978-1259709074 Chapter 15 Part 1

Chapter 15 – Strategic Pricing Methods Marketing 6th

McGraw-Hill Education.

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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

McGraw-Hill Education.

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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

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

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?

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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?

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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