Chapter 11: Pricing Strategies — Additional Considerations

Chapter Overview

Once a company selects a base pricing approach (from Chapter 10), it must fine-tune that pricing with
strategic adaptations — considering product mix, customer types, market conditions, legal constraints,
and competitors' actions.

This chapter explores:

• Advanced pricing strategies

• How to respond to changing market dynamics

• Legal and ethical issues in pricing

SECTION 1: New Product Pricing Strategies

Used during product launch to enter the market effectively

1. Market-Skimming Pricing (Price Skimming)

• High initial price, reduced over time

• Targets early adopters willing to pay a premium

Conditions for use:

• Strong brand image

• Product perceived as high quality/innovation

• Low price elasticity

• Few/no competitors initially

Example: Apple’s iPhones and flagship tech gadgets

 2. Market-Penetration Pricing

• Low initial price to attract mass market

• Goal: Gain market share quickly

Conditions for use:

• Price-sensitive market

• Economies of scale achievable

• Discourages competitors

Example: Netflix’s original pricing model, budget airlines

SECTION 2: Product Mix Pricing Strategies

Adjust pricing based on relationships between products in a firm’s portfolio

1. Product Line Pricing

• Different pricing levels for a range of related products

• E.g., Car models with varied features: Basic, Premium, Luxury

2. Optional Product Pricing

• Base product + optional features/add-ons

• E.g., Airline tickets (seat selection, luggage), smartphones (storage upgrades)

3. Captive Product Pricing

• Products that require complementary goods

• Low price on main item, high price on accessories

• E.g., Printers & ink, razors & blades

4. By-Product Pricing

• Selling leftover production by-products

• Reduces disposal costs, adds revenue

• E.g., Cheese by-products used in fertilizer

5. Product Bundle Pricing

• Combine multiple products at a reduced price

• Encourages higher volume sales

 • E.g., McDonald’s Value Meals, Microsoft Office Suite

SECTION 3: Price Adjustment Strategies

1. Discount and Allowance Pricing

Discounts:

• Cash Discount (e.g. 2% off if paid in 10 days)

• Quantity Discount

• Seasonal Discount

Allowances:

• Trade-in Allowance: For old product returned

• Promotional Allowance: Payment to dealers for promoting product

2. Segmented Pricing

Selling the same product at different prices to different segments.

Types:

• Customer-segment pricing (e.g., student/senior discounts)

• Product-form pricing (different versions priced differently)

• Location-based pricing (e.g., theater seat locations)

• Time-based pricing (e.g., matinee movie tickets)

Must reflect real differences in demand, not be discriminatory.

3. Psychological Pricing

• Price affects perception of quality or value

• Examples:

o Charm pricing: $9.99 vs $10

o Prestige pricing: High price = high status (e.g., Rolex)

 4. Promotional Pricing

Temporary price cuts to boost short-term sales.

Examples:

• Flash sales

• Seasonal promotions

• Limited-time offers

• Loss leaders (below-cost to drive store traffic)

Risk: Can damage brand perception if used too often

5. Geographical Pricing

Prices vary based on customer location.

Strategies:

• FOB-origin pricing: Customer pays freight

• Uniform-delivered pricing: Same price regardless of location

• Zone pricing: Prices vary by geographical zone

• Basing-point pricing: Price based on base-city freight cost

• Freight-absorption pricing: Seller absorbs shipping cost

6. Dynamic and Online Pricing

• Prices change based on demand, time, competition

• Enabled by real-time data and AI

Used in:

• Airlines, hotels, ride-sharing (Uber surge)

• E-commerce flash sales (Amazon dynamic pricing)

 7. International Pricing

Companies adjust pricing for international markets based on:

• Economic conditions

• Buying power

• Currency fluctuation

• Tariffs and taxes

• Local competition and culture

Example: Same product is priced lower in developing markets (e.g., smartphones in India)

SECTION 4: Price Changes — Initiating & Responding

Initiating Price Cuts — When and Why?

• Excess capacity

• Falling demand

• Competitor price cuts

• To dominate market

Risks:

• Price wars

• Perception of lower quality

Initiating Price Increases

• Rising costs (e.g., fuel)

• Increased demand

• “Hot” product

How to increase price smartly:

• Unbundle features

• Use value-added communication

• Make it look like an upgrade

 Buyer Reactions to Price Changes

• May assume product quality has changed

• Seek alternatives

• Complain or switch brands

Competitor Reactions

Marketers must anticipate competitor responses:

• Match the cut?

• Add value instead?

• Launch a counter-attack?

Use competitor analysis tools to predict reactions.

SECTION 5: Legal & Ethical Considerations in Pricing

Pricing within Channel Levels

• Price-fixing: Illegal collusion among competitors to set prices

• Predatory pricing: Pricing below cost to drive competitors out

Pricing across Channel Levels

• Retail price maintenance: Forcing resellers to keep a specific price

• Deceptive pricing: Misleading pricing tactics (e.g., fake discounts)

Legal penalties + reputational damage

Public Policy Concerns

• Protect consumers from unfair pricing

• Ensure fair competition

• Prevent monopolistic practices

 Final Revision Table

Strategy Purpose Example

Skimming Maximize profits early Apple iPhones

Penetration Quickly gain market share Netflix, Xiaomi

Optional Product Pricing Monetize upgrades Airline luggage fees

Captive Product Pricing Lock-in accessories Razor blades, printer ink

Bundle Pricing Increase perceived value McD Meal Combos

Psychological Pricing Influence perception $9.99 instead of $10

Promotional Pricing Boost short-term sales Flash sales, coupons

Zone Pricing Reflect shipping costs Online retail

Dynamic Pricing Real-time price updates Uber, airline tickets

Price Fixing (Illegal) Anti-competitive collusion Horizontal price agreement

Predatory Pricing (Illegal) Undercut to eliminate rivals Below-cost pricing

Exam Prep Checklist

Memorize key definitions (skimming, bundling, predatory pricing)

Learn when and why to apply each strategy
Understand legal vs ethical issues clearly
Be able to apply pricing strategies to real-world brands
Draw connections between product life cycle stage and pricing
Know differences between pricing within product mix vs customer segments

Let me know if you’d like:

• A summarized flashcard pack

• Visual mind map of all strategies

• Practice case questions for exam drill

You're now fully prepped for Chapter 11. Ready for Chapter 12?