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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

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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

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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

V. DETERMINE CHANNEL DISCOUNTS AND

ALLOWANCES

A. Cash Discounts

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D. Seasonal Discounts

E. Promotional Allowances

F. Geographic Aspects of Pricing

i. FOB Pricing

ii. Uniform Delivered Pricing

VI. EXECUTE PRICE CHANGES

VII. UNDERSTAND LEGAL CONSIDERATIONS IN

PRICING

A. Price-Fixing

B. Price Discrimination

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

advantage over competitors due to flexibility in pricing strategies as well as its ability to translate

cost savings to the bottom line.

target return on investment (ROI) A pricing strategy in which a bottom-line profit target is

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.

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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

would cost separately.

reference pricing A pricing strategy in which a firm gives customers comparative prices when

considering purchase of a product so they are not viewing a price in isolation from prices of

other choices.

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

minimal spending on promotional efforts.

high/low pricing A pricing strategy in which the retailer offers frequent discounts, primarily

through sales promotions to stated regular prices.

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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.

A major caution with a penetration pricing strategy is that, because price is a cue for

developing customer perceptions of product quality, the value proposition may be reduced if

2. Pricing against competitors is common. Yet the approach carries some significant problems.

a. What are the advantages of competitor-based pricing?

A competitor’s price is one of the most visible elements of their marketing strategy, and

b. What are the risks of using competitor-based pricing exclusive of other approaches?

It can lead to exaggerated extremes in pricing such that on the high end a firm’s products

do not project customer value or on the low-end price wars ensue.

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?

Automobiles – Many customers decide the type of auto desired and then based their

choice on pricing issues like sticker price and available discounts.

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3. Review Exhibit 11.3 on price-quality positioning, along with the accompanying discussion.

a. Consider the low quality/high price quadrant. Identify a brand (other than the examples

in the chapter) that you believe currently resides in this quadrant. How is it able to

command a high price? Do you believe the pricing strategy is sustainable for that brand?

Why or why not?

Recently, in the last round of new technology introductions in the gaming console

business, Microsoft introduced the XBOX 360 gaming console that had questionable

b. Consider the high quality/low price quadrant. Identify a brand (other than the examples

in the chapter) that you believe presently resides in this quadrant. In your opinion, why

has the brand undertaken this pricing strategy? Do you believe there are risks to the

brand in remaining too long in that quadrant? Why or why not?

Recently, in the last round of new technology introduction in the gaming console

business, Nintendo introduced the Wii gaming console at a significantly lower price than

its closest competitors, Sony and Microsoft. Nintendo may have attempted a penetration

4. Select any three of the pricing tactics identified in the chapter. For each tactic:

a. Identify a brand (other than the examples in the chapter) that you believe is currently

employing that tactic.

b. Provide evidence to support the use of that tactic.

c. Is the use of the tactic effective? Why or why not?

d. What factors might cause a need to abandon this tactic in favor of another?

Brand

Tactic

Effective

Abandon?

McDonald’s

Price bundling

Successful campaign

May consider in

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tuition and fees

more exclusivity.

increased price

competition from

other universities

with high academic

reputations.

Comcast

Captive pricing

Successful campaign

May consider in

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?

When a competitor introduces a price drop, in general you have a few options: match the

price drop, exceed the price drop, or do nothing.

b. What are the risks associated with each of the options?

To do nothing means that Proctor & Gamble may risk losing market share. However, a

MANAGEMENT DECISION CASE

Surge Pricing: But is it a Surge of Customer Value?

Students will likely be familiar with Uber. Many of them, especially those of drinking age, may

have used Uber to get home after visiting a bar with friends. This responsible behavior (planning

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As of this writing (September 2017), Uber has just named a new chief executive and industry

observers expect some significant changes compared to when the company was run by the

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

merely trying to get more drivers on the road to provide transportation exactly where it is

Uber’s surge pricing should go: Maybe the idea of surge pricing is OK, but the way Uber is

handling their surge pricing is creating an unfair exchange. Uber has not specified an actual

hard cap to the price and, as noted in the case, their experiments have results in fares for

local trips reaching $300 and can be 50-times higher than normal rates. Uber also doesn’t

provide the consumer with enough information to make an informed choice. For example,

Uber notes that surge pricing is in effect, and the consumer can get an estimated price, but

the consumer does not know what demand is. Will it be 10 minutes until the price starts to

drop or 10 hours? While this may not be price-fixing, deceptive pricing, or price

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2. What adjustments and improvements to the implementation and communication with

customers about Uber’s surge pricing strategy do you suggest in order to help those

customers better understand the value proposition and improve acceptance? How might you

explain surge pricing to consumers so the benefit they receive from it is better understood?

As noted in the discussion for question 1, Uber does not provide sufficient information to its

consumers for them to make informed choices. There is currently no information on the

maximum surge price. Uber has experimented with pricing in different locales where one

local 30-minute fare would equal the same cost of renting a car for five days!

To help consumers make an informed decision, Uber needs to be as transparent as possible.

Consumers using Uber often expect to make a two-way journey (out for dinner and drinks

then home, or to the grocery store and back). When these consumers decide to use Uber, they

3. If surge pricing was found to be illegal, do you think prices for Uber’s service would rise in

general? Why or why not?

Yes (driver focus): Uber will need to make up this revenue from some place and still needs

drivers on the road when demand is high. Just because surge pricing—as practiced by Uber

in its current form—might be found illegal doesn’t mean there aren’t other ways to charge

additional fees to gather the same amount of revenue. Uber will at least want to cover that

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lost revenue, continue to pay drivers to be on the road, and will also want to increase prices

(and profits) as they grow and gather more market strength.

No (rider focus): Uber is essentially the middle man for a network business model that, to be

successful, requires Uber recruit lots of drivers and lots of riders. If surge pricing were

illegal and Uber attempts to raise overall prices to recover the lost revenue, they risk

alienating customers, who look at Uber as an inexpensive alternative to taxis and may shift