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Chapter 11
Manage Pricing Decisions
11-1
LEARNING OBJECTIVES
LO 11-2 Explore different pricing objectives and related strategies.
LO 11-4 Describe approaches to setting the exact price.
LO 11-6 Understand how to execute price changes.
LO 11-7 Examine legal considerations in pricing
CHAPTER OUTLINE
I. PRICE IS A CORE COMPONENT OF VALUE
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II. ESTABLISH PRICING OBJECTIVES AND RELATED
STRATEGIES
A. Penetration Pricing
B. Price Skimming
C. Profit Maximization and Target ROI
D. Competitor-Based Pricing
i. Stability Pricing
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E. Value Pricing
III. SELECT PRICING TACTICS
A. Product Line Pricing
B. Captive Pricing
C. Price Bundling
D. Reference Pricing
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E. Prestige Pricing
F. Odd/Even Pricing
G. One-Price Strategy and Variable Pricing
H. Everyday Low Pricing (EDLP) and High/Low Pricing
I. Auction Pricing
IV. SET THE EXACT PRICE
A. Cost-Plus Pricing/Markup on Cost
B. Markup on Sales Price
C. Average-Cost Pricing
D. Target Return Pricing
V. DETERMINE CHANNEL DISCOUNTS AND
ALLOWANCES
A. Cash Discounts
B. Trade Discounts
C. Quantity Discounts
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D. Seasonal Discounts
E. Promotional Allowances
F. Geographic Aspects of Pricing
i. FOB Pricing
ii. Uniform Delivered Pricing
iii. Zone Pricing
VI. EXECUTE PRICE CHANGES
VII. UNDERSTAND LEGAL CONSIDERATIONS IN
PRICING
A. Price-Fixing
B. Price Discrimination
C. Deceptive Pricing
D. Predatory Pricing
E. Fair Trade and Minimum Markup Laws
VIII. SUMMARY
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KEY TERMS
cost leadership A marketing strategy in which a firm utilizes its core cost advantages to gain an
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.
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 in 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.
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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
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
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target return pricing A pricing decision made by considering fixed and variable costs and then
demand forecasting to determine the price per unit.
retailer, which is then compensated by the manufacturer.
FOB (free on board) Designation of when title transfers and which supply chain entity pays for
freight. Options are generally FOB-origin and FOB-destination.
uniform delivered pricing When the same delivery fee is charged to customers regardless of
geographic location within a set area.
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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.
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.
2. Pricing against competitors is common. Yet the approach carries some significant problems.
a. What are the advantages of competitor-based pricing?
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?
Chapter 11
Manage Pricing Decisions
tuition and fees
more exclusivity.
increased price
competition from
other universities
with high academic
reputations.
Comcast
Captive pricing
through free DVRs
that require a
monthly subscription
fee
Successful campaign
to gain customer
commitment.
May consider in
presence of
increased price
competition from
other cable, satellite,
and
telecommunications
companies.
5. Assume that you are a marketing manager for Pantene shampoo and conditioner, two of
P&G’s star products, and that several of P&G’s 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?
MANAGEMENT DECISION CASE
Surge Pricing: But is it a Surge of Customer Value?
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Questions for Consideration
1. While many consumers don’t like Uber’s surge pricing, it can’t easily be claimed that it is
price-fixing (as it is not coordinated with competitors such as Lyft), price discrimination (as
all customers in a surge area are subject to the same price increase), or deceptive pricing
(Uber is nothing if not obvious about the price increase). Thus, despite the negative reactions,
surge pricing is legal. Do you agree that it should be legal? Build a strong case either way,
depending on your feelings about surge pricing.
Uber’s surge pricing should stay: Uber’s surge pricing is the ultimate reflection of a
capitalistic economy. Supply and demand should drive prices. Uber (as noted in the case) is
11-13
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SUGGESTED VIDEO
Walmart vs Target (5:00 minutes)
Description: BusinessWeek story on 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?
Chapter 11
Manage Pricing Decisions
Pricing: Specialized Bicycle Components (SBC) (4:05 minutes)
Description: Specialized Bicycle Components, Inc. (SBC) caters to the experienced cyclist. In
this video, SBC's brand manager explains the company's segmentation and pricing strategy.
1. Review the tactical pricing approaches shown in Exhibit 11.4. Which of these did you see
evidence of being part of the SBC pricing strategy? Discuss the evidence you observed.
2. The SBC executive noted that children who start their cycling experience on SBC bicycles
will be more likely to purchase SBC products in the future as they grow older. Which of the
pricing strategies listed in Exhibit 11.2 might come into play in support of this objective?
1
https://hbr.org/2015/12/everyone-hates-ubers-surge-pricing-heres-how-to-fix-it
2
http://time.com/money/4845407/uber-drivers-really-make-per-hour/
