New Product PricingWith a new product, competition does not exist or is minimal, hence the general pricing strategies depend on different factors. Show
Learning Objectives Compare and contrast penetration pricing and skimming pricing Key TakeawaysKey Points
Key Terms
With a totally new product, competition does not exist or is minimal. Two general strategies are most common for setting prices: (1) Penetration pricingIn the introductory stage of a new product's life cycle means accepting a lower profit margin and to price relatively low. Such a strategy should generate greater sales and establish the new product in the market more quickly. Penetration pricing is the pricing technique of setting a relatively low initial entry price, often lower than the eventual market price, to attract new customers. The strategy works on the expectation that customers will switch to the new brand because of the lower price. Penetration pricing is most commonly associated with a marketing objective of increasing market share or sales volume, rather than to make profit in the short term. The advantages of penetration pricing to the firm are as follows:
A penetration strategy would generally be supported by the following conditions: price-sensitive consumers, opportunity to keep costs low, the anticipation of quick market entry by competitors, a high likelihood for rapid acceptance by potential buyers, and an adequate resource base for the firm to meet the new demand and sales. Pricing: Companies and businesses set prices at certain levels in order to attract customers. (2) Skimming Skimming involves goods being sold at higher prices so that fewer sales are needed to break even. Selling a product at a high price
and sacrificing high sales to gain a high profit is therefore "skimming" the market. Skimming is usually employed to reimburse the cost of investment of the original research into the product. It is commonly used in electronic markets when a new range, such as DVD players, are firstly dispatched into the market at a high price. This strategy is often used to target "early adopters" of a product or service. Early adopters generally have a relatively lower price-sensitivity and this can be
attributed to their need for the product outweighing their need to economize, a greater understanding of the product's value, or simply having a higher disposable income.
Product Line PricingLine pricing is the use of a limited number of price points for all the product offerings of a vendor. Learning Objectives Describe the characteristics of line
pricing Key TakeawaysKey Points
Key Terms
Line pricing is the use of a limited number of prices for all the product offerings of a vendor. This is a tradition started in the old five and dime stores in which everything cost either 5 cents or 10 cents. Its underlying rationale is that these amounts are seen as suitable price points for a whole range of products by prospective customers. It has the advantage of ease of administering, but the disadvantage of inflexibility, particularly in times of inflation or unstable prices. Five and Dime Stores: Traditional five and dime stores followed a line pricing strategy. All of the goods were either $0.05 or $0.10. The dollar store is a modern equivalent. Line pricing serves several purposes that benefit both buyers and sellers. Customers want and expect a wide assortment of goods, particularly shopping goods. Many small price differences for a given item can be confusing. If ties were priced at $15, $15.35, $15.75, and so on, selection would be more difficult. The customer would not be able to judge quality
differences as reflected by such small increments in price. So having relatively few prices reduces this kind of confusion.
Psychological PricingPsychological pricing is a marketing practice based on the theory that certain prices have meaning to many buyers. Learning Objectives Explain
the types of psychological pricing Key TakeawaysKey Points
Key Terms
Price, as is the case with certain other elements in the marketing mix, has multiple
meanings beyond a simple utilitarian statement. One such meaning is often referred to as the psychological aspect of pricing. Inferring quality from price is a common example of the psychological aspect of price. For instance, a buyer may assume that a suit priced at $500 is of higher quality than one priced at $300. Odd Pricing: Odd prices end with digits like 5, 7, 8, and 9. They are intended to drive demand higher. Psychological pricing is one cause of price points. For a long time, marketing people have attempted to explain why odd prices are used. It seemed to make little difference whether one paid $29.95 or $30.00 for an item. Perhaps one of the most often heard explanations concerns the psychological impact of odd prices on customers. The explanation is that customers perceive even prices such as $5.00 or $10.00 as regular prices. Odd prices, on the other hand, appear
to represent bargains or savings and therefore encourage buying. There seems to be some movement toward even pricing; however, odd pricing is still very common. A somewhat related pricing strategy is combination pricing, such as two-for-one or buy-one-get-one-free. Consumers tend to react very positively to these pricing techniques.
Pricing During Difficult Economic TimesDuring a recession, companies must consider their unique situation and what value they provide customers when devising a pricing strategy. Learning Objectives Discuss pricing strategies during difficult economic times Key TakeawaysKey Points
Key Terms
Pricing During Difficult Economic Times Every company has a unique pricing strategy during a boom period, based on their own product, market, and managerial decision making. However, during a recession, many
companies may be tempted to abandon these strategies. After all, if customers are less willing to spend money, simplistic logic suggests that, by cutting prices, you can attract more customers. However, this strategy should be approached with caution. Price Cuts: Slashing prices on low value goods (while maintaining prices on high value goods) is a potential pricing strategy during difficult economic times. Similarly, price increases during a recession can also be a bad
idea. Many firms try to recover higher costs through price increases, which can turn away customers. Customers locked into contracts may have no regress if a company raises prices on them, but it tarnishes the seller's reputation and will make the customer think twice when the time comes to renew. Fighter Brands In marketing, a fighter brand (sometimes called a fighting brand) is a lower priced offering launched by a company to take on, and ideally take out, specific competitors that are attempting to under-price them. Unlike traditional brands that are designed with target consumers in mind, fighter brands are created specifically to combat a
competitor that is threatening to take market share away from a company's main brand. Fighter Brands: The Celeron microprocessor is a case study of a successful fighter brand. When the strategy works, a fighter brand not only defeats a low-priced competitor, but also opens up a new market. The Celeron microprocessor, shown here, is a case study of successful fighter brand. Despite the success of its Pentium processors, Intel faced a major threat from less costly processors that were better placed to serve the emerging market for low-cost personal computers, such as the AMD K6. Intel wanted to protect the brand equity and price premium of its Pentium chips, but it also wanted to avoid AMD gaining a foothold on the lower end of the market. So it created Celeron as a cheaper, less powerful version of its Pentium chips to serve this market. Everyday Low PricingEveryday low price is a pricing strategy offering consumers a low price without having to wait for sale price events or comparison shopping. Learning Objectives Translate the
meaning of the EDLP (everyday low price) pricing strategy Key TakeawaysKey Points
Key Terms
Everyday low price (EDLP) is a pricing strategy promising consumers a low price without the need to wait for sale price events or comparison shopping. Trader Joe's: Trader Joe's is unique because it doesn't require membership for its customers to enjoy its low prices. Apart from the many strengths of Trader Joe's, the most prominent is their
commitment to quality and lower prices. The company has worked hard to manage this economic image of value for its products that competitors, even giant retail stores, are unable to meet. Trader Joe's is not an ordinary store. It is unique because it does not market itself like other grocery stores do nor does it require its customers to take out a membership to enjoy its low prices. High/Low PricingHigh-low pricing is a strategy where most goods offered are priced higher than competitors, but lower prices are offered on other key items. Learning Objectives Recognize the mechanism of High/Low pricing strategies Key TakeawaysKey Points
Key Terms
High-low pricing is a method of pricing for an organization where the goods or services offered by the organization are regularly priced higher than competitors. However, through promotions,
advertisements, and or coupons, lower prices are offered on other key items consumers would want to purchase. The lower promotional prices are designed to bring customers to the organization where the customer is offered the promotional product as well as the regular higher priced products. High-Low Pricing Strategies: Many big firms are using high-low pricing strategies, especially in the shoe industry (ex: Reebok, Nike, and Adidas). There are many big firms using this type of pricing strategy (ex: Reebok, Nike, Adidas). The way competition prevails in the shoe industry is through high-low price. Also high-low pricing is extensively used in the fashion industry by companies (ex: Macy's and Nordstrom) This pricing strategy is not only in the shoe and fashion industry but also in many other industries. However, in these industries one or two firms will not provide discounts and works on fixed rate of earnings. Those firms will follow everyday low price strategy in order to compete in the market. Other Pricing StrategiesOne pricing strategy does not fit all, thus adapting various pricing strategies to new scenarios is necessary for a firm to stay viable. Learning Objectives Describe various pricing strategies Key TakeawaysKey Points
Key Terms
Pricing strategies for products or services encompass three main ways to improve profits. The business owner can cut costs, sell more, or find more profit with a better pricing strategy. When costs are already at their lowest and sales are hard to find, adopting a better pricing strategy is a key option to stay viable. There are many different pricing strategies that can be utilized for different selling scenarios: Cost-Plus PricingCost-plus pricing is the simplest pricing method. The firm calculates the cost of producing the product and adds on a percentage (profit) to that price to give the selling price. This method although simple has two flaws: it takes no account of demand and there is no way of determining if potential customers will purchase the product at the calculated price. Limit PricingA limit price is the price set by a monopolist to discourage economic entry into a market, and is illegal in many countries. The limit price is the price that the entrant would face upon entering as long as the incumbent firm did not decrease output. The limit price is often lower than the average cost of production or just low enough to make entering not profitable. The quantity produced by the incumbent firm to act as a deterrent to entry is usually larger than would be optimal for a monopolist, but might still produce higher economic profits than would be earned under perfect competition. Dynamic PricingA flexible pricing mechanism made possible by advances in information technology, and employed mostly by Internet based companies. By responding to market fluctuations or large amounts of data gathered from customers - ranging from where they live to what they buy to how much they have spent on past purchases - dynamic pricing allows online companies to adjust the prices of identical goods to correspond to a customer's willingness to pay. The airline industry is often cited as a success story. In fact, it employs the technique so artfully that most of the passengers on any given airplane have paid different ticket prices for the same flight. Dynamic Pricing: Dynamic pricing allows online companies to adjust the prices of identical goods to correspond to a customer's willingness to pay. Non-Price CompetitionNon-price competition means that organizations use strategies other than price to attract customers. Advertising, credit, delivery, displays, private brands, and convenience are all examples of tools used in non-price competition. Business people prefer to use non-price competition rather than price competition, because it is more difficult to match non-price characteristics. Pricing Above CompetitorsPricing above competitors can be rewarding to organizations, provided that the objectives of the policy are clearly understood and that the marketing mix is used to develop a strategy to enable management to implement the policy successfully. Pricing above competition generally requires a clear advantage on some non-price element of the marketing mix. In some cases, it is possible due to a high price-quality association on the part of potential buyers. Such an assumption is increasingly dangerous in today's information-rich environment. Consumer Reports and other similar publications make objective product comparisons much simpler for the consumer. There are also hundreds of dot.com companies that provide objective price comparisons. The key is to prove to customers that your product justifies a premium price. Pricing Below Competitors While some firms are positioned to
price above competition, others wish to carve out a market niche by pricing below competitors. The goal of such a policy is to realize a large sales volume through a lower price and profit margins. By controlling costs and reducing services, these firms are able to earn an acceptable profit, even though profit per unit is usually less. Such a strategy can be effective if a significant segment of the market is price-sensitive and/or the organization's cost structure is lower than competitors.
Costs can be reduced by increased efficiency, economies of scale, or by reducing or eliminating such things as credit, delivery, and advertising. For example, if a firm could replace its field sales force with telemarketing or online access, this function might be performed at lower cost. Such reductions often involve some loss in effectiveness, so the trade off must be considered carefully. Licenses and AttributionsCC licensed content, Shared previously
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What is it called when marketing intermediaries receive a discount to compensate for other services they provide such as setting up store displays?reframing discount. What is it called when marketing intermediaries receive a discount to compensate for other services they provide, such as setting up store displays? Functional discount.
What is it called when different customers pay different prices?Price discrimination is a selling strategy that charges customers different prices for the same product or service based on what the seller thinks they can get the customer to agree to. In pure price discrimination, the seller charges each customer the maximum price they will pay.
Is a company's product sales as a percentage of total sales for that industry?Market share is the percent of total sales in an industry generated by a particular company. Market share is calculated by taking the company's sales over the period and dividing it by the total sales of the industry over the same period.
Is the marketing of two or more products for a single package price?Bundling is the practice of marketing two or more product or service items in a single package with one price.
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