9.6 PRODUCT MIX PRICING STRATEGIES

In product line pricing, management must decide on the price steps to set between the various products in a line.

The price steps should take into account cost differences between the products in the line.

Optional product pricing is offering to sell optional or accessory products along with a main product.

In captive product pricing, companies make products that must be used along with a main product.

In the case of services, captive-product pricing is called two-part pricing. The price of the service is broken into a fixed fee plus a variable usage rate.

Using by-product pricing, the company seeks a market for the by-products produced in the generation of some products and services.

Using product bundle pricing, sellers often combine several of their products and offer the bundle at a reduced price.

9.7 PRICE ADJUSTMENT STRATEGIES

Discounts include:

·        Cash discount is a price reduction to buyers who pay their bills promptly.

·        Quantity discount is a price reduction to buyers who buy large volumes.

·        Functional discount (also called a trade discount) is offered by the seller to trade- channel members who perform certain functions.

·        Seasonal discount is a price reduction to buyers who buy merchandise or services out of season.

Allowances are a reduction from the list price.

·        Trade-in allowances are price reductions given for turning in an old item when buying a new one.

·        Promotional allowances are payments or price reductions to reward dealers for participating in advertising and sales support programs.

Segmented pricing occurs when the company sells a product or service at two or more prices, even though the difference in prices is not based on differences in costs.

·        Customer-segment pricing: different customers pay different prices for the same product or service.

·        Product-form pricing: Different versions of the product are priced differently but not according to differences in their costs.

·        Location-based pricing: A company charges different prices for different locations, even though the cost of offering each location is the same.

·        Time-based pricing: A firm varies its price by the season, the month, the day, and even the hour.

Psychological pricing occurs when sellers consider the psychology of prices and not simply the economics.

One aspect of psychological pricing is reference prices—prices that buyers carry in their minds and refer to when looking at a given product.

With promotional pricing, companies will temporarily price their products below list price and sometimes even below cost to create buying excitement and urgency.

·        Discounts: A reduction from normal prices to increase sales and reduce inventories.

·        Special-event pricing: Pricing differently in certain seasons to draw more customers.

·        Limited-time offers (flash sales): Create buying urgency and make buyers feel lucky to have gotten in on the deal.

·        Cash rebates: Offered to consumers who buy the product from dealers within a specified time; the manufacturer sends the rebate directly to the customer.

Promotional pricing can have adverse effects.

1.      Price promotions can create “deal-prone” customers who wait until brands go on sale before buying them.

2.      Constantly reduced prices can erode a brand’s value in the eyes of customers.

3.      Promotional pricing can lead to industry price wars.

Geographical Pricing involves deciding how to price products for customers located in different parts of the country or world.

·        FOB-origin pricing: The goods are placed free on board (hence, FOB) a carrier. At that point the title and responsibility pass to the customer, who pays the freight from the factory to the destination.

·        Uniform-delivered pricing is the opposite of FOB pricing. Here, the company charges the same price plus freight to all customers, regardless of their location.

·        Zone pricing falls between FOB-origin pricing and uniform-delivered pricing. All customers within a given zone pay a single total price; the more distant the zone, the higher the price.

·        Basing-point pricing: The seller selects a given city as a “basing point” and charges all customers the freight cost from that city to the customer location, regardless of the city from which the goods are actually shipped.

·        Freight-absorption pricing. Using this strategy, the seller absorbs all or part of the actual freight charges in order to get the desired business.

9.7.1 Dynamic and Online Pricing

Dynamic Pricing is adjusting prices continually to meet the characteristics and needs of individual customers and situations.

Dynamic pricing is extremely prevalent online where the Internet seems to be taking us back to a new age of fluid pricing.

Dynamic pricing offers many advantages:

·        Online sellers can mine their databases to gauge a specific shopper’s desires, measure his or her means, and instantaneously tailor products to fit that shopper’s behavior, and price products accordingly.

·        Buyers can also negotiate prices at online auction sites and exchanges.

·        Online buyers benefit from the Web and dynamic pricing. A wealth of price comparison sites—such as Yahoo! Shopping and PriceGrabber—offer instant product and price comparisons from thousands of vendors.

9.7.2 International Pricing

The price that a company should charge in a specific country depends on many factors, including economic conditions, competitive situations, laws and regulations, and development of the wholesaling and retailing system. Costs play an important role in setting international prices.

9.8 PRICE CHANGES

9.8.1 Initiating Price Changes

Initiating Price Cuts

Several situations may lead a firm to consider cutting its price.

·        Excess capacity

·        Falling demand in the face of strong price competition

·        Desire to dominate market

Initiating Price Increases

A major factor in price increases is cost inflation.

When raising prices, the company must avoid being perceived as a price gouger.

One technique for avoiding this problem is to maintain a sense of fairness surrounding any price increase.

Buyer Reactions to Price Changes

Customers do not always view price changes in a straightforward or rational way. They may view price cuts or price increases in several ways.

Competitor Reactions to Price Changes

Competitors are most likely to react when the number of firms involved is small, when the

product is uniform, and when the buyers are well informed about products and prices.

9.8.2 Responding to Price Changes

The firm needs to consider several issues: Why did the competitor change the price? Is the price change temporary or permanent? What will happen to the company’s market share and profits if it does not respond? Are other competitors going to respond?

1.      The company could reduce its price to match the competitor’s price.

2.      The company could maintain its price but raise the perceived value of its offer.

3.      The company could improve quality and increase price, moving its brand into a higher price-value position.

4.      The company could launch a low-price “fighter brand”—adding a lower-price item to the line or creating a separate lower-price brand.

9.9 PUBLIC POLICY AND PRICING

9.9.1 Pricing Within Channel Levels

Federal legislation on price-fixing states that sellers must set prices without talking to competitors. Otherwise, price collusion is suspected.

Sellers are prohibited from using predatory pricing—selling below cost with the intention of punishing a competitor or gaining higher long-run profits by putting competitors out of business.