A gray market employs irregular but not necessarily illegal methods of distributing products

Chapter 15 Strategic Pricing Methods and Tactics ©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.  No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.

Learning Objectives (1 of 2) Learning Objective 15.1 Identify three methods that firms use to set their prices. Learning Objective 15.2 Describe the difference between an everyday low pricing (EDLP) strategy and a high/low strategy. Learning Objective 15.3 Explain the difference between a price skimming and a market penetration pricing strategy. LO 15.1 Identify three methods that firms use to set their prices. LO 15.2 Describe the difference between an everyday low pricing (EDLP) strategy and a high/low strategy. LO 15.3 Explain the difference between a price skimming and a market penetration pricing strategy. These are the learning objectives for this chapter.

Learning Objectives (2 of 2) Learning Objective 15.4 Identify tactics used to reduce prices to consumers. Learning Objective 15.5 Identify tactics used to reduce prices to businesses. Learning Objective 15.6 List the pricing practices that are illegal or unethical. LO 15.4 Identify tactics used tor educe prices to consumers. LO 15.5 Identify tactics used to reduce prices to businesses. LO 15.6 List the pricing practices that are illegal or unethical. These are additional learning objectives for this chapter.

Tiffany & Co. ©Stephen Lovekin/Getty Images for 20th Century Fox

Considerations for Setting Price Strategies Note the many factors that go into formulating a pricing strategy and discuss why some strategies choose not to take into consideration the value that consumers place on an offering. ©McGraw-Hill Education

Value-Based Methods Setting prices that focus on the overall value of the product offering as perceived by the consumer: Improvement Value Method Cost of Ownership Method Sellers need to determine consumer value perceptions. These methods require a great deal of research to be implemented successfully. ©McGraw-Hill Education

Value-Based Methods: Improvement Value ©McGraw-Hill Education

PROGRESS CHECK (1 of 3) What are the three different considerations for setting prices? How can you use value-based methods for setting prices? Cost-based, competitor-based, value-based Value-based methods include approaches to setting prices that focus on the overall value of the product offering as perceived by the consumer. Two key approaches include Improvement Value Method and Cost of Ownership Method.

Everyday low pricing (EDLP) Pricing Strategies Everyday low pricing (EDLP) High/Low Pricing This slide introduces the subsequent series of slides or can be used as a basis for a shortened lecture.

Everyday Low Pricing (EDLP) vs. High/Low Pricing Create value for consumers in different ways. EDLP reduces consumers’ search costs. High/low provides the thrill of the chase for the lowest price. Group activity: Imagine you need an outfit for an upcoming party. You can visit TJMaxx, where you know you will find an EDLP pricing strategy. However, Nordstrom is having its semi-annual sale, during which it drastically marks down its usually high prices. Where do you think you will find a better price? Which offers better value? Why?

In High/Low Pricing Consumers Use Reference Prices Internal reference price External reference price Group activity: In groups, list the average prices of the following items: rent on a one-bedroom apartment, a backpack, a washing machine, a mid-size car, a house, a bicycle, and a soda. Compare the price points among groups. Usually, students provide relatively accurate price points for products they use frequently, but their estimates likely vary significantly for the other items. Discuss how they determined these prices.

New Product Pricing Strategies Market Penetration Pricing Price Skimming Group activity: Develop a list of products that might use price skimming versus penetration pricing. What qualities should a product possess to use a price skimming strategy? For example, Godiva introduced its hot chocolate mix at a price point that was double that of other hot cocoa mixes. How was it able to achieve success with this product? Penetration pricing helps firms build market share for their new products quickly, but consumers must be price elastic for this strategy to work. Price skimming is often used for high-demand video games like Far Cry 5 because fans will pay a higher price to be one of the first to own the newest version. ©Chesnot/Getty Images

Pricing Tactics Aimed at Consumers (1 of 2) Markdowns Quantity Discounts Seasonal Discounts Coupons Rebates ©McGraw-Hill Education

Pricing Tactics Aimed at Consumers (2 of 2) Leasing/Rentals Price Bundling Leader Pricing Price Lining ©McGraw-Hill Education

Business Pricing Tactics and Discounts ©Alex Segre/Alamy Stock Photo

PROGRESS CHECK (2 of 3) What are some consumer-oriented pricing tactics? What are some B2B-oriented pricing tactics? EDLP saves search costs of finding lowest overall prices, and High/low provides the thrill of the chase for the lowest price. Price skimming and penetration pricing.

Legal and Ethical Aspects of Pricing Deceptive or illegal price advertising Predatory pricing Legal and Ethical Aspects of Pricing A host of laws and regulations at both the federal and state levels attempt to prevent unfair pricing practices, but some are poorly enforced, and others are difficult to prove. Price discrimination Price fixing

Deceptive or Illegal Price Advertising Deceptive reference prices Loss-leader pricing Bait and switch Ask students: When is a sale not really a sale? Answer: If the merchandise is placed on the retail floor and almost immediately put on sale, then it is considered to be deceptive because the merchandise was never really sold at the higher price, but consumers are expected to believe that they are receiving a significant discount. Ask students: Have you ever been involved in a bait and switch? ©Alex Segre/Alamy Stock Photo

Predatory Pricing Illegal Difficult to prove Prices set low with the intent to drive competitor out of business Illegal Difficult to prove Ask students: How would a company prove predatory pricing? Answer: They would need records that show intent or have interviews of those who can verify the intent to drive competition out of business. In addition, they must show that the company charged prices lower than its average costs. To date, no one has been able to prove that Walmart engages in predatory pricing.

Price Discrimination Is not always illegal Different rules in the B2B and B2C markets Federal law does not apply to sales to end consumers Price discrimination in a B2B setting isn’t always illegal. It is legal to give quantity discounts, to meet competition, and in barter situations. Ask students: Why are quantity discounts legal? Answer: Because it costs less on a per unit basis to sell to customers that buy larger quantities.

Horizontal price fixing Vertical price fixing Horizontal price fixing Price Fixing Ask students: How many products list a manufacturer’s suggested retail price? How many indicate a retail price instead? Note that MSRPs are a form of vertical price fixing; the manufacturer sets the price, and wherever the consumer shops, the price will be the same. However, some retailers argue that this form of price fixing prevents them from passing lower costs on to consumers. Ask students: What do you think? According to the U.S. Department of Justice, Apple and several publishing agencies have engaged in vertical price fixing, as outlined in Ethical & Societal Dilemma 14.1 The Verdict: Apple Conspired to Raise Prices on eBooks.

Gray Market Pricing Uses irregular but not necessarily illegal methods. Gray market for luxury goods. A gray market employs irregular but not necessarily illegal methods; generally, it legally circumvents authorized channels of distribution to sell goods at prices lower than those intended by the manufacturer. Ethical & Societal Dilemma 15.2 discusses how luxury goods marketers and manufacturers are trying to beat the gray market in Asia.

PROGRESS CHECK (3 of 3) What common pricing practices are considered to be illegal or unethical? Deceptive reference prices, loss-leader pricing, bait and switch, price fixing.

Marketing Chapter 15 The End