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Chapter 15 - Strategic Pricing Methods Marketing 6th
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
1
Chapter 15
Strategic Pricing Methods
Tools for Instructors
• Brief Chapter Outline
• Learning Objectives
• Extended Chapter Outline with Teaching Tips
• Answers to End of Chapter Learning Aids
• Chapter Case Study
• Additional Teaching Tips
• Connect Activities
Brief Chapter Outline
Considerations for Setting Price Strategies
Pricing Strategies
Pricing Tactics
Legal and Ethical Aspects of Pricing
End of Chapter Learning Aids
Chapter Case Study: Pizza Players, Pizza Prices
Learning Objectives
LO15-1 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
LO15-2 Describe the difference between an everyday low pricing (EDLP) strategy 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
customer who pays the low price.
LO15-3 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
Chapter 15 - Strategic Pricing Methods Marketing 6th
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
2
to signal high quality, limit demand, recoup their investment quickly, and/or test people’s price sensitivity.
LO15-4 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 discounts, seasonal discounts, coupons, rebates, leasing, price bundling, leader pricing, and
LO15-5 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
LO15-6 List the pricing practices that are illegal or unethical
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
Extended Chapter Outline with Teaching Tips
I. Considerations for Setting Price Strategies
A. Cost-Based Methods
B. Competition-Based Methods
C. Value-Based Pricing Methods
1. Improvement Value Method
2. Cost of Ownership Method
3. Implementing Value-Based Pricing Methods
Progress Check: Several questions are offered for students to check their understanding of core
concepts.
1 What are the three different strategies for setting pricing?
2 How can you use value-based strategies for setting prices?
Chapter 15 - Strategic Pricing Methods Marketing 6th
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
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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 of a new
II. Pricing Strategies
A. Everyday Low Pricing (EDLP)
B. High/Low Pricing
C. New Product Pricing Strategies
1. Penetration Pricing
2. Price Skimming
Progress Check: Several questions are offered for students to check their understanding of core
concepts.
1 Explain 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. By reducing consumers’ search costs, EDLP adds value;
consumers can spend less of their valuable time comparing prices, including sale prices, at
expend the time and effort to seek out the lowest price every time.
2 What pricing strategies should be considered when introducing a new product?
Answer: Some new product pricing strategies include price skimming, which is offering a new
III. Pricing Tactics
A. Pricing Tactics Aimed at Consumers
1. Markdowns
2. Quantity Discounts for Consumers
3. Seasonal Discounts
4. Coupons
5. Rebates
6. Leasing
7. Price Bundling
8. Leader Pricing
9. Price Lining
Chapter 15 - Strategic Pricing Methods Marketing 6th
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
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B. Business Pricing Tactics and Discounts
1. Seasonal Discounts
2. Cash Discounts
3. Allowances
4. Quantity Discounts
5. Uniform Delivered versus Zone Pricing
Progress Check: Several questions are offered for students to check their understanding of core
concepts.
1 What are some consumer-oriented pricing tactics?
2 What are some B2B pricing tactics?
allowances, and quantity discounts.
IV. Legal and Ethical Aspects of Pricing
A. Deceptive or Illegal Price Advertising
1. Deceptive Reference Prices
2. Loss-Leader Pricing
3. Bait and Switch
B. Predatory Pricing
C. Price Discrimination
D. Price Fixing
1. Gray Market Pricing
Progress Check: Several questions are offered for students to check their understanding of core
concepts.
1 What common pricing practices are considered to be illegal or unethical?
loss-leader pricing, bait and switch, predatory pricing, price discrimination, and price fixing.
Answers to End of Chapter Learning Aids
Marketing Digitally
1 Go to www.coupons.com. In which product categories does this website offer coupons?
Choose a product from each category.
• How effective are coupons for selling these types of products? Why?
Chapter 15 - Strategic Pricing Methods Marketing 6th
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
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• Do any sellers offer rebates through this website? Why or why not?
• What are the benefits to the seller of using coupons.com instead of offering coupons in a
newspaper?
• How do you think coupons.com makes money? For example, consider what companies
are advertising on the site. Do the same companies who advertise on their site offer
coupons?
Students’ answers will vary based on the product category they choose. Ask students if they believe
these coupons are effective for selling these types of products. With the economic recession, coupons
2 Visit the website for Bag, Borrow, or Steal (www.bagborroworsteal.com) and select handbags.
Click on the “Handbags,” then choose “Gucci,” in the Designer category on the left column,
and then “Sort by” Price. What is the difference between Gucci’s highest and lowest priced
bags? Notice that if a product says “Waitlist,” it has already been borrowed, but if it says
“Borrow,” then it is available for you to borrow. Are the bags that are waitlisted the highest
priced or the lowest priced? How would you determine the price it charges to rent a bag?
Students’ answers may vary depending on the assortment that Gucci is offering at the time. The lowest
priced item on Bag, Borrow, or Steal for Gucci is $45.00 per month for a $300 ‘Joy’ Mini Boston Handbag.
The most expensive purse is $380 per month for a $2,800 Large “Techno Horsebit” Shoulder Flap
Marketing Applications
1 Suppose you have been hired as the pricing manager for a drugstore chain that typically
adds a fixed percentage onto the cost of each product to arrive at the retail price. Evaluate
this technique. What would you do differently?
The benefit of this type of cost-based pricing is that it is relatively simple to use and assumes that costs
competitors in influencing pricing decisions.
2 Some high-fashion retailers, notably H&M and Zara, sell what some call “disposable
fashion”—apparel priced so reasonably low that it can be disposed of after just a few
wearings. Here is your dilemma: You have an important job interview and need a new suit.
You can buy the suit at one of these stores for $129 or at Brooks Brothers for $500. Of
course, the Brooks Brothers suit is of higher quality and will therefore last longer. How would
you use the two value-based approaches described in this chapter to determine which suit to
buy?
Chapter 15 - Strategic Pricing Methods Marketing 6th
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
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The two value-based approaches are improvement value and cost of ownership method. Improvement
value represents an estimate of how much more or less consumers are willing to pay for a product
relative to other comparable products. If a student is buying a suit, he/she might consider the
3 A phone manufacturer is determining a price for its product using a cost-based pricing
strategy. The fixed costs are $100,000, and the variable costs are $50,000. If 1,000 units are
produced and the company wants to have a 30 percent markup, what is the price of the
phone?
If the company wants to have a 30 percent markup, they should charge $195 per phone. To cover the
$195.00.
4 Identify two stores at which you shop, one of which uses everyday low pricing and another
that uses a high/low pricing strategy. Do you believe that each store’s chosen strategy is
appropriate for the type of merchandise it sells and the market of customers to whom it is
appealing? Justify your answer that customers
Students’ answers may vary. Stores like Walmart offer customers an EDLP strategy. Many department
stores like Dillard’s, Kohl’s, and sometimes even Target, offer a high/low pricing strategy. Why would one
store offer one pricing strategy over the other?
5 As the product manager for Whirlpool’s line of washing machines, you are in charge of pricing
new products. Your product team has developed a revolutionary new washing machine that
relies on radically new technology and requires very little water to get clothes clean. This
technology will likely be difficult for your competition to copy. Should you adopt a skimming
or a penetration pricing strategy? Justify your answer.
Price skimming is a strategy of selling a new product or service at a high price that innovators and early
adopters are willing to pay in order to obtain it. After the high-price market segment becomes saturated
and sales slow down, firms lower the price to capture the second-most price-sensitive segment. In a
6 What is the difference between a cumulative and a noncumulative quantity discount?
A cumulative quantity discount is a pricing tactic that offers a discount based on the amount purchased
