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Principles of Marketing

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Principles of Marketing ­ MGT301
Lesson ­ 26
Lesson overview and learning objectives:
We have already discussed the different factors affecting pricing decisions and approaches that can
be used to price the product/services, today we will discuss price-adjustment strategies. Price-
adjustment strategies account for customer differences and start changing situations, and strategies
for initiating and responding to price changes
A. Price-Adjustment Strategies
Companies usually adjust their basic prices to account for various customer differences and
changing situations. Fig summarizes six price-adjustment strategies: discount and allowance
pricing, segmented pricing,
D is c o u n t a n d A llo w a n c e
P r ic in g
geographical  pricing,  and
international pricing.
S e g m e n te d P r ic in g
s y c h o lo g ic a l P r ic in g
a. Discount
P r o m o tio n a l P r ic in g
Allowance Pricing
Most companies adjust their
G e o g r a p h ic a l P r ic in g
basic  price  to  reward
In te r n a t io n a l P r ic in g
responses,  such  as  early
payment of bills, volume purchases, and off-season buying. These price adjustments--called
discounts and allowances--can take many forms.
A cash discount is a price reduction to buyers who pay their bills promptly. A typical example is
"2/10, net 30," which means that although payment is due within 30 days, the buyer can deduct 2
percent if the bill is paid within 10 days. The discount must be granted to all buyers meeting these
terms. Such discounts are customary in many industries and help to improve the sellers' cash
reduce bad debts
Adjusting Basic Price to Reward Customers
collection costs.
For Certain Responses
discount is a price
reduction to buyers
who  buy  large
volumes. A typical
Cash Discount
Seasonal Discount
example might be
"Rs10 per unit for
less than 100 units,
Quantity Discount
T rade-In Allow ance
Rs9 per unit for
100 or more units."
By law, quantity
Functional Discount
Prom otional Allow ance
discounts must be
offered equally to
Principles of Marketing ­ MGT301
all customers and must not exceed the seller's cost savings associated with selling large quantities.
These savings include lower selling, inventory, and transportation expenses. Discounts provide an
incentive to the customer to buy more from one given seller, rather than from many different
A functional discount (also called a trade discount) is offered by the seller to trade channel
members who perform certain functions, such as selling, storing, and record keeping.
Manufacturers may offer different functional discounts to different trade channels because of the
varying services they perform, but manufacturers must offer the same functional discounts within
each trade channel.
A seasonal discount is a price reduction to buyers who buy merchandise or services out of
season. For example, lawn and garden equipment manufacturers offer seasonal discounts to
retailers during the fall and winter months to encourage early ordering in anticipation of the heavy
spring and summer selling seasons. Hotels, motels, and airlines will offer seasonal discounts in
their slower selling periods. Seasonal discounts allow the seller to keep production steady during an
entire year.
Allowances are another type of reduction from the list price. For example, trade-in allowances are
price reductions given for turning in an old item when buying a new one. Trade-in allowances are
most common in the automobile industry but are also given for other durable goods. Promotional
allowances are payments or price reductions to reward dealers for participating in advertising and
sales support programs.
Segmented Pricing
Companies will often adjust their basic prices to allow for differences in customers, products, and
locations. In segmented pricing, the company sells a product or service at two or more prices, even
though the difference in prices is not based on differences in costs.
Segmented pricing takes several forms. Under customer-segment pricing, different customers pay
different prices for the same product or service. Museums, for example, will charge a lower
admission for students and senior citizens. Under product-form pricing, different versions of the
product are priced differently but not according to differences in their costs. Using location
pricing, a company charges different prices for different locations, even though the cost of offering
at each location is the same. For instance, theaters vary their seat prices because of audience
preferences for certain locations. Finally, using time pricing, a firm varies its price by the season,
the month, the day, and even the hour. Public utilities vary their prices to commercial users by time
of day and weekend versus weekday. The telephone company offers lower off-peak charges, and
resorts give seasonal discounts.
For segmented pricing to be an effective strategy, certain conditions must exist. The market must
be segmentable, and the segments must show different degrees of demand. Members of the
segment paying the lower
price should not be able to
turn around and resell the
Selling Products At Different Prices Even
product  to  the  segment
paying  the  higher  price.
Though There is No Difference in Cost
Competitors should not be
able to undersell the firm in
the segment being charged
the higher price. Nor should
Custom er - Segm ent
Location Pricing
the costs of segmenting and
watching the market exceed
the extra revenue obtained
Product - Form
Tim e Pricing
from the price difference. Of
Principles of Marketing ­ MGT301
pricing must also be legal. Most importantly, segmented prices should reflect real differences in
customers' perceived value. Otherwise, in the long run, the practice will lead to customer
resentment and ill will.
c. Psychological Pricing
Price says something about the product. For example, many consumers use price to judge quality.
An Rs1000 bottle of perfume may contain only Rs300 worth of scent, but some people are willing
to pay the Rs 1000 because this price indicates something special.
In using psychological pricing, sellers consider the psychology of prices and not simply the
economics. For example, one study of the relationship between price and quality perceptions of
cars found that consumers perceive higher-priced cars as having higher quality. By the same token,
higher-quality cars are perceived to be even higher priced than they actually are. When consumers
can judge the quality of a product by examining it or by calling on past experience with it, they use
price less to judge quality. When consumers cannot judge quality because they lack the information
or skill, price becomes an important quality signal:
Another aspect of psychological pricing is reference pricing--prices that buyers carry in their
minds and refer to when looking at a given product. The reference price might be formed by
noting current prices, remembering past prices, or assessing the buying situation. Sellers can
influence or use these consumers' reference prices when setting price. For example, a company
could display its product next to more expensive ones in order to imply that it belongs in the same
class. Department stores often sell women's clothing in separate departments differentiated by
price: Clothing found in the more expensive department is assumed to be of better quality.
Companies can also influence consumers' reference prices by stating high manufacturer's suggested
prices, by indicating that the product was originally priced much higher, or by pointing to a
competitor's higher price.
d. Promotional pricing,
Companies will temporarily price their products below list price and sometimes even below cost.
Promotional pricing takes several forms. Supermarkets and department stores will price a few
products as loss leaders to attract customers to the store in the hope that they will buy other items
at normal markups. Sellers will also use special-event pricing in certain seasons to draw more
customers. Manufacturers will sometimes offer cash rebates to consumers who buy the product
from dealers within a specified time; the manufacturer sends the rebate directly to the customer.
Rebates have been popular with automakers and producers of durable goods and small appliances,
but they are also used with consumer-packaged goods. Some manufacturers offer low-interest
financing, longer warranties, or free maintenance to reduce the consumer's "price." This practice
has recently become a favorite of the auto industry. Or, the seller may simply offer discounts from
normal prices to increase sales and reduce inventories.
Promotional pricing, however, can have adverse effects. Used too frequently and copied by
competitors, price promotions can create "deal-prone" customers who wait until brands go on sale
before buying them. Or, constantly reduced prices can erode a brand's value in the eyes of
customers. Marketers sometimes use price promotions as a quick fix instead of sweating through
the difficult process of developing effective longer-term strategies for building their brands. In fact,
one observer notes that price promotions can be downright addicting to both the company and the
customer. The point is that promotional pricing can be an effective means of generating sales in
certain circumstances but can be damaging if taken as a steady diet.
e. Geographical Pricing
A company also must decide how to price its products for customers located in different parts of
the country or world. Should the company take risk of losing the business of more distant
customers by charging them higher prices to cover the higher shipping costs? Or should the
Principles of Marketing ­ MGT301
company charge all customers the same prices regardless of location? Because each customer picks
up its own cost, supporters of FOB pricing feel that this is the fairest way to assess freight charges.
The disadvantage, however, is that Peerless will be a high-cost firm to distant customers?
Uniform-delivered pricing is the opposite of FOB pricing. Here, the company charges the same
price plus freight to all customers, regardless of their location. The freight charge is set at the
average freight cost. Other advantages of uniform-delivered pricing are that it is fairly easy to
administer and it lets the firm advertise its price nationally.
Zone pricing falls between FOB-origin pricing and uniform-delivered pricing. The company sets
up two or more zones. All customers within a given zone pay a single total price; the more distant
the zone, the higher the price. Using base point pricing, the seller selects a given city as a "basing
point" and charges all customers the freight cost from that city to the customer location, regardless
of the city from which the goods are actually shipped. If all sellers used the same basing-point city,
delivered prices would be the same for all customers and price competition would be eliminated.
Industries such as sugar, cement, steel, and automobiles used basing-point pricing for years, but
this method has become less popular today. Some companies set up multiple basing points to
create more flexibility: They quote freight charges from the basing-point city nearest to the
Finally, the seller who is anxious to do business with a certain customer or geographical area might
use freight-absorption pricing. Using this strategy, the seller absorbs all or part of the actual freight
charges in order to get the desired business. The seller might reason that if it can get more
business, its average costs will fall and more than compensate for its extra freight cost. Freight-
absorption pricing is used for market penetration and to hold on to increasingly competitive
f. International Pricing
Companies that market their products internationally must decide what prices to charge in the
different countries in which they operate. In some cases, a company can set a uniform worldwide
price. The price that a company should charge in a specific country depends on many factors,
including economic conditions, competitive situations, laws and regulations, and development of
the wholesaling and retailing system. Consumer perceptions and preferences also may vary from
country to country, calling for different prices. Or the company may have different marketing
objectives in various world markets, which require changes in pricing strategy. Costs play an
important role in setting international prices. Travelers abroad are often surprised to find that
goods that are relatively inexpensive at home may carry outrageously higher price tags in other
countries. In some cases, such price escalation may result from differences in selling strategies or
market conditions. In most instances, however, it is simply a result of the higher costs of selling in
foreign markets--the additional costs of modifying the product, higher shipping and insurance
costs, import tariffs and taxes, costs associated with exchange-rate fluctuations, and higher channel
and physical distribution costs.
Table of Contents:
  1. PRINCIPLES OF MARKETING:Introduction of Marketing, How is Marketing Done?
  5. MARKETING CHALLENGES IN THE 21st CENTURY:Connections with Customers
  6. STRATEGIC PLANNING AND MARKETING PROCESS:Setting Company Objectives and Goals
  7. PORTFOLIO ANALYSIS:MARKETING PROCESS,Marketing Strategy Planning Process
  8. MARKETING PROCESS:Analyzing marketing opportunities, Contents of Marketing Plan
  9. MARKETING ENVIRONMENT:The Companyís Microenvironment, Customers
  10. MARKETING MACRO ENVIRONMENT:Demographic Environment, Cultural Environment
  12. THE MARKETING RESEARCH PROCESS:Developing the Research Plan, Research Approaches
  14. CONSUMER BUYING BEHAVIOR:Model of consumer behavior, Cultural Factors
  15. CONSUMER BUYING BEHAVIOR (CONTINUED):Personal Factors, Psychological Factors
  16. BUSINESS MARKETS AND BUYING BEHAVIOR:Market structure and demand
  17. MARKET SEGMENTATION:Steps in Target Marketing, Mass Marketing
  18. MARKET SEGMENTATION (CONTINUED):Market Targeting, How Many Differences to Promote
  19. Product:Marketing Mix, Levels of Product and Services, Consumer Products
  20. PRODUCT:Individual product decisions, Product Attributes, Branding
  21. PRODUCT:NEW PRODUCT DEVELOPMENT PROCESS, Idea generation, Test Marketing
  23. KEY TERMS:New-product development, Idea generation, Product development
  24. Price the 2nd P of Marketing Mix:Marketing Objectives, Costs, The Market and Demand
  25. PRICE THE 2ND P OF MARKETING MIX:General Pricing Approaches, Fixed Cost
  26. PRICE THE 2ND P OF MARKETING MIX:Discount and Allowance Pricing, Segmented Pricing
  27. PRICE THE 2ND P OF MARKETING MIX:Price Changes, Initiating Price Increases
  28. PLACE- THE 3RD P OF MARKETING MIX:Marketing Channel, Channel Behavior
  29. LOGISTIC MANAGEMENT:Push Versus Pull Strategy, Goals of the Logistics System
  30. RETAILING AND WHOLESALING:Customer Service, Product Line, Discount Stores
  31. KEY TERMS:Distribution channel, Franchise organization, Distribution center
  32. PROMOTION THE 4TH P OF MARKETING MIX:Integrated Marketing Communications
  33. ADVERTISING:The Five Mís of Advertising, Advertising decisions
  34. ADVERTISING:SALES PROMOTION, Evaluating Advertising, Sales Promotion
  35. PERSONAL SELLING:The Role of the Sales Force, Builds Relationships
  36. SALES FORCE MANAGEMENT:Managing the Sales Force, Compensating Salespeople
  38. DIRECT MARKETING:PUBLIC RELATIONS, Major Public Relations Decisions
  39. KEY TERMS:Public relations, Advertising, Catalog Marketing
  40. CREATING COMPETITIVE ADVANTAGE:Competitor Analysis, Competitive Strategies
  41. GLOBAL MARKETING:International Trade System, Economic Environment
  42. E-MARKETING:Internet Marketing, Electronic Commerce, Basic-Forms
  43. MARKETING AND SOCIETY:Social Criticisms of Marketing, Marketing Ethics