IFUGAO STATE UNIVERSITY

COLLEGE OF BUSINESS AND MANAGEMENT

1st Term; Academic Year 2024-2025

PRICING STRATEGY

CHAPTER V: Competition-Based Pricing

In this chapter, we will explore the fundamentals of competition-based pricing, its benefits
and challenges, and practical considerations for implementing this strategy in your business.
Through a deeper understanding of competitive pricing dynamics, organizations can not only
survive but thrive in competitive environments.

MARKET STRUCTURE AND PRICES

Market Structure is determined by the nature and degree of competition among businesses
that operate in the same industry.

Perfect Competition

 A market with perfect competition consists of a very large number of businesses

producing nearly identical products and has many buyers.
 Buyers are well-informed about the price, quality, and availability of products.
 Because consumers have so many choices of similar products, price is often the
deciding factor, making it difficult for a single business to raise prices.
 Example: agricultural products, oil, sugar and salt.

Monopolistic Competition

 Monopolistic competition is a type of market structure where many companies are

present in an industry, and they produce similar but differentiated products.
 Many suppliers, compete for business and buyers shop around for the best deal they
can find.
 Products offered are not identical but very similar, so differentiating products is
important.
 Example: Mcdo vs. Jollibee

Oligopoly

 Oligopoly markets are markets dominated by a small number of suppliers who

together have substantial influence over a certain industry or market.
 While the group holds a great deal of market power, no one company within the
group has enough sway to undermine the others or steal market share. As a result,
prices in this market are moderate because of the presence of a certain degree of
competition.
 Example: Airlines Industry in the Philippines: Cebu Pacific, Air Asia, Phil. Airline
Monopoly

 A monopolistic market is a theoretical condition that describes a market where only

one company may offer products and services to the public. A monopolistic market is
the opposite of a perfectly competitive market, in which an infinite number of firms
operate.

COMPETITIVE PRICING/COMPETITION-BASED PRICING

Competitive pricing is the process of selecting strategic price points to best take advantage
of a product or service based market relative to competition. This pricing method is used
more often by businesses selling similar products since services can vary from business to
business, while the attributes of a product remain similar. This type of pricing strategy is
generally used once a price for a product or service has reached a level of equilibrium, which
occurs when a product has been on the market for a long time and there are many
substitutes for the product.

TYPES OF COMPETITION-BASED PRICING

With competition-based pricing, companies make three types of pricing decisions — to set
prices above, the same, or below their direct competitors.

1. Above the Competition (Premium Pricing)

Setting a premium price above market value can be effective if the company demonstrates
that the product or service is somehow superior to the competition. This could mean a more
significant investment in marketing to position the brand as ‘luxury’, added features, or
favorable customer terms like extended warranties.

2. The Same as the Competition (Price Matching)

Price-match promises are a common competition-based pricing strategy companies use to

stop customers from switching to competitors for a better price. With this competitor-based
pricing strategy, companies promise to offer the same price as their competitors for identical
products. Branding and marketing also allow companies to remain competitive while
differentiating themselves.

3. Below the Competition (Loss Leader Pricing)

Intentionally setting prices below competitor selling prices (also known as loss leader pricing)
can effectively grow market share and revenue in the short term. Marketing yourself as the
lowest cost option is a genuine pricing strategy, but it can affect profitability and damage
perceived value in the long term.

KEY ASPECTS TO CONSIDER WHEN USING COMPETITIVE PRICING

1. Market Analysis: Research competitors to understand their pricing models,

including premium, mid-range, and discount strategies.

2. Price Positioning: Decide whether to price above, below, or at par with

competitors based on your brand positioning and value proposition.

3. Value Perception: Consider how your product differs from competitors. If you offer
unique features or superior quality, you might justify a higher price.

4. Dynamic Pricing: Monitor competitor prices regularly and adjust your prices as
needed to remain competitive while maintaining profitability.

5. Promotions and Discounts: Use strategic promotions to attract customers without

permanently lowering prices.

6. Customer Feedback: Gather insights from customers regarding price sensitivity

and perceived value to inform pricing decisions.

7. Legal Considerations: Be aware of pricing laws and regulations to avoid anti-

competitive practices.

SIMPLE FRAMEWORK

The framework for setting up competitive pricing is straightforward. Steps you can take to set
up your competitive pricing strategy are:

1. Identify your key competition

2. Determine their price position and strategy
3. Find the values they offer across key customer segments
4. Price your offerings compared to competition based on the values you offer
Finding competitive data may be challenging, but it will help you better understand your
customer base and who customers view as your competitors when making a purchase.

WHEN SHOULD YOU USE COMPETITIVE PRICING?

Competitor-based pricing is often used in markets where numerous companies sell similar
products or services, like retail and e-commerce. In environments with minimal product
variation and many options available, brands may rely on a competitor-based pricing
strategy to determine their optimal pricing positions. This can be especially useful for
startups entering a new market without historical pricing data and those that need a fast
route to market. Implementing competitive pricing strategies involves ongoing market
research and regular monitoring to maintain competitiveness and align with business goals.
WHEN SHOULDN’T YOU USE A COMPETITIVE PRICING STRATEGY?

A competitor-based pricing strategy isn’t a viable choice for every type of business. For
example, a company that dominates a market with very little competition would be better off
using other pricing strategies like value-based pricing. Likewise, a competitive pricing
strategy wouldn’t suit businesses with a very unique product or service that allows them to
dictate the price.

ADVANTAGES OF COMPETITOR-BASED PRICING

Competition-based pricing offers several advantages to businesses, including:

1. Ease and Simplicity. Unlike more complex pricing strategies, competitor-based pricing is
relatively simple. Companies review pricing for similar products and services in the market
and decide where they should sit relative to these. If their product is of superior quality, they
may set their price slightly higher than competitors and market these features heavily. If they
offer a ‘basic’ option accessible to more potential customers, they may opt for a loss leader
pricing strategy.

2. Speed to Market. Competition-based pricing can be an excellent choice for brands that
want to enter a market quickly and easily. New brands without enough data negate the need
for detailed research because they can capitalize on work done by existing competitors.

3. Increased Revenue and Market Share. A competitor-based pricing strategy, especially

price matching or loss leader pricing, can help businesses claim market share from
competitors. Savvy customers always conduct price comparisons — in-store or online — to
get the best possible deal. This tactic can effectively maintain customers or lure them away
from the competition.

4. A Greater Profit Margin. Competitor-based pricing has the potential to boost profits when
done correctly. A premium pricing strategy can certainly achieve this, though it may be at the
expense of volume. Production costs should also be considered if you intend to price drop or
price match.

5. Customer Satisfaction. In well-established markets, customers are familiar with price

points and have solid expectations of value. Using competitor-based pricing means
customers can immediately judge value based on how prices differ between brands.

DISADVANTAGES OF COMPETITION-BASED PRICING

Competitor-based pricing models don’t come without risks. Companies considering a

competition-based pricing strategy should also understand the following disadvantages.

1. Lower Margins. It’s easy to see how a price matching or loss leader pricing strategy can
lead to slimmer margins. In these situations, companies risk a race to the bottom; eventually,
the selling price fails to cover the cost of production, and customer expectations are dragged
down so low that it’s not viable for businesses to operate.

2. Leaving money on the table. When companies base their prices on their competitors’
prices, they risk leaving potential revenue and profit on the table. A lack of price intelligence
and qualitative research means some businesses may over or under-price their products. A
superior quality product marketed well can command a higher price, regardless of how
competitors price their products.

3. Lack of Unique Value. Focusing too much on competitors can lead to a failure to
communicate your product’s unique value, resulting in a commoditized perception.
4. Cost Structure Ignored. This approach may overlook your own costs and value
proposition, leading to pricing that doesn’t cover expenses.

5. Market Saturation. In highly competitive markets, pricing wars can emerge, driving prices
down and reducing overall profitability for all players.

6. Imitation Risk. Following competitors too closely can lead to a lack of differentiation and
innovation in product offerings.

7. Limited Insight. Relying solely on competitor pricing can provide a narrow view of the
market, missing insights from customer preferences and behavior.

8. Inflexibility. Over-reliance on competitor pricing can hinder innovation and prevent

businesses from exploring other pricing strategies that might be more beneficial.

EXAMPLES OF COMPETITIVE BASED PRICING

Here are a few examples of businesses that may adopt a Competitive Based Pricing
strategy.

Retailers

Retailers who are selling the same products as their competitors frequently use Competitive
Based Pricing, as potential customers often compare prices for their desired items and make
a purchase decision based on price. This is especially prevalent in the online space were
Google’s Shopping feature makes price comparison easy for consumers.

Amazon is a well-known example of an online retailer who conducts large-scale and ongoing
analysis of competitor pricing with the aim of being the lowest-price option in the market.

Apple

It could be argued that Apple adopt a Competitive Based Pricing strategy, but opt for the
Premium Pricing approach. Apple consistently charges above the prices of it’s competitors
and has branding, marketing and messaging that works hard to justify the higher price points.

Coca Cola

The Coca Cola Company has a vast range of products that they sell into multiple global
markets, and, as such, will implement a wide range of different prices strategies. However,
for the most part, if we look at the Coca Cola product alone, they operate a Competitive
Based Pricing strategy, closely tracking the price of their biggest competitor Pepsi.

CHAPTER VI: Cost-Based Pricing

In this chapter, we will delve into the principles of cost-based pricing, its advantages and
limitations, and key considerations for implementation. Understanding this pricing strategy is
essential for organizations aiming to establish a sustainable pricing framework while
navigating competitive landscapes.

COST-BASED PRICING

Cost-based pricing involves setting prices based on the costs for producing, distributing, and
selling the product plus fair rate of return for its effort and risk.
Types of Cost

Fixed costs/Overhead – are costs that do not vary with production or sales level (rent,
business licenses, etc.).

Variable Costs – vary directly with the level of production (materials, labor, shipping, etc.).

Example: Bread shop. Whether or not the shop makes any sales, it must pay the same
monthly rent, utilities, or interests on loans. These are the fixed costs of the business. The
store also has variable costs, including the expense of buying sugar, flour, yeast, butter.
These expenses rise directly with the number of items sold. The more bread the store sells
the more resources it must buy to make more goods.

Total Cost - fixed cost and variable cost are combined together.

COSTS AT DIFFERENT LEVELS OF PRODUCTION

To price wisely, management needs to know how its costs vary with different levels of
production.

Example: Texas Instruments - a global semiconductor company that designs, manufactures,

tests and sells analog and embedded processing chips.

Suppose TI built a plant to produce 1,000 calculators per day. Costs at different levels of
production shows that the cost per calculator is high if TI’s factory produces only a few per
day. But as production moves up to 1,000 calculators per day, the average cost per unit
decreases. This is because the fixed cost are spread over more units, with each one bearing
a smaller share of the fixed cost. TI can try to produce more than 1,000 calculators per day,
but average costs will increase because the plant becomes more inefficient. Workers have to
wait for machines, the machines will break down more often, and wprkers get in each other’s
way.

If TI believed it could sell 2,000 calculators a day, it should consider building a larger plant.
COSTS AS A FUNCTION OF PRODUCTION EXPERIENCE

Example: Suppose TI runs a plant that produces 3,000 calculators per day. As TI gains
experience in producing calculators, it learns how to do it better. Workers learn shortcuts and
become more familiar with the equipment. With practice, the work becomes better organized.
With higher volume, TI becomes more efficient and gains economies of scale. As a result,
the average cost tends to decrease with accumulated production experience. As shown
below, the average cost of producing the first 100,000 calculators is $10 per calculator.
When the company has produced the first 200,000 calculators, the average cost has fallen
to $8.50. Afters its accumulated production experience doubles again to 400,000, the
average cost is $7. This drop in the average cost with accumulated production experience is
called the experience curve or the learning curve.

COSTS-PLUS-PRICING/MARK-UP PRICING - adding a standard mark-up to the cost of the

product.

Example 1:

Example 2:

Reasons for using Mark-up

- Sellers are more certain about costs
- When all firms in the industry use this pricing method, prices tend to be similar,
so price competition is minimized
- Many feel that cost-plus pricing is fairer for both buyers and sellers
- Sellers earn fair return on their investment but do not take advantage of buyers
when buyer’s demand becomes great
Break-even Analysis and Target Profit Pricing

The firm tries to determine the price at which it will break even or make target return it
is seeking.

If the company wants to make a profit, it must sell more than 30,000 units at P20.
Suppose a manufacturer has invested 1 Million in the business and wants to set a
price to earn a 20% return or 200,000.00. In that case it must sell at least 50,000 units
at P20 each.

ADVANTAGES

1. Simplicity: Easy to calculate and implement, providing clear guidelines for pricing
decisions.
2. Cost Recovery: Ensures that all costs are covered before profit is made, reducing
financial risk.
3. Predictability: Helps in forecasting profits based on set costs and sales volumes.
4. Stability: Prices can remain consistent, which can help in building customer trust.

DISADVANTAGES

1. Ignores Market Demand: Fails to consider customer willingness to pay or competitor

pricing, which can lead to mispricing.
2. Potential for Overpricing or Underpricing: If costs are miscalculated, it may result in
prices that are either too high (driving away customers) or too low (not covering costs).
3. Limited Flexibility: May lead to inflexible pricing that doesn’t adapt well to market
changes.
4. Neglects Value Proposition: Focuses more on costs than on the perceived value of
the product to the customer, which can hinder competitive positioning.

WHEN TO USE
1. Stable Market Conditions: In environments where costs are predictable and
competition is limited.
2. Manufacturing Industries: Particularly in industries with well-defined cost structures.
3. New Product Development: When establishing pricing for new products based on
development costs.

CHAPTER VII: Customer Value-Based Pricing

In this chapter, we will explore the principles of customer value-based pricing, its benefits,
and the challenges it presents. By leveraging this pricing strategy, organizations can
effectively position themselves in the market, driving both customer satisfaction and
business success.

CUSTOMER VALUE-BASED PRICING

This uses buyers’ perception of value, not the seller’s cost, as the key to pricing. Value-
based pricing means that the marketer cannot design a product and marketing program and
then set the price. Price is considered along with other marketing mix variables before the
marketing program is set.

Although costs are important consideration in setting price, cost based pricing is often
product driven. The company designs what it considers to be a good product, adds up cost
of making the product, and sets a price that covers costs plus a target profit. Marketing must
then convince buyers that the product’s value at that price justifies its purchase. If the price
turns out to be high, the company must settle for lower markups or lower sales, both
resulting in disappointing profits.

Value-based pricing reverse this process. The company first assesses customer needs and
value perceptions. It then sets its target price based on customer perceptions of value. The
targeted value and price drive decisions about what costs can be incurred and the resulting
product design. As a result, pricing begins with analyzing consumer needs and value
perceptions, and the price is set to match perceived value.

It is important to remember that “good value” is not the same as “low price”.

Companies often find it hard to measure the value customers will attach to its product. For
example, calculating the cost of ingredients in a meal at a fancy restaurant is relatively easy.
But assigning value to other satisfactions such as taste, environment, relaxation,
conversation, and status is very hard. Such value is subjective; it varies both for different
consumers and different situations.

Still, consumers will use these perceived values to evaluate a product’s price, so the
company must work to measure them. Sometimes, companies ask consumers how much
they would pay for a basic product and for each benefit added to the offer. Or a company
might conduct experiments to test the perceived value of different product offers. According
to an old Russian proverb, there are two fools in every market—one who asks too much and
one who asks too little. If the seller charges more than the buyers’ perceived value, the
company’s sales will suffer. If the seller charges less, its products sell very well, but they
produce less revenue than they would if they were priced at the level of perceived value.

TWO TYPES OF VALUE-BASED PRICING

1. Good-Value Pricing

Recent economic events have caused a fundamental shift in consumer attitudes toward
price and quality. In response, many companies have changed their pricing approaches to
bring them in line with changing economic conditions and consumer price perceptions. More
and more, marketers have adopted good-value pricing strategies—offering the right
combination of quality and good service at a fair price.

In many cases, this has involved introducing less-expensive versions of established, brand-
name products. To meet tougher economic times and more frugal consumer spending habits,
fast-food restaurants such as Taco Bell and McDonald’s offer value meals and dollar menu
items.

Alberto-Culver’s TRESemmé hair care line promises “A salon look and feel at a fraction of
the price.” And every car company now offers small, inexpensive models better suited to the
strapped consumer’s budget.

In other cases, good-value pricing has involved redesigning existing brands to offer more
quality for a given price or the same quality for less.

An important type of good-value pricing at the retail level is everyday low pricing (EDLP).
EDLP involves charging a constant, everyday low price with few or no temporary price
discounts. Retailers such as Costco and the furniture seller Room & Board practice EDLP.
The king of EDLP is Walmart, which practically defined the concept. Except for a few sale
items every month, Walmart promises everyday low prices on everything it sells. In contrast,
high-low pricing involves charging higher prices on an everyday basis but running frequent
promotions to lower prices temporarily on selected items. Department stores such as Kohl’s
and Macy’s practice high-low pricing by having frequent sales days, early-bird savings, and
bonus earnings for store credit-card holders.
2. Value-Added Pricing

Value-based pricing doesn’t mean simply charging what customers want to pay or setting
low prices to meet competition. Instead, many companies adopt value-added pricing
strategies. Rather than cutting prices to match competitors, the attach value-added features
and services to differentiate their offers and thus support higher prices. For example, when
rebranding their hotels, Southern Sun realized they could give their customers a positive
experience not by lowering prices but by adding value to the services they provide (see
chase attached).

Also consider this example:

The monsoon season in Mumbai, India, is three months of near-nonstop rain. For 147 years,
most Mumbaikars protected themselves with a Stag umbrella from venerable Ebrahim
Currim & Sons. Like Ford’s Model T, the basic Stag was sturdy, affordable, and of any color,
as long as it was black. By the end of the twentieth century, however, the Stag was
threatened by cheaper imports from China. Stag responded by dropping prices and
scrimping on quality. It was a bad move: For the first time since the 1940s, the brand began
losing money.

Finally, however, Stag came to its senses. It abandoned the price war and started innovating.
It launched designer umbrellas in funky designs and cool colors. Teenagers and young
adults lapped them up. It then launched umbrellas with a built-in high-power flashlight for
those who walk unlit roads at night and models with prerecorded tunes for music lovers. For
women who walk secluded streets after dark, there’s Stag’s Bodyguard model, armed with
glare lights, emergency blinkers, and an alarm. Customers willingly pay up to a 100 percent
premium for the new products. Under the new value-added strategy, the Stag brand has now
returned to profitability. Come the monsoon season in June, the grand old black Stags still
reappear on the streets of Mumbai—but now priced 15 percent higher than the imports.

The Stag example illustrates once again that customers are motivated not by price but by
what they get for what they pay. “If consumers thought the best deal was simply a question
of money saved, we’d all be shopping in one big discount store,” says one pricing expert.
“Customers want value and are willing to pay for it. Savvy marketers price their products
accordingly.

ADVANTAGES

1. Maximized Revenue: By aligning prices with perceived value, businesses can capture
more value and potentially increase profits.
2. Stronger Customer Relationships: Focusing on customer needs fosters loyalty and
trust, leading to long-term relationships.
3. Competitive Differentiation: A clear value proposition can distinguish your product in a
crowded market.
4. Adaptability: Allows for flexibility in pricing based on changing customer perceptions
and market conditions.
DISADVANTAGES

1. Complexity: Requires in-depth market research and understanding of customer

psychology, which can be resource-intensive.
2. Subjectivity: Perceived value can vary widely among customers, making it challenging
to set a uniform price.
3. Potential Misalignment: If the perceived value is overestimated, it can lead to pricing
that customers are unwilling to pay.
4. Market Changes: Customer perceptions of value can shift due to trends or new
competitors, requiring ongoing adjustments.
WHEN TO USE

1. Premium Products: Ideal for luxury or high-end products where customers are willing
to pay for perceived value.
2. Innovative Solutions: Suitable for new or unique products that provide distinct
advantages over existing options.
3. Niche Markets: Effective in targeting specific segments where value perception can be
leveraged.

CHAPTER VIII: Other Pricing Strategies

In this chapter, we’ll look at some additional pricing considerations: new- product pricing,
product mix pricing, price adjustments, and initiating and reacting to prices changes.

NEW-PRODUCT PRICING STRATEGIES

Market-Skimming Pricing

Many companies that invent new products set high initial prices to “skim” revenues layer by
layer from the market. Apple frequently uses this strategy, called market-skimming pricing
(or price skimming). When Apple first introduced the iPhone, its initial price was as much as
$599 per phone. The phones were purchased only by customers who really wanted the
sleek new gadget and could afford to pay a high price for it. Six months later, Apple dropped
the price to $399 for an 8GB model and $499 for the 16GB model to attract new buyers.
Within a year, it dropped prices again to $199 and $299, respectively, and you can now buy
an 8GB model for $99. In this way, Apple skimmed the maximum amount of revenue from
the various segments of the market.
Market skimming makes sense only under certain conditions. First, the product’s quality and
image must support its higher price, and enough buyers must want the product at that price.
Second, the costs of producing a smaller volume cannot be so high that they cancel the
advantage of charging more. Finally, competitors should not be able to enter the market
easily and undercut the high price.

Market-Penetration Pricing

Rather than setting a high initial price to skim off small but profitable market segments, some
companies use market-penetration pricing. Companies set a low initial price to penetrate the
market quickly and deeply—to attract a large number of buyers quickly and win a large
market share. The high sales volume results in falling costs, allowing companies to cut their
prices even further. For example, the giant Swedish retailer IKEA used penetration pricing to
boost its success in the Chinese market:

When IKEA first opened stores in China in 2002, people crowded in but not to buy home
furnishings. Instead, they came to take advantage of the freebies-air conditioning, clean
toilets, and even decorating ideas. Chinese consumers are famously frugal. When it came
time to actually buy, they shopped instead at local stores just down the street that offered
knockoffs of IKEA’s designs at a fraction of the price. So to lure the finicky Chinese
customers, IKEA slashed its prices in China to the lowest in the world, the opposite
approach of many Western retailers there. By increasingly stocking its Chinese stores with
China-made products, the retailer pushed prices on some items as low as 70 percent below
prices in IKEA’s outlets outside China. The penetration pricing strategy worked. IKEA now
captures a 43 percent market share of China’s fast-growing home wares market alone, and
the sales of its seven mammoth Chinese stores surged 25 percent last year. The cavernous
Beijing store draws nearly six million visitors annually. Weekend crowds are so big that
employees need to use megaphones to keep them in control.

Several conditions must be met for this low-price strategy to work. First, the market
must be highly price sensitive so that a low price produces more market growth. Second,
production and distribution costs must decrease as sales volume increases. Finally, the low
price must help keep out the competition, and the penetration pricer must maintain its low-
price position. Otherwise, the price advantage may be only temporary.

PRODUCT MIX PRICING STRATEGIES

The strategy for setting a product’s price often has to be changed when the product is part of
a product mix. In this case, the firm looks for a set of prices that maximizes its profits on the
total product mix. Pricing is difficult because the various products have related demand and
costs and face different degrees of competition.

Product Line Pricing

Product line pricing is setting the price steps between various products in a product line
based on cost differences between the products, customer evaluations of different features,
and competitors’ prices.
Companies usually develop product lines rather than single products. For example,
Rossignol offers seven different collections of alpine skis of all designs and sizes, at prices
that range from $150 for its junior skis, such as Fun Girl, to more than $1,100 for a pair from
its Radical racing collection. It also offers lines of Nordic and backcountry skis, snowboards,
and ski-related apparel. In product line pricing, management must determine the price steps
to set between the various products in a line. The price steps should take into account cost
differences between products in the line. More importantly, they should account for
differences in customer perceptions of the value of different features.

Optional Product Pricing

Many companies use optional product pricing—offering to sell optional or accessory
products along with the main product. For example, a car buyer may choose to order a
global positioning system (GPS) and Bluetooth wireless communication. Refrigerators come
with optional ice makers. And when you order a new PC, you can select from a bewildering
array of processors, hard drives, docking systems, software options, and service plans.
Pricing these options is a sticky problem. Companies must decide which items to include in
the base price and which to offer as options.

Captive Product Pricing

Companies that make products that must be used along with a main product are using
captive product pricing. Examples of captive products are razor blade cartridges,
videogames, and printer cartridges. Producers of the main products (razors, videogame
consoles, and printers) often price them low and set high markups on the supplies. For
example, when Sony first introduced its PS3 videogame console, priced at $499 and $599
for the regular and premium versions.

By-Product Pricing
Producing products and services often generates byproducts. If the by-products have no
value and if getting rid of them is costly, this will affect pricing of the main product. Using by
product pricing, the company seeks a market for these by-products to help offset the costs of
disposing of them and help make the price of the main product more competitive.

The by-products themselves can even turn out to be profitable—turning trash into cash. For
example, Seattle’s Woodland Park Zoo has learned that one of its major by-products—
animal poo—can be an excellent source of extra revenue.

Product Bundle Pricing

Using product bundle pricing, sellers often combine several products and offer the bundle at
a reduced price. For example, fast-food restaurants bundle a burger, fries, and a soft drink at
a “combo” price. Bath & Body Works offers “three-fer” deals on its soaps and lotions (such
as three antibacterial soaps for $10).

PRICE ADJUSTMENT STRATEGIES

Companies usually adjust their basic prices to account for various customer differences and
changing situations.
Discount and Allowance Pricing
Most companies adjust their basic price to reward customers for certain responses, such as
the early payment of bills, volume purchases, and off-season buying. These price
adjustments— called discounts and allowances—can take many forms.
The many forms of discounts include a cash discount, a price reduction to buyers who pay
their bills promptly. A typical example is “2/10, net 30,” which means that although payment
is due within 30 days, the buyer can deduct 2 percent if the bill is paid within 10 days. A
quantity discount is a price reduction to buyers who buy large volumes. A seller offers a
functional discount (also called a trade discount) to trade-channel members who perform
certain functions, such as selling, storing, and record keeping. A seasonal discount is a price
reduction to buyers who buy merchandise or services out of season.
Allowances are another type of reduction from the list price. For example, trade-in
allowances are price reductions given for turning in an old item when buying a new one.
Tradein allowances are most common in the automobile industry but are also given for other
durable goods. Promotional allowances are payments or price reductions to reward dealers
for participating in advertising and sales support programs.

Segmented Pricing
Companies will often adjust their basic prices to allow for differences in customers, products,
and locations. In segmented pricing, 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.

Psychological Pricing
Price says something about the product. For example, many consumers use price to judge
quality. A $100 bottle of perfume may contain only $3 worth of scent, but some people are
willing to pay the $100 because this price indicates something special.

In using psychological pricing, sellers consider the psychology of prices, not simply the
economics. For example, consumers usually perceive higher-priced products as having
higher quality. When they can judge the quality of a product by examining it or by calling on
past experience with it, they use price less to judge quality. But when they cannot judge
quality because they lack the information or skill, price becomes an important quality signal.
For example, who’s the better lawyer, one who charges $50 per hour or one who charges
$500 per hour? You’d have to do a lot of digging into the respective lawyers’ credentials to
answer this question objectively; even then, you might not be able to judge accurately. Most
of us would simply assume that the higher-priced lawyer is better.

Even small differences in price can signal product differences. For example, in a recent
study, people were asked how likely they were to choose among LASIK eye surgery
providers based only on the prices they charged: $299 or $300. The actual price difference
was only $1, but the study found that the psychological difference was much greater.
Preference ratings for the providers charging $300 were much higher. Subjects perceived
the $299 price as significantly less, but it also raised stronger concerns about quality and risk.
Some psychologists even argue that each digit has symbolic and visual qualities that should
be considered in pricing. Thus, eight is round and even and creates a soothing effect,
whereas seven is angular and creates a jarring effect.

Promotional Pricing
With promotional pricing, companies will temporarily price their products below list price and
sometimes even below cost to create buying excitement and urgency. Promotional pricing
takes several forms. A seller may simply offer discounts from normal prices to increase sales
and reduce inventories. Sellers also use special-event pricing in certain seasons to draw
more customers. Thus, large-screen TVs and other consumer electronics are promotionally
priced in November and December to attract holiday shoppers into the stores.
Geographical Pricing
A company also must decide how to price its products for customers located in different
location. Should the company risk losing the business of more-distant customers by charging
them higher prices to cover the higher shipping costs? Or should the company charge all
customers the same prices regardless of location? We will look at five geographical pricing
strategies for the following hypothetical situation:

The Peerless Paper Company is located in Atlanta, Georgia, and sells paper products to
customers all over the United States. The cost of freight is high and affects the companies
from whom customers buy their paper. Peerless wants to establish a geographical pricing
policy. It is trying to determine how to price a $10,000 order to three specific customers:
Customer A (Atlanta), Customer B (Bloomington, Indiana), and Customer C (Compton,
California).

One option is for Peerless to ask each customer to pay the shipping cost from the Atlanta
factory to the customer’s location. All three customers would pay the same factory price of
$10,000, with Customer A paying, say, $100 for shipping; Customer B, $150; and Customer
C, $250. Called FOB-origin pricing, this practice means that 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. Because each customer picks up its
own cost, supporters of FOB pricing feel that this is the fairest way to assess freight charges.
The disadvantage, however, is that Peerless will be a high-cost firm to distant customers.

Uniform-delivered is the opposite of FOB pricing. Here, the company charges the same
price plus freight to all customers, regardless of their location. The freight charge is set at the
average freight cost. Suppose this is $150. Uniform-delivered pricing therefore results in a
higher charge to the Atlanta customer (who pays $150 freight instead of $100) and a lower
charge to the Compton customer (who pays $150 instead of $250). Although the Atlanta
customer would prefer to buy paper from another local paper company that uses FOB-origin
pricing, Peerless has a better chance of winning over the California customer.

Zone pricing falls between FOB-origin pricing and uniform-delivered pricing. The company
sets up two or more zones. All customers within a given zone pay a single total price; the
more distant the zone, the higher the price. For example, Peerless might set up an East
Zone and charge $100 freight to all customers in this zone, a Midwest Zone in which it
charges $150, and a West Zone in which it charges $250. In this way, the customers within a
given price zone receive no price advantage from the company. For example, customers in
Atlanta and Boston pay the same total price to Peerless. The complaint, however, is that the
Atlanta customer is paying part of the Boston customer’s freight cost.

Using 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. For example, Peerless might set Chicago as the
basing point and charge all customers $10,000 plus the freight from Chicago to their
locations. This means that an Atlanta customer pays the freight cost from Chicago to Atlanta,
even though the goods may be shipped from Atlanta. If all sellers used the same basing-
point city, delivered prices would be the same for all customers, and price competition would
be eliminated.

Finally, the seller who is anxious to do business with a certain customer or geographical
area might use freight-absorption pricing. Using this strategy, the seller absorbs all or part
of the actual freight charges to get the desired business. The seller might reason that if it can
get more business, its average costs will decrease and more than compensate for its extra
freight cost. Freight-absorption pricing is used for market penetration and to hold on to
increasingly competitive markets.
Dynamic Pricing
Throughout most of history, prices were set by negotiation between buyers and sellers.
Fixed price policies—setting one price for all buyers—is a relatively modern idea that arose
with the development of large-scale retailing at the end of the nineteenth century. Today,
most prices are set this way. However, some companies are now reversing the fixed pricing
trend. They are using dynamic pricing—adjusting prices continually to meet the
characteristics and needs of individual customers and situations.

Dynamic pricing offers many advantages for marketers. For example, Internet sellers such
as Amazon.com can mine their databases to gauge a specific shopper’s desires, measure
his or her means, instantaneously tailor products to fit that shopper’s behavior, and price
products accordingly. Catalog retailers such as L.L.Bean or Spiegel can change prices on
the fly according to changes in demand or costs, changing prices for specific items on a day-
by-day or even hour-by-hour basis. And many direct marketers monitor inventories, costs,
and demand at any given moment and adjust prices instantly.

International Pricing
Companies that market their products internationally must decide what prices to charge in
the different countries in which they operate. In some cases, a company can set a uniform
worldwide price. For example, Boeing sells its jetliners at about the same price everywhere,
whether in the United States, Europe, or a third-world country. However, most companies
adjust their prices to reflect local market conditions and cost considerations.

The price that a company should charge in a specific country depends on many factors,
including economic conditions, competitive situations, laws and regulations, and the
development of the wholesaling and retailing system. Consumer perceptions and
preferences also may vary from country to country, calling for different prices. Or the
company may have different marketing objectives in various world markets, which require
changes in pricing strategy. For example, Samsung might introduce a new product into
mature markets in highly developed countries with the goal of quickly gaining mass-market
share—this would call for a penetration-pricing strategy. In contrast, it might enter a less-
developed market by targeting smaller, less price-sensitive segments; in this case, market-
skimming pricing makes sense.

Costs play an important role in setting international prices. Travelers abroad are often
surprised to find that goods that are relatively inexpensive at home may carry outrageously
higher price tags in other countries. A pair of Levi’s selling for $30 in the United States might
go for $63 in Tokyo and $88 in Paris. A McDonald’s Big Mac selling for a modest $3.57 in
the United States might cost $5.29 in Norway, and an Oral-B toothbrush selling for $2.49 at
home may cost $10 in China.

PRICE CHANGES
After developing their pricing structures and strategies, companies often face situations in
which they must initiate price changes or respond to price changes by competitors.

Initiating Price Changes

In some cases, the company may find it desirable to initiate either a price cut or a price
increase. In both cases, it must anticipate possible buyer and competitor reactions.

Initiating Price Cuts

Several situations may lead a firm to consider cutting its price. One such circumstance is
excess capacity. Another is falling demand in the face of strong price competition or a
weakened economy. In such cases, the firm may aggressively cut prices to boost sales and
market share. But as the airline, fast-food, automobile, and other industries have learned in
recent years, cutting prices in an industry loaded with excess capacity may lead to price
wars as competitors try to hold onto market share.

A company may also cut prices in a drive to dominate the market through lower costs. Either
the company starts with lower costs than its competitors, or it cuts prices in the hope of
gaining market share that will further cut costs through larger volume. Lenovo uses an
aggressive low-cost, low-price strategy to increase its share of the PC market in developing
countries.

Initiating Price Increases

A successful price increase can greatly improve profits. For example, if the company’s profit
margin is 3 percent of sales, a 1 percent price increase will boost profits by 33 percent if the
sales volume is unaffected. A major factor in price increases is cost inflation. Rising costs
squeeze profit margins and lead companies to pass cost increases along to customers.
Another factor leading to price increases is over demand: When a company cannot supply
all that its customers need, it may raise its prices, ration products to customers, or both.
Consider today’s worldwide oil and gas industry.

When raising prices, the company must avoid being perceived as a price gouger. For
example, when gasoline prices rise rapidly, angry customers often accuse the major oil
companies of enriching themselves at the expense of consumers. Customers have long
memories, and they will eventually turn away from companies or even whole industries that
they perceive as charging excessive prices. In the extreme, claims of price gouging may
even bring about increased government regulation.

Buyer Reactions to Price Changes

Customers do not always interpret price changes in a straightforward way. A price increase,
which would normally lower sales, may have some positive meanings for buyers. For
example, what would you think if Rolex raised the price of its latest watch model? On the
one hand, you might think that the watch is even more exclusive or better made. On the
other hand, you might think that Rolex is simply being greedy by charging what the traffic will
bear.

Similarly, consumers may view a price cut in several ways. For example, what would you
think if Rolex were to suddenly cut its prices? You might think that you are getting a better
deal on an exclusive product. More likely, however, you’d think that quality had been
reduced, and the brand’s luxury image might be tarnished.

PUBLIC POLICY AND MARKETING

Price competition is a core element of our free-market economy. In setting prices,
companies usually are not free to charge whatever prices they wish. National and even local
laws govern the rules of fair play in pricing. In addition, companies must consider broader
societal pricing concerns. In setting their prices, for example, pharmaceutical firms must
balance their development costs and profit objectives against the sometimes life-and-death
needs of drug consumers.

Pricing within Channel Levels

Federal legislation on price-fixing states that sellers must set prices without talking to
competitors. Otherwise, price collusion is suspected. Price-fixing is illegal per se—that is, the
government does not accept any excuses for price-fixing. In the Philippines, price fixing
between or among competitors is likewise per se prohibited, as provided under Section
14(a)(1) of the PCA. Violation of this provision carries the penalty of fine and imprisonment.
The Philippine Competition Act (PCA) or R.A. 10667 is the primary competition law of the
Philippines for promoting fair competition in the marketplace and protecting well-being of
consumers in the process.
Sellers are also 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. This protects small sellers from larger ones who might sell items below cost
temporarily or in a specific locale to drive them out of business. The biggest problem is
determining just what constitutes predatory pricing behavior. Selling below cost to unload
excess inventory is not considered predatory; selling below cost to drive out competitors is.
Thus, the same action may or may not be predatory depending on intent, and intent can be
very difficult to determine or prove.

Pricing Across Channel Levels

The Robinson-Patman Act seeks to prevent unfair price discrimination by ensuring that
sellers offer the same price terms to customers at a given level of trade. For example, every
retailer is entitled to the same price terms from a given manufacturer, whether the retailer is
Sears or your local bicycle shop. However, price discrimination is allowed if the seller can
prove that its costs are different when selling to different retailers—for example, that it costs
less per unit to sell a large volume of bicycles to Sears than to sell a few bicycles to the local
dealer.

Laws also prohibit retail (or resale) price maintenance; a manufacturer cannot require
dealers to charge a specified retail price for its product. Although the seller can propose a
manufacturer’s suggested retail price to dealers, it cannot refuse to sell to a dealer that takes
independent pricing action nor can it punish the dealer by shipping late or denying
advertising allowances.

Deceptive pricing occurs when a seller states prices or price savings that mislead
consumers or are not actually available to consumers. This might involve bogus reference or
comparison prices, as when a retailer sets artificially high “regular” prices and then
announces “sale” prices close to its previous everyday prices.