Marketing
Chapter 11
Objective 11-1 Describe the major strategies for pricing new products.
Pricing strategies can be challenging. There are two broad strategies. Market-skimming pricing (price
skimming) means setting a high price for a new product to skim maximum revenues layer by layer from
the segments willing to pay the high price, the company makes fewer but more profitable sales. Market-
penetration pricing means setting a low price for a new product to attract a large number of buyers and
a large market share.
Objective 11-2 Explain how companies find a set of prices that
maximizes the profits from the total product mix.
There are five product mix pricing situations.
1. Product line pricing: setting the price steps between various products in a product line based on
cost differences between the products, customer evaluations of different features and
competitor’s prices.
2. Optional product pricing: the pricing of optional or accessory products along with a main
product.
3. Captive product pricing: setting a price for products that must be used along with a main
product.
4. By-product pricing: setting a price for by-products to make the main product’s price more
competitive.
5. Product bundle pricing: combining several products and offering the bundle at a reduced price.
Objective 11-3 Discuss how companies adjust their prices to take into
account different types of customers and situations.
There are also seven price adjustment strategies that can be used.
1. Discount: a straight reduction in price on purchases during a stated period of time or of larger
quantities. Allowance is promotional money paid by manufacturers to retailers in return for an
agreement to feature the manufacturer’s products in some way.
2. Segmented pricing: selling a product or service at two or more prices, where the difference in
prices is not based on costs. Customer-segment pricing involves different types of customers
paying different pricing. Product-form pricing involves different prices for different versions of
the same product. Location-based pricing involves different prices for different locations,
while time-based pricing involves different prices for different moments in time.
3. Psychological pricing: pricing that considers the psychology of prices, not simply the economics,
the price says something about the product. Reference prices are prices that buyers carry in
their minds and refer to when they look at a given product.
4. Promotional pricing: temporarily pricing products below the list price, and sometimes even
below cost, to increase short-run sales.
, 5. Geographical pricing: setting prices for customers located in different parts of the country or
world. This can be FOB-origin pricing: 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: a geographical pricing strategy in which the company
charges the same price plus freight to all customers, regardless of their location. Zone
pricing: the company sets up two or more zones. All customers within a zone pay the same total
price, the more distant the zone, the higher the price. Base-point pricing: a pricing strategy in
which the seller designates some city as a base point and charges all customers the freight cost
from that city to the customer. Freight-absorption pricing is a strategy in which the seller
absorbs all or part of the freight charges to get the desired business.
6. Dynamic pricing means adjusting pricing continually to meet the characteristics and needs of
individual customers and situations.
7. International pricing: charging different pricing for customers in different countries.
Objective 11-4 Discuss the key issues related to initiating and
responding to price changes.
After setting prices, there are often situations in which companies need to change their prices.
Sometimes, the company finds it desirable to initiate price cuts, for instance when demand is falling, or
price increases to improve profits. Consumers can react differently to changes in prices, as well as
competitors. When competitors change prices first, the firm has to respond. There are as many as four
responses, namely: the firm can reduce its price, maintain its price but raise the perceived value of the
product, improve the quality and increase the price or launch a low-price fighter brand to compete with
the price change.
Objective 11-5 Discuss the major public policy concerns and key pieces
of legislation that affect pricing decisions.
There is legislation surrounding price fixing (talking to competitors to set prices), which is illegal.
Predatory pricing (selling below costs to punish competitor) is also prohibited. Many countries also try to
prevent unfair price discrimination and deceptive pricing.
,Figure 11.1 Responding to Competitor Price Changes.
Figure 11.2 Public Policy Issues in Pricing.
, Chapter 12
Objective 12-1 Explain why companies use marketing channels and
discuss the functions these channels perform.
In order to produce a product, relationships with others in the supply chain are necessary. The
term demand chain might be better, because it suggests a sense-and-respond view of the market.
A value delivery network is composed of the company, suppliers, distributors and ultimately the
customers, who partner with each other to improve the performance of the entire system in delivering
customer value. The marketing channel (distribution channel) is a set of interdependent organisations
that help make a product or service available for use or consumption by the consumer or business user.
Channel members can add value by providing more efficiency and specialization in making goods. Some
of the key function channel members do are: information gathering, promotion, contacting buyers,
matching products and needs and negotiating agreements. But also physical distribution, financing and
taking over risks of carrying out the work.
A channel level is a layer of intermediaries that performs some work in bringing the product and its
ownership closer to the final buyer. Channel 1 is a direct marketing channel: a marketing channel that
has no intermediary levels. Indirect marketing channels are channels containing one or more
intermediary levels. Channels are behavioural systems composed of real companies and people, who
interact to accomplish goals. Each channel member depends on others and they behave differently,
which can lead to channel conflict: disagreement among marketing channel members on goals, roles and
rewards, who should do what and for what rewards. Horizontal conflict occurs among firms at the same
channel level. Vertical conflict is between different levels of the same channel.
Figure 12.1 How a Distributor Reduces the Number of Channel Transactions.
Chapter 11
Objective 11-1 Describe the major strategies for pricing new products.
Pricing strategies can be challenging. There are two broad strategies. Market-skimming pricing (price
skimming) means setting a high price for a new product to skim maximum revenues layer by layer from
the segments willing to pay the high price, the company makes fewer but more profitable sales. Market-
penetration pricing means setting a low price for a new product to attract a large number of buyers and
a large market share.
Objective 11-2 Explain how companies find a set of prices that
maximizes the profits from the total product mix.
There are five product mix pricing situations.
1. Product line pricing: setting the price steps between various products in a product line based on
cost differences between the products, customer evaluations of different features and
competitor’s prices.
2. Optional product pricing: the pricing of optional or accessory products along with a main
product.
3. Captive product pricing: setting a price for products that must be used along with a main
product.
4. By-product pricing: setting a price for by-products to make the main product’s price more
competitive.
5. Product bundle pricing: combining several products and offering the bundle at a reduced price.
Objective 11-3 Discuss how companies adjust their prices to take into
account different types of customers and situations.
There are also seven price adjustment strategies that can be used.
1. Discount: a straight reduction in price on purchases during a stated period of time or of larger
quantities. Allowance is promotional money paid by manufacturers to retailers in return for an
agreement to feature the manufacturer’s products in some way.
2. Segmented pricing: selling a product or service at two or more prices, where the difference in
prices is not based on costs. Customer-segment pricing involves different types of customers
paying different pricing. Product-form pricing involves different prices for different versions of
the same product. Location-based pricing involves different prices for different locations,
while time-based pricing involves different prices for different moments in time.
3. Psychological pricing: pricing that considers the psychology of prices, not simply the economics,
the price says something about the product. Reference prices are prices that buyers carry in
their minds and refer to when they look at a given product.
4. Promotional pricing: temporarily pricing products below the list price, and sometimes even
below cost, to increase short-run sales.
, 5. Geographical pricing: setting prices for customers located in different parts of the country or
world. This can be FOB-origin pricing: 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: a geographical pricing strategy in which the company
charges the same price plus freight to all customers, regardless of their location. Zone
pricing: the company sets up two or more zones. All customers within a zone pay the same total
price, the more distant the zone, the higher the price. Base-point pricing: a pricing strategy in
which the seller designates some city as a base point and charges all customers the freight cost
from that city to the customer. Freight-absorption pricing is a strategy in which the seller
absorbs all or part of the freight charges to get the desired business.
6. Dynamic pricing means adjusting pricing continually to meet the characteristics and needs of
individual customers and situations.
7. International pricing: charging different pricing for customers in different countries.
Objective 11-4 Discuss the key issues related to initiating and
responding to price changes.
After setting prices, there are often situations in which companies need to change their prices.
Sometimes, the company finds it desirable to initiate price cuts, for instance when demand is falling, or
price increases to improve profits. Consumers can react differently to changes in prices, as well as
competitors. When competitors change prices first, the firm has to respond. There are as many as four
responses, namely: the firm can reduce its price, maintain its price but raise the perceived value of the
product, improve the quality and increase the price or launch a low-price fighter brand to compete with
the price change.
Objective 11-5 Discuss the major public policy concerns and key pieces
of legislation that affect pricing decisions.
There is legislation surrounding price fixing (talking to competitors to set prices), which is illegal.
Predatory pricing (selling below costs to punish competitor) is also prohibited. Many countries also try to
prevent unfair price discrimination and deceptive pricing.
,Figure 11.1 Responding to Competitor Price Changes.
Figure 11.2 Public Policy Issues in Pricing.
, Chapter 12
Objective 12-1 Explain why companies use marketing channels and
discuss the functions these channels perform.
In order to produce a product, relationships with others in the supply chain are necessary. The
term demand chain might be better, because it suggests a sense-and-respond view of the market.
A value delivery network is composed of the company, suppliers, distributors and ultimately the
customers, who partner with each other to improve the performance of the entire system in delivering
customer value. The marketing channel (distribution channel) is a set of interdependent organisations
that help make a product or service available for use or consumption by the consumer or business user.
Channel members can add value by providing more efficiency and specialization in making goods. Some
of the key function channel members do are: information gathering, promotion, contacting buyers,
matching products and needs and negotiating agreements. But also physical distribution, financing and
taking over risks of carrying out the work.
A channel level is a layer of intermediaries that performs some work in bringing the product and its
ownership closer to the final buyer. Channel 1 is a direct marketing channel: a marketing channel that
has no intermediary levels. Indirect marketing channels are channels containing one or more
intermediary levels. Channels are behavioural systems composed of real companies and people, who
interact to accomplish goals. Each channel member depends on others and they behave differently,
which can lead to channel conflict: disagreement among marketing channel members on goals, roles and
rewards, who should do what and for what rewards. Horizontal conflict occurs among firms at the same
channel level. Vertical conflict is between different levels of the same channel.
Figure 12.1 How a Distributor Reduces the Number of Channel Transactions.
