Principles of Marketing
Nineteenth Edition, Global Edition
Chapter 11
Pricing Strategies: Advanced
Topics
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Learning Objectives
11.1 Describe the major strategies for pricing new products.
11.2 Explain how companies choose a portfolio of prices to
maximize the profits from the total product mix.
11.3 Discuss how companies adjust their prices to account
for different types of customers and situations.
11.4 Discuss the key issues related to initiating and
responding to price changes.
11.5 Discuss the major public policy concerns and key laws
and regulations that affect pricing decisions.
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ALD I: You Can’t Eat Frills, So Why
Pay for Them?
ALD I promises a unique
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delivers “a faster, easier, and
smarter way to save money
on high-quality groceries and
more. ALD I does things
‘differently’ to bring you Ken
amazing low prices.” Wolter/Shutterstock
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Learning Objective 1
Describe the major strategies for pricing new products.
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New Product Pricing Strategies (1 of 2)
Market-skimming pricing strategy sets high initial prices to
“skim” revenue layers from the market.
• Product quality and image must support the price.
• Buyers must want the product at the price.
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New Product Pricing Strategies (2 of 2)
Market-penetration pricing involves setting a low price for
a new product in order to attract a large number of buyers
and a large market share.
Penetration pricing: Gillette
prices its Fusion ProGlide
starter pack low to attract a
large market share and then
makes money over time
through sales of high-margin
refill blades.
Vladimir
Zhupanenko/Shutterstock
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Learning Objective 2
Explain how companies choose a portfolio of prices to
maximize the profits from the total product mix.
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Product Mix Pricing Strategies
• Product line pricing
• Optional product pricing
• Captive product pricing
• By-product pricing
• Product bundle pricing
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Product Mix Pricing Strategies (1 of 3)
Product Line and Optional Product Pricing
Product line pricing takes into account the cost differences
between products in the line, customer evaluations of their
features, and competitors’ prices.
Optional product pricing takes into account optional or
accessory products along with the main product.
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Product Mix Pricing Strategies (2 of 3)
Captive product pricing sets prices of products that must
be used along with the main product.
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Product Mix Pricing Strategies (3 of 3)
Product Line and Optional Product Pricing
By-product pricing sets a price for by-products in order to make the
main product’s price more competitive.
Product bundle pricing combines several products at a reduced price.
By-product pricing: U.S. poultry
processors have turned chicken
feet, mostly considered a waste
product, into a profitable by-product
by selling them in China, where they
are considered a delicacy and often
priced higher than actual chicken
meat.
Santiparp Wattanaporn/Shutterstock
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Learning Objective 3
Discuss how companies adjust their prices to account for
different types of customers and situations.
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Price Adjustment Strategies
Table 11.2 Price Adjustments
Strategy Description
Discount and allowance Reducing prices to reward customer responses such as volume
pricing purchases, paying early, or promoting the product
Segmented pricing Adjusting prices to allow for differences in customers, products, or
locations
Psychological pricing Adjusting prices for psychological effects
Promotional pricing Temporarily reducing prices to spur short-run sales
Geographical pricing Adjusting prices to account for the geographic location of customers
Dynamic and personalized Adjusting prices continually to meet the characteristics and needs of
pricing individual customers and situations
International pricing Adjusting prices for international markets
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Price Adjustment Strategies (1 of 12)
Discount pricing reduces prices on purchases during a
stated period of time or of larger quantities.
Allowances discount list prices by providing promotional
money in return for an agreement to feature the
manufacturer’s products in some way. Allowances include
trade-in allowances and promotional allowances.
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Price Adjustment Strategies (2 of 12)
Segmented Pricing
• Customer-segment pricing
• Product form pricing
• Location-based pricing
• Time-based pricing
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Price Adjustment Strategies (3 of 12)
Segmented Pricing
For segmented pricing to be effective:
• Market must be segmentable
• Segments must show different degrees of demand
• Costs of segmenting cannot exceed the extra revenue
• Must be legal
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Price Adjustment Strategies (4 of 12)
Segmented pricing involves selling a product or service at two or more
prices, where the difference in prices is not based on differences in
costs.
Segmented pricing: Microsoft and
other electronics brands have
launched dedicated online stores
for military members, veterans, and
their families, with discounts of
10 percent or more on the wide
range of products offered there.
Microsoft Corporation
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Price Adjustment Strategies (5 of 12)
Psychological Pricing
Psychological pricing considers the psychology of prices and not
simply the economics; the price is used to say something about the
product.
Reference prices are prices that buyers carry in their minds and refer to
when they look at a given product.
Psychological pricing: Dunkin’s S!p coffee
experiment showed that price and context
can affect brand perceptions.
Dunkin' Donuts
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Price Adjustment Strategies (6 of 12)
Promotional Pricing
Promotional pricing is characterized
by temporarily pricing products below
the list price, and sometimes even
below cost, to increase short-run sales.
Examples include:
• special-event pricing
• limited-time offers
• cash rebates
• low-interest financing, extended
warranties, or free maintenance
Promotional pricing: Some marketers
bombard consumers with endless
Keri Miksza
price promotions, eroding the brand’s
value. “Shopping with a coupon at Bed
Bath & Beyond has begun to feel like
a given instead of like a special treat.”
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Price Adjustment Strategies (7 of 12)
Geographical pricing is used for customers in different
parts of the country or the world.
• FO B-origin pricing
• Uniform-delivered pricing
• Zone pricing
• Basing-point pricing
• Freight-absorption pricing
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Price Adjustment Strategies (8 of 12)
Geographical Pricing
FO B-origin (free on board) pricing is a geographical
pricing strategy in which goods are placed free on board a
carrier; the customer pays the freight from the factory to the
destination.
Uniform-delivered pricing is a geographical pricing
strategy in which the company charges the same price plus
freight to all customers, regardless of their location.
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Price Adjustment Strategies (9 of 12)
Geographical Pricing
Zone pricing is a strategy in which the company sets up two
or more zones where customers within a given zone pay the
same price.
Basing-point pricing means that a seller selects a given
city as a “basing point” and charges all customers the freight
cost from that city to the customer.
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Price Adjustment Strategies (10 of 12)
Geographical Pricing
Freight-absorption pricing is a strategy in which the seller
absorbs all or part of the freight charges in order to get the
desired business.
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Price Adjustment Strategies (11 of 12)
Dynamic pricing involves adjusting prices continually to meet the characteristics
and needs of individual customers and situations.
Dynamic online pricing benefits both sellers and buyers. Consumers armed with
instant access to product and price comparisons can often negotiate better in-
store prices.
Dynamic pricing: Thanks to the internet
and apps such as ShopSavvy, smart
shoppers can now routinely compare
prices online to take advantage of the
constant price skirmishes among
sellers, snap up good deals, and
leverage retailer price-matching
policies. Dynamic pricing done poorly,
however, can cause shopper confusion,
disgruntlement, or brand distrust.
Courtesy of ShopSavvy
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Price Adjustment Strategies (12 of 12)
International pricing involves adjusting prices continually to meet the
characteristics and needs of individual customers and situations.
International prices: Companies
often must change their pricing
strategies from country to country.
For example, Apple sells its latest
phones at premium prices to
affluent Chinese customers but
successfully launched its iPhone 13
at a lower price while also
introducing the iPhone13 Mini at a
lower price point aimed at China’s
CookieWei/Shutterstock
midrange customers.
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Learning Objective 4
Discuss the key issues related to initiating and responding to
price changes.
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Price Changes (1 of 5)
Initiating Price Changes
Price cuts occur due to:
• Excess capacity
• Increased market share
Price increases occur due to:
• Cost inflation
• Increased demand
• Lack of supply
Price reduction strategy: Thanks to
its lower prices, Wavestorm is now
the surfboard market leader.
Image by Stan Moniz; Owned by Agit Global, Inc.
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Price Changes (2 of 5)
Buyer Reactions to Pricing Changes
• Price increases
– Product is “hot”
– Company greed
• Price cuts
– New models will be available
– Models are not selling well
– Quality issues
Initiating price increases: When
gasoline prices rise rapidly,
regardless of the reason, angry
consumers often accuse the major
oil companies of enriching Jerry and Marcy Monkman/EcoPhotography.com/Alamy
Stock Photo
themselves by gouging customers.
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Price Changes (3 of 5)
Competitor Reactions to Pricing Changes
• Why did the competitor change the price?
• Is the price cut permanent or temporary?
• Is the company trying to grab market share?
• Is the company doing poorly and trying to increase sales?
• Is it a signal to decrease industry prices to stimulate
demand?
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Price Changes (4 of 5)
Figure 11.1 Responding to Competitor Price Changes
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Price Changes (5 of 5)
Responding to Pricing Changes
Effective Action Responses
• Reduce price to match competition
• Maintain price but raise the
perceived value through
communications
• Improve quality and increase price
• Launch a lower-price “fighting” brand
Fighter brands: Intel launched its
Celeron microprocessor as a fighter
brand to compete head-to-head with
Ralf Liebhold/Shutterstock
competitor AMD’ s lower-priced
processors, allowing Intel’s high-end
Pentium processor line to maintain its
premium prices.
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Discussion Question (1 of 2)
How should a company respond to a competitor’s price
changes?
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Learning Objective 5
Discuss the major public policy concerns and key laws and
regulations that affect pricing decisions.
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Public Policy and Pricing (1 of 5)
Figure 11.2 Public Policy Issues in Pricing
Source: Adapted from Dhruv Grewal and Larry D. Compeau, “Pricing and Public Policy: A
Research Agenda and Overview of the Special Issue,” Journal of Public Policy and
Marketing, Spring 1999, pp. 3–10.
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Public Policy and Pricing (2 of 5)
Pricing Within Channel Levels
Price fixing legislation requires sellers to set prices without talking to
competitors.
Predatory pricing legislation prohibits selling below cost with the
intention of punishing a competitor or gaining higher long-term profits by
putting competitors out of business.
Predatory pricing: Some
industry
critics have
Amazon.com
accused
of pricing books at fire-sale prices
that harm competing booksellers.
But is it predatory pricing or just
plain good competitive marketing?
imageBROKER/Alamy Stock Photo
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Public Policy and Pricing (3 of 5)
Pricing Across Channel Levels
Robinson-Patman Act prevents unfair price discrimination by ensuring
that the seller offer the same price terms to customers at a given level of
trade.
Price discrimination is allowed if the seller:
• can prove that costs differ when selling to different retailers.
• manufactures different qualities of the same product for different
retailers.
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Public Policy and Pricing (4 of 5)
Pricing Across Channel Levels
Retail (or resale) price maintenance occurs when a manufacturer requires a
dealer to charge a specific retail price for its product, which is prohibited by law.
Pharmaceutical Pricing: No Easy
Answers
Responsible pharmaceutical pricing:
Most consumers understand that they
will have to pay the price for beneficial
drugs. They just want to be treated fairly
in the process.
pixelrobot/123R F
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Public Policy and Pricing (5 of 5)
Pricing Across Channel Levels
Deceptive pricing occurs when a seller states prices or
price savings that mislead consumers or are not actually
available to consumers.
• Bogus reference or comparison prices
• Scanner fraud and price confusion
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Discussion Question (2 of 2)
Describe the major public policy issues.
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