Pricing the Product
Read this chapter. Pricing is a difficult issue because most products will sell at some volume at just about any price level. Some customers are willing to pay almost any price for a specific product, but how many of those customers exist? Marketers could consider a value-priced model, but this may make the product's price so low that there is no way to profit. One common pricing strategy is known as "the loss leader", which involves selling one product below the cost to manufacture it to get it in customers' hands. They make up for this loss later with complementary goods. This is commonly seen in video game console sales. Console system manufacturers like Sony and Nintendo will price the system below the cost to manufacture it. Consumers adopt the systems due to the attractive price point, and the manufacturer makes up for the initial loss on the system with sales of proprietary accessories and video games.
DEVELOPING A PRICING STRATEGY
NEW PRODUCT PRICING
A somewhat different pricing situation relates to new product pricing. With a totally new product, competition does not exist or is minimal. What price level should be set in such cases? Two general strategies are most common: penetration and skimming. Penetration pricing in the introductory stage of a new product's life cycle means accepting a lower profit margin and to price relatively low. Such a strategy should generate greater sales and establish the new product in the market more quickly. Price skimming involves the top part of the demand curve. Price is set relatively high to generate a high profit margin and sales are limited to those buyers willing to pay a premium to get the new product (see Figure 9.3).
NEWSLINE: THE RISK OF FREE PC'S
There's no such thing as a free PC. But judging from the current flood of offers for free or deeply discounted computers, you might think that the laws of economics and common sense have been repealed. In fact, all of those deals come with significant strings attached and require close examination. Some are Simply losers. Others can provide substantial savings, but only for the right customers.
The offers come in two categories. In one type, consumers get a free computer along with free Internet access, but have to accept a constant stream of advertising on the screen. In the other category, the customer gets a free or deeply discounted PC in exchange for a long-term contract for paid Internet services.
Most of these are attractive deals, but the up-front commitment to $700 or more worth of Internet service means they are not for everyone. One group that will find little value in the arrangement is college students, since nearly all schools provide free and often high-speed Met access. Others who could well end up losing from these deals are the lightest and heaviest users of the Internet. People who want Internet access only to read e-mail and do a little light Web browsing would likely do better to buy an inexpensive computer and sign up for a $10-a-month limited-access account with a service provider.
People who use the Internet a lot may also be poor candidates. That's because three years is a long commitment at a time when Internet access technology is changing rapidly. Heavy users are likely to be the earliest adopters of high-speed cable or digital subscriber line service as it becomes available in their areas.
Which strategy is best depends on a number of factors. A penetration strategy would generally be supported by the following conditions: price-sensitive consumers, opportunity to keep costs low, the anticipation of quick market entry by competitors, a high likelihood for rapid acceptance by potential buyers, and an adequate resource base for the firm to meet the new demand and sales.
Quantity demanded in a given period of time (# of unit)
Skimming generates a higher profit margin while penetration generates greater volume.
FIGURE 9.3 Penetration and skimming pricing strategies as they relate to the demand curve
You are already familiar with price lines. Ties may be priced at $15, $ 17, $20, and $22.50; bluejeans may be priced at $30, $32.95, $37.95, and $45. Each price must be far enough apart so that buyers can see definite quality differences among products. Price lines tend to be associated with consumer shopping goods such as apparel, appliances, and carpeting rather than product lines such as groceries. Customers do very little comparison-shopping on the latter.
Price lining serves several purposes that benefit both buyers and sellers. Customers want and expect a wide assortment of goods, particularly shopping goods. Many small price differences for a given item can be confusing. If ties were priced at $1 5, $15.35, $15.75, and so on, selection would be more difficult; the customer could not judge quality differences as reflected by such small increments in price. So, having relatively few prices reduces the confusion.
From the seller's point of view, price lining holds several benefits. First, it is simpler and more efficient to use relatively fewer prices. The product/service mix can then be tailored to selected price points. Price points are simply the different prices that make up the line. Second, it can result in a smaller inventory than would otherwise be the case.
It might increase stock turnover and make inventory control simpler. Third, as costs change, either increasing or decreasing the prices can remain the same, but the quality in the line can be changed. For example, you may have bought a $20 tie fifteen years ago. You can buy a $20 tie today, but it is unlikely that today's $20 tie is of the same fine quality as it was in the past. While customers are likely to be aware of the differences, they are nevertheless still able to purchase a $20 tie. During inflationary periods the quality/price point relationship changes. From the point of view of salespeople, offering price lines will make selling easier. Salespeople can easily learn a small number of prices. This reduces the likelihood that they will misquote prices or make other pricing errors. Their selling effort is therefore more relaxed, and this atmosphere will influence customers positively. It also gives the salesperson flexibility. If a customer can't afford a $2,800 Gateway system, the $2,200 system is suggested.