Chapter 14: Developing Pricing Strategies and Programs

Chapter 14: Developing Pricing Strategies and Programs
What is the six-step procedure most firms use to set their pricing policy?
The first step is to select the pricing objective. Next, the company must determine demand. After determining demand the company must estimate its costs. The fourth step is to analyze competitors' costs, prices, and offers. Next is to select a pricing method. The sixth and last step is to select the final price.


Explain the difference between everyday low pricing (EDLP) and high-low pricing. When would each of these methods be used?
A retailer using an EDLP pricing policy charges a constant low price with little or no promotions or sales. This strategy provides constant prices for consumers and can lead to lower perceived prices by consumers over time. In high-low pricing, the retailer charges higher prices on an everyday basis but then runs frequent promotions in which prices are temporarily lowered below the EDLP level.
What five major objectives might a company pursue through pricing? Explain each of these.
A company can pursue any of the following five major objectives through pricing: survival, maximum current profit, maximum market share, market skimming, or product-quality leadership. The first objective, survival, is a short-run objective to cover variable costs and some fixed costs. To maximize current profits the company must estimate demand and costs with various prices and choose the price that produces maximum current profits. To maximize market share the company sets the lowest price it can, assuming a price sensitive market. In market-skimming pricing, companies set high prices when introducing new high-tech products. Finally, with product-quality leadership pricing prices are set to imply a high level of quality.
Describe the various pricing techniques known as promotional pricing that can be used to stimulate early purchase.
Companies can use several pricing techniques to stimulate early purchases.
Loss-leader pricing is used by retailers to stimulate store traffic by dropping the prices of well-known brands.
Special-event pricing is used in certain seasons to draw in more customers.
Cash rebates encourage the purchase of the manufacturers' products within a specified time period.
Low-interest financing is also used to attract customers with low interest rates. Monthly payments can be reduced by offering buyers longer payment terms. Companies can add free or low-cash warranties and service contracts.
And finally, psychological discounting can be used by setting an artificially high price and then offering the product at a substantial saving.