8 - Pricing Strategies

Question 1

new product pricing strategies

Answer 1

• > introductory phase: challenge of setting prices for the first time
  1. market skimming pricing
  2. market penetration pricing

Question 2

market skimming pricing

Answer 2

sets high initial prices to “skim” revenue layers from the market

• should not be very easy to competitors to enter market and undercut the high price
• usually w/ tech products, because NDP can be very expensive
• used to cover costs of production
• price is reduced as the novelty wears off and as substitute products appear.

Question 3

market penetration pricing

Answer 3

setting low price in order to attract a large number of buyers + market share

• high sales volume = falling costs, allowing companies to cut their prices even further

Question 4

product mix pricing strategies (5)

Answer 4

product line pricing

optional product pricing

captive product pricing

by-product pricing

product bundle pricing

Question 5

product line pricing

Answer 5

takes into account the cost difference between products in the line, customer evaluations of their features and competitors’ prices

eg. Starbucks cup sizes

Question 6

optional product pricing

Answer 6

takes into account optional/accessory products along with the main product

eg. phone cases

Question 7

captive product pricing

Answer 7

sets prices of products that must be used along with the main product

eg. Nespresso coffee capsules

in services: two part pricing = fixed fee + variable usage rate
eg. disney you pay ticket but don’t have to pay for food

Question 8

by-product pricing

Answer 8

refers to products with little or no value produced as a result of the main product

• makes main product price more competitive
  eg. coffee shop sells the used ground coffee

Question 9

product bundle pricing

Answer 9

combines several products at a reduced price

eg. pack of 3 shampoos for the price of 2

Question 10

price adjustment strategies (7)

Answer 10

discount + allowance pricing 
segmented pricing 
psychological pricing 
promotional pricing 
geographic pricing
dynamic pricing 
international pricing

Question 11

discount + allowance pricing

Answer 11

reduces prices to reward customer responses such as making volume purchases, paying early or promoting the product

discounts = cash discounts for paying promptly, quantity discounts…

allowances = trade-in allowances for turning in old items when buying new ones…

Question 12

segmented pricing

Answer 12

involves selling a product/service at two or more prices
- not based on differences in costs

• customer segmented pricing (eg. student discounts)
• product form pricing (eg. different versions of product)
• location based pricing (eg. international student fees)
• time based pricing

Question 13

requirements for segmented pricing to be effective (4)

Answer 13

market must be segmental

segments must show different degrees of demand

costs of segmenting cannot exceed the extra revenue

must be legal

Question 14

psychological pricing

Answer 14

price says something about the product
- people assume higher price means higher quality

reference prices = prices that customers carry in their mind and refer to when looking at a product

Question 15

promotional pricing

Answer 15

temporarily pricing products below price and sometimes even below cost => increase short-run sales

• discounts
• special events
• limited time offers
• cash rebates
• low interest financing

Question 16

adverse effects of promotional pricing

Answer 16

bargain wars

consumers are bombarded with deals - pricing confusion

used too often - creates deal prone customers

can erode a brand’s value

Question 17

geographic pricing (5)

Answer 17

FOB pricing - buyer bears the shipping cost entirely

uniform delivered pricing - charges the same price plus freight to all customers, regardless of location

zone pricing - set up zones, customers within a given zone pay the same price

basing-point pricing - seller selects a city as a “basing point” and charges all customers the freight cost from that city to the customer

freight-absorption pricing – the seller absorbs all or part of the freight charges

Question 18

dynamic pricing

Answer 18

continuously adjusting prices to meet the characteristics + needs of individual customers and situations

Question 19

international pricing

Answer 19

sets prices based on:

• economic conditions
• competitive situations
• laws + regulations
• wholesaling + retailing systems

Question 20

price changes

Answer 20

cuts occur due to:

• excess capacity
• increased market share

increases occur due to:

• cost inflation
• increased demand
• lack of supply

Question 21

buyers reactions to price changes

Answer 21

price increase:

• product is ‘hot’
• company greed

price cuts:

• new model will be available
• models are not selling well
• quality issues

Question 22

effective action responses to price changes

Answer 22

• reduce price to match competitors
• maintain price but raise perceived value
• improve quality + increase price
• launch a lower price ‘fighting brand’

Question 23

pricing public policy

Answer 23

w/in channel levels:

• price fixing (w/out talking to competitors)
• predatory pricing (prohibits selling below costs to purposely hurt competitors)

across channel levels:

• retail price maintenance
• deceptive pricing
• price discrimination