578 Part 7 Pricing Decisions
CHAPTER 19
PRICING STRATEGIES
CHAPTER OVERVIEW
Setting a price is rarely a one-time decision. And it’s never a standard routine. The previous chapter
introduced the concept of price and its role in the economic system and marketing strategy. This chapter
examines various pricing strategies and price structures, and commonly used methods such as
reductions from list prices and geographic considerations.
Few businesses want to be the first to raise prices. They may wait until increases in their own costs force
them to up prices. And they may be reluctant to raise prices even when strong demand justifies it,
because they want to preserve long-term relationships with customers.
Changes in the 17th Edition
The chapter has been updated and revised in several ways:
• The Opening Vignette and Evolution of a Brand discuss the problems faced by online retailers.
Though the volume of online shopping has increased, according to a recent study, about 68
percent of consumers abandon their electronic shopping carts without making a purchase. The
challenge posed to retailers is how to convert interest in the product into an actual sale. A few
• Solving an Ethical Controversy analyzes the crisis faced by a number of wireless providers—
their inability to sustain unlimited plans. The ultimate result is they have resorted to “throttling”
their services and upsetting their customers. The pros and cons of this issue are discussed in
“Throttling ‘Unlimited’ Data Plans.”
Chapter 19 Pricing Strategies 579
• Marketing Success discusses various strategies used by Chili’s Grill & Bar for attracting
customers. The recent economic downturn in the United States has taken a serious toll on the
full-service casual dining industry, as consumers became more price-sensitive and increasingly
cautious about their discretionary spending. In an attempt to improve its profit margins, Chili’s Grill
& Bar has revamped its menu. The challenge, strategy, and outcome of these decisions are
discussed in “Chili’s Serves Everyday Value.”
LECTURE OUTLINE
Opening Vignette and Evolution of a Brand—Discounts Reduce Abandoned e-Carts discusses
how online retailers can convert a customer’s shopping cart into an actual sale. What incentives
can be offered to customer to make them place their complete their online purchase?
Chapter Objective 1: Describe the three alternative pricing strategies and when each
strategy is most appropriate.
Key Terms: skimming pricing strategy, market-plus pricing, step out, penetration pricing
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Figure 19.1 Price
Reductions to
Increase Market
1. Pricing strategies
a. The strategies used to price products grow from
marketing strategies formulated to accomplish overall
goals
b. Three commonly-used pricing strategies are skimming,
penetration, and competitive pricing
2. Skimming pricing strategy
a. Skimming pricing strategies (or market-plus pricing)
580 Part 7 Pricing Decisions
product, its
“standard” price,
and how various
price reductions
might affect its
market share. Is low
price always a
factor in boosting
competition
ii. When supply begins to exceed demand, or when
competition catches up, the initial high price is
dropped
iii. Improvements in existing products may allow
firms to change to a skimming strategy
iv. This strategy is also used to market higher–end
goods
b. Benefits of a skimming strategy:
i. It allows manufacturers to quickly recover R&D
costs
ii. It allows firms to maximize revenue for a new
product before competitors enter the field
iii. It is a useful tool for segmenting a product’s
overall market on the basis of price
3. Penetration pricing strategy
a. A penetration pricing strategy (or market-minus pricing)
sets a low price as a major marketing weapon
i. Firms often price products much lower than
competing offerings when entering new markets
preference stage
v. Many firms use a penetration strategy with the
intention of raising prices in the future, but
sometimes rivals will simply match their prices
vi. It’s also used to lure shoppers into new stores
b. When penetration strategies work:
i. With goods or services characterized by highly
elastic demand
c. Everyday low pricing
i. Everyday low pricing (EDLP), closely related to
penetration pricing, is a strategy devoted to
continuous low prices as opposed to relying on
short-term tactics
ii. It takes two forms—offering consistently low
prices on many items (used by large retailers), or
setting stable wholesale prices that undercut
4. Competitive pricing strategy
a. Competitive pricing strategies de-emphasize price
competition by matching other firms’ prices, then
concentrating marketing efforts on the other three
f. Once competitors regularly match prices, marketers often
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turn to other strategies to improve products and attract
customers
Assessment check questions
1.1. What are the three major pricing strategies? The three major pricing
1.2. What is EDLP? EDLP stands for “everyday low pricing.” It is a
variation of penetration pricing often used by discounters.
Chapter Objective 2: Explain how prices are quoted.
Key Terms: list prices, market price, cash discounts, negative cash discounts, trade discounts,
quantity discounts, cumulative quantity discounts, noncumulative quantity discounts,
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Components of
Retail Gasoline
Prices. To answer
the question posed,
who gets the money
from retail gas
1. Price quotations
a. The chosen method of quoting prices depends on many
2. List prices
a. Most price structures are built around list prices—the
rates normally quoted to potential buyers
b. These are determined by one of the methods discussed
in the Chapter 18
c. For example, the price of raw goods (oil) affects the price
3. Reductions from list price
a. The amount that a consumer pays for a product—its
market price—may or may not equal the list price
b. Discounts and allowances sometimes reduce list prices
c. Cash discounts
i. Buyers receive price reductions in exchange for
prompt payment of bills, known as cash discounts
ii. Discount terms usually specify exact time periods
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Figure 19.3 Chain
d. Trade discounts
i. Trade discounts, or functional discounts, are
payments to channel members for performing
marketing tasks
ii. A manufacturer’s list price must incorporate the
costs incurred by channel members in performing
e. Quantity discounts
i. Quantity discounts are price reductions granted
for large-volume purchases
ii. These discounts are justified by sellers based on
the thinking that large orders reduce selling
expenses
f. Allowances
i. Allowances resemble discounts by specifying
deductions from list prices, usually in the form of
either trade–ins or promotional allowances
ii. Trade–ins are used in sales of large durable
goods (autos)—the list price remains unchanged
but the seller accepts less money along with a
g. Rebates
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i. A rebate refers to the refund of a portion of an
item’s purchase price
ii. Rebates are offered on a wide variety of products
by manufacturers eager to get customers to try
products or to move models during periods of
slow sales
4. Geographic (transportation) considerations
a. Few businesses are unaffected by geographic
considerations
b. Geographic factors affect the marketer’s ability to receive
inventory and ship orders quickly, influencing the costs
involved
c. Buyers and sellers can handle transportation expenses in
This decision has major effects on a firm’s efforts to
expand its geographic coverage to distant markets
d. FOB pricing
i. FOB (free on board) plant prices, or FOB origin
prices, include no shipping charges
ii. The buyer must pay all freight charges to
transport the product—the seller pays only to load
the merchandise aboard the selected carrier
e. Uniform-delivered price
i. Uniform-delivered pricing occurs when all buyers
are quoted the same price, including
transportation costs
ii. Such a pricing structure is the exact opposite of
FOB origin pricing
f. Zone pricing
Chapter 19 Pricing Strategies 585
delivered pricing system, dividing the market into
different zones and setting a single price within
each zone
g. Basing-point pricing
i. In basing-point pricing, the price of a product
includes the list price at the factory plus freight
charges from the basing-point city nearest the
buyer
Assessment check questions
2.1. What are the three major types of discounts? The three major types
of discounts are cash discounts, trade discounts, and quantity discounts.
Chapter Objective 3: Identify the various pricing policy decisions marketers must make.
Key Terms: pricing policy, psychological pricing, odd pricing, unit pricing, price flexibility,
product-line pricing, promotional pricing, loss leaders, leader prices
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1. Pricing policies
a. Pricing policies contribute important information to buyers
as they assess the firm’s total image
b. Overall a pricing policy is a general guideline that reflects
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Solving an Ethical
Controversy—
Throttling
“Unlimited” Data
Plans — The pros
and cons of
policies: psychological pricing, price flexibility, product–
line pricing, and promotional pricing
2. Psychological pricing
a. Psychological pricing says that certain prices or price
ranges make products more appealing than others to
buyers
odd pricing and unit pricing
b. Odd pricing
i. Odd pricing refers to a strategy in which
marketers set prices at odd numbers just under
round numbers
ii. It is based on the belief that a price of $9.95
appeals more strongly to consumers than a price
of $10.00
c. Unit pricing
i. Unit pricing states prices in terms of some
recognized unit of measurement or a standard
numerical count
3. Price flexibility
a. Price flexibility refers to the decision to set one price
applying to all buyers or to permit variable prices for
different customers
i. One-price policies generally fit mass-selling
marketing programs
ii. Variable policies work better for programs based
on individual bargaining and involving larger
purchases (autos, real estate)
4. Product-line pricing
a. Product-line pricing refers to the practice of setting a
limited number of prices for a selection of merchandise
b. Price points help retailers define and differentiate product
lines
c. Most retailers practice extensive product-line pricing
i. They can purchase and offer specific lines in
limited price categories
merchandise quality
5. Promotional pricing
a. In promotional pricing, a lower-than-normal price is used
as a temporary ingredient in a firm’s selling strategy
b. Some promotional arrangements act as recurrent
6. Loss leaders and leader pricing
a. Loss leaders are goods priced below cost to attract
customers who may also buy regularly priced
merchandise
i. They can be effective in bringing in customers
ii. They may be limited in states with unfair–trade
laws
b. Leader pricing are a variation of the loss leader system
i. They’re a legal alternative to loss leaders
3.2. Describe the two types of psychological pricing other than prestige
pricing. The two additional types of psychological pricing are odd pricing,
3.3. What is promotional pricing? Promotional pricing is a lower-than–
normal price for a set period of time.
Learning Objective 4: Discuss the relationship of price to consumer perceptions of
quality.
Key Terms: none
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1. Price-quality relationships
a. One of the most thoroughly researched aspects of pricing
is price-quality relationships—the connection between
price and consumer perceptions of product quality
b. In the absence of other cues, price serves as an
important indicator of a product’s quality
i. Many buyers interpret high prices as signals of
high-quality products as well as goods related to
prestige
2. Price limits
a. Price limits refer to the ways that consumers define
certain limits within which their product-quality
perceptions vary directly with price
Assessment check questions
4.1. Describe the price–quality connection. Price is an important indicator
of a product’s quality. However, many marketers now work hard to
Chapter 19 Pricing Strategies 589
convince consumers they are offering high-quality products at the lowest
possible price.
4.2. What are price limits? Price limits indicate certain boundaries within
Chapter Objective 5: Contrast competitive bidding and negotiated prices.
Key Terms: competitive bidding
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1. Competitive bidding and negotiated prices
a. Many government and organization procurement
departments do not pay set prices for their purchases
b. Instead, they determine the lowest prices available for
items that meet specifications through competitive
bidding
c. Competitive bidding is the process of inviting potential
suppliers to quote prices on proposed purchases or
contracts
i. Detailed specifications describe the product the
2. Negotiating prices online
a. Negotiating prices is another form of bidding
b. Many people see the Internet as one big auction site as it
brings together buyers and sellers for just about any item
Assessment check questions
5.1. What is competitive bidding? Competitive bidding consists of inviting
5.2. Describe the benefits of an auction to the buyer and the seller. An
590 Part 7 Pricing Decisions
Chapter Objective 6: Explain the importance of transfer pricing.
Key Terms: transfer price, profit center
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Figure 19.4
Transfer Pricing to
Escape Taxation.
Discuss how
1. The transfer pricing dilemma
a. Transfer price refers to the price for moving goods
between profit centers
2. Issues regarding transfer pricing
a. Some questions posed by the pricing problem:
i. What rate should profit center A (maintenance
department) charge profit center B (production
department)?
ii. Should the price be the same as it would be if A
sold the product to an outside party?
iii. Should B receive a discount?
Assessment check questions
6.1. Define transfer price. A transfer price is the price for moving goods
between profit centers.
Chapter Objective 7: Compare the three alternative global pricing strategies.
Key Terms: none
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1. Global considerations and online pricing
a. Every online marketer is inherently a global marketer
b. These marketers must understand internal and external
conditions affecting global pricing strategies
2. Traditional global pricing strategies
a. Firms use one of three export pricing strategies—a
standard worldwide price, dual pricing, or market-
differentiated pricing
b. Standard worldwide prices
i. Standard worldwide prices are often set
regardless of target markets
c. Dual pricing
i. Dual pricing distinguishes prices for domestic and
export sales
ii. Some exporters practice cost-plus pricing to set
dual prices that fully allocate their true domestic
and foreign costs to product sales in those
d. Market-differentiated pricing
i. Market-differentiated pricing is an even more
flexible pricing arrangement to set prices
according to local marketplace conditions
Assessment check questions
7.1. What are the three traditional global pricing strategies? The three
7.2. Which is the most flexible global pricing strategy? The most flexible
global pricing strategy is market-differentiated pricing, which allows firms
to set prices according to actual conditions.
Learning Objective 8: Relate the concepts of cannibalization, bundle pricing, and bots to
online pricing strategies.
Key Terms: cannibalization, multichannel shoppers, bot, robot, bundle pricing
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Career Readiness:
Using Apps for
Comparison
Shopping—How
does using mobile
apps enhance
consumers’
shopping
1. Characteristics of online pricing
a. Marketers are applying old strategies in new ways to deal
2. The cannibalization dilemma
a. Many companies price the same products differently
online
b. This practice runs the risk of cannibalization, or securing
additional sales through lower prices that take sales
away from the marketer’s other products (or channels)
c. In a new twist to an old tactic, firms are self-inflicting
price cuts by creating competition among their own
products
i. This practice was debated in the first decade of e-
business, but today’s marketers are savvy about
integrating marketing channels
3. Use of shopbots
a. A bot or shopbot (derived from the word robot) is a
search program that acts as a comparison shopping
agent
i. It searches the Web for a specific product and
prints a list of sites that offer the product at the
b. But marketers stress that online shoppers will check