Pricing Decisions in Industrial Marketing

Selecting the Final Price

The preceding pricing methods narrow the price range from which to  select the final price. In selecting the final price, the company must consider  additional factors.

Psychological Pricing. Sellers should consider the psychology of prices in  addition to their economics. Many consumers use price as an indicator of  quality. A study of the relationship between price and quality perceptions of cars found the relationship to be operating in a reciprocal manner. Higher priced  cars were perceived to possess (unwarranted) high quality. Higher quality  cars were likewise perceived to be higher priced than they actually  were. When alternative information about true quality is available, price  becomes a less significant indicator of quality. When this information is not  available, price acts as a quality signal.

Sellers often manipulate reference prices in pricing their product. Buyers  carry in their minds a reference price when looking at a particular product. The  reference price might have been formed by noticing current prices, past prices,  or the buying context. For example, a seller can place its product among  expensive products to imply that it belongs in the same class. Department  stores will display women’s apparel in separate departments differentiated by  price; dresses found in the more expensive department are assumed to be of  better quality. Reference-price thinking is also created by stating a high  manufacturer’s suggested price, or by indicating that the product was priced much  higher originally, or by pointing to a competitor’s high price. If a company  wants a high-price image instead of a low-price image, it should avoid the  odd-ending tactic.

The final price must take into account the brand’s quality and advertising  relative to competition. Farris and Reibstein examined the relationship between  relative price, relative quality, and relative advertising for 227 consumer  businesses and found the following results:

  1. Brands with average relative quality but high relative advertising  budgets were able to charge premium prices. Consumers apparently  were willing to pay higher prices for known products than for  unknown products,
  2. Brands with high relative quality and high relative advertising  obtained the highest prices. Conversely, brands with low quality  and low advertising charged the lowest prices.  
  3. The positive relationship between high prices and high advertising  held most strongly in the later stages of the product life cycle, for  market leaders and for low-cost products.

The contemplated price must be/consistent with  company pricing policies. Many companies set up a pricing department to  develop pricing policies and establish or approve pricing decisions. Their  aim is to insure that the salespeople quote prices that are reasonable to  customers and profitable to the company.

Management must also consider the  reactions of other parties to the contemplated price. How will the  distributors, and dealers feel about it? Will the company sales force be willing to  sell at that price or complain that the price is too high? How will competitors react  to this price? Will suppliers raise their prices when they see the company’s  price? Will the government intervene and prevent this price from being charged?  In the last case, marketers need to know the laws affecting price and make sure  that their pricing policies are defensible.

Promotional Pricing Strategies

Under certain circumstances, companies will temporarily price their  products below the list price and sometimes even below cost. Promotional pricing  takes several forms.

  1. Loss-Leader Pricing. Here supermarkets and department stores drop the  price on well-known brands to stimulate additional store traffic. But  manufacturers typically disapprove of their brands being used as loss leaders  because this can dilute the brand image as well as cause complaints from  other retailers who charge the list price. Manufacturers have tried to restrain  middlemen from loss-leader pricing through retail-price-maintenance laws, but  these laws have been revoked.
  2. Special-Event Pricing. Sellers will establish special prices in certain  seasons to draw in more customers.
  3. Cash Rebates. Consumers are offered cash rebates to encourage their  purchasing the manufacturer’s product within a specified time period. The  rebates can help the manufacturer clear inventories without cutting the list  price. Auto manufacturers have offered rebates several times in recent years to  stimulate sales. The initial rebates were effective, but, when repeated, they  seemed to lose their effectiveness. They may have given a price break to  those who intended to buy a car without stimulating others to think about  buying a car. Rebates also appear in consumer-packaged-goods marketing.  They stimulate sales without costing the company as much as would cutting  the price. The reason is that many buyers buy the product but fail to mail in the  coupon for a refund.
  4. L0w-Interest Financing. Instead of lowering the price, the company can  offer customers low-interest financing. Auto makers announced 3% financing  and in one case 0% financing to attract customers. Since many auto buyers  finance their auto purchases, low-interest financing is appealing. However,  although low-interest financing attracts customers to auto showrooms,  many don’t buy when they learn that a large down payment is required; the loan  must be paid back in 30 months instead of 60 months; the car price is not  discounted much with this kind of loan; and the loan may apply only to  expensive cars.
  5. Warranties and Service Contracts. The company can promote sales by  adding a free warranty offer or service contract. Instead of charging for the  warranty or service contract, it offers it free or at a reduced price if the  customer will buy. This is a way of reducing the “price.”
  6. Psychological Discounting. This involves putting an artificially high price  on a product and offering it at substantial savings; for example, companies must research these promotional pricing tools and make sure  that they are lawful in the particular country. If they work, the problem is that  competitors will copy them rapidly, and they lose their effectiveness for the  individual company. If they do not work, they waste company money that could  have been put into longer-impact marketing tools, such as building up product  quality and service and improving the product image through advertising.

Discriminatory Pricing Strategies

Companies will often modify their basic price to accommodate  differences in customers, products, locations, and so on. Discriminatory pricing occurs when a company sells a product or service at two or more prices  that do not reflect a proportional difference in costs. Discriminatory pricing  takes several forms:

  1. Customer-Segment Pricing. Here different customer groups are charged  different prices for the same product or service. Museums will charge a lower  admission fee to students and senior citizens.
  2. Product-Form pricing. Here different versions of the product are priced  differently but not proportionately to their respective costs.
  3. Time Pricing. Here prices are varied by season. Public utilities vary their energy  rates to commercial use.

For price discrimination to work, certain conditions must exist. First, market  must be segmentable, and the segments must show different intensities of  demand. Second, members of the lower price segments must not be  able to resell the product to the higher price segment. Third, competitors must  not be able to understand the firm in the higher price segment. Fourth, cost of  segmenting and pricing the market must not exceed the extra  revenue derived from price discrimination. Fifth, the practice must not breed  customer resentment and ill will. Sixth, the particular form of price  discrimination must not be illegal. As a result of deregulation in several  industries, competitors have increased their use of discriminatory pricing.

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