
costs.
Under location pricing, a company charges different prices
for different locations, even though the cost of offering each
location is the same.
Using time-based pricing, a firm varies its prices by the
season, the month, the day, and even the hour.
For segmented pricing to be an effective strategy, certain
conditions must exist:
•The market must be segmentable, and the segments
must show different degrees of demand.
•The costs of segmenting and watching the market
cannot exceed the extra revenue obtained from the
price difference.
•The segmented pricing must be legal.
•Segmented prices should reflect real differences in
customers’ perceived value.
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