Page 377 - Foundations of Marketing

344 Part 4 | Product and Price Decisions

Figure 12.8 Types of Pricing Strategies

Catogories and Types of Pricing Strategies

New-Product Pricing Differential Pricing Psychological Pricing Product-Line Pricing Promotional Pricing
• Price skimming • Negotiated pricing • Odd-number • Captive pricing • Price leaders
• Penetration pricing • Secondary-market pricing • Premium pricing • Special-event
pricing • Multiple-unit • Price lininig pricing
• Periodic pricing • Comparison
dicounting • Reference pricing
discounting
• Random • Bundle pricing
discounting • Everyday low
prices
• Customary pricing

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New-Product Pricing

The two primary types of new-product pricing strategies are price skimming and penetration
pricing. An organization can use one or both over a period of time.

Price Skimming

Some consumers are willing to pay a high price for an innovative product, either because of
its novelty or because of the prestige or status that ownership confers. Price skimming is the
strategy of charging the highest possible price for a product during the introduction stage of
its life cycle. The seller essentially “skims the cream” off the market, which helps a firm to
recover the high costs of R&D more quickly. In addition, a skimming policy may hold down
demand for the product in instances where the firm’s production capacity is limited during
the introduction stage. A danger is that a price skimming strategy may make the product
appear more lucrative than it actually is to potential competitors. A firm also risks misjudging
demand and facing insufficient sales at the high price.

Penetration Pricing
At the opposite extreme, penetration pricing is the strategy of setting a low price for a new
product. The main purpose of setting a low price is to build market share quickly in order to
encourage product trial by the target market and discourage competitors from entering the
market. If the low price stimulates sales, the firm may be able to order longer production runs,
increasing economies of scale and resulting in decreased production costs per unit. A disad-
vantage of penetration pricing is that it places a firm in a less-flexible pricing position. It is
price skimming Charging more difficult to raise prices significantly than it is to lower them.
the highest possible price that
buyers who most desire the
product will pay Differential Pricing
penetration pricing Setting
prices below those of An important issue in pricing decisions is whether to use a single price or different prices for
competing brands to penetrate the same product. A single price is easily understood by both employees and customers. Since
a market and gain a significant many salespeople and customers dislike negotiating prices, having a single price reduces the
market share quickly risk of a marketer developing an adversarial relationship with customers.
Differential pricing means charging different prices to different buyers for the same
differential pricing Charging
different prices to different quality and quantity of product. For differential pricing to be effective, the market must con-
buyers for the same quality and sist of multiple segments with different price sensitivities. When this method is employed,
quantity of product caution should be used to avoid confusing or antagonizing customers. Differential pricing

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