Firms usually adjust their basic prices to account for various consumer differences and changing conditions. We examine the seven price adjustment strategies and they are discount and allowance pricing, segmented pricing, psychological pricing, promotional pricing, geographical pricing,dynamic pricing, and international pricing.
Discount and Allowance Pricing
Most of the companies adjust their basic price to reward consumers for certain responses, such as the early payment of the bills, volume purchases, and off-season consumption. These price adjustments are called discounts and allowances. They can take many forms. The many forms of discounts consists a cash discount, a price reduction to the consumer who pay their bills promptly. A typical example is “3/15, net 30,” which means that although payment is due within 30 days, the buyer can deduct 3 percent if the bill is paid within 15 days. A quantity discount is a price reduction to consumers who buy large volumes. A seller offers a functional discount to trade-channel members who perform functions like selling, storing, and record keeping. Seasonal discount is a price reduction to consumers who buy merchandise or services out of season. The allowance is another type of reduction from the list price. For example, trade-in allowances are price reductions provided for turning in an old item while buying a new one. Trade-in allowances are most common allowances in the automobile industry but are also provided in other durable goods. Promotional allowances are payments or price reductions that are practiced to reward dealers for participating in advertising and sales support programs.
Firms usually adjust their basic prices to allow for differences in customers, products as well as locations. In segmented pricing, the firm sells a product or service at two or more prices, although the difference in prices is not on the basis of differences in costs. Segmented pricing takes various forms. Under customer-segment pricing, different consumers pay different prices for the same product or service. For example, Museums and movie theaters may charge a lower admission for students and senior citizens. In product-form pricing, several versions of the product are priced differently but not according to differences in its costs. For example, a one-liter bottle (about 34 ounces) of Evian mineral water cost $1.59 at local supermarket. But a five-ounce aerosol can of Evian Mineral Water Spray sells for a suggested retail price of $11.39 at beauty boutiques and spas. Using location-based pricing, a firm charges a price for different locations, although the cost of offering each location is the same. For example, state universities charge higher tuition for out-of-state students, and theaters vary their prices of the seat because of the preferences of audience for certain locations. Finally, by using time-based pricing, companies vary its price by the season, the month, the day, and also in the hour. For segmented pricing to be one of the effective strategies, certain conditions must exist. The market should be segmentable, and segments must show various degrees of demand. The costs of segmenting and reaching to the market should not exceed the extra revenue obtained from the price difference. Definitely, the segmented pricing must also be legal. It is necessary that segmented prices should reflect real differences in consumers’ perceived value.
Price tells something about the product and services. For example, most of the customers use price to judge quality. A $100 bottle of perfume might contain only $3 worth of scent, but some people are willing to pay the $100 because this price provides something special. While using psychological pricing, sellers consider the psychology of prices, not simply the economics. For example, consumers often perceive higher-priced products as of higher quality. When they could judge the quality of a product by examining it or by experiencing with it, they use less price as a factor while judging it . But when they could not judge quality because they lack the information or skill, price will become an important quality signal.
The other aspect of psychological pricing is reference prices—prices that consumer carries in their minds and refer to when looking at a given product. The reference price may be formed by noting current prices, memorizing the past prices, or assessing the buying situation. Sellers could influence or use these consumers’ reference prices while setting price:
With promotional pricing, firms will temporarily price their products below list price and sometimes even at below cost to generates buying excitement and urgency. Promotional pricing may take different forms. A seller might simply offer discounts from normal prices to increase sales and reduce inventories. Sellers also may use special-event pricing in certain seasons in order to draw more customers. Hence, large-screen TVs and other consumer electronics are promotionally priced in November and December for attracting holiday shoppers into the stores.
Manufacturers sometimes provide an offer of cash rebates to the customers who buy the product from dealers within a specified time; the sellers send the rebate directly to the customer. Rebates have been popular in automakers and producers of cell phones as well as small appliances, but they also used in consumer packaged goods.:
A firm also must decide how to price its products for consumer located in different parts of the nation or the world. Should the firm risk losing the business of more-distant consumers by charging them higher prices to cover the higher cost of shipping? Or the should firm charge all consumers the same prices regardless of location. Geographical pricing is setting the pricing of any product or services on the basis of the location of the customers of the nation and different parts of the world.
Throughout most of history, prices are being set by negotiation between buyers and sellers. Fixed Price policies—setting one price for all consumers—is a relatively modern idea that arose by the development of large-scale retailing at the end of the nineteenth century. Today, most of the prices are set this way. However, some firms are now reversing the fixed pricing trend. They are using dynamic pricing. Dynamic pricing refers to the adjustment of prices continually to meet the characteristics as well as needs of individual consumers and situations. For example, if we think about how the Internet has affected pricing. From the mostly fixed pricing practices of the past century, the Internet is taking us back into a new age of fluid pricing. The flexibility of the Internet provides Web sellers to instantly and constantly adjust prices to a broad range of goods based on demand dynamics.In other cases, consumer control pricing by bidding on auction sites like in eBay or negotiating on sites such as Priceline.
Firms that market their products internationally should decide what prices to charge in the various countries in which they operate their business. In some cases, an organization could set a uniform price all over the world. For example, Boeing sells its jetliners on the same price everywhere, whether it is in the United States, Europe, or a third-world country. However, most firms adjust their prices to reflect local market conditions and cost considerations. The price that a firm should charge in a certain nation or state depends on various factors, including economic conditions, laws and regulations, competitive situations and the development of the wholesaling and retailing system. Customer perceptions and preferences also may vary from country to country, calling for different prices. Also, the company might have different marketing objectives in different world markets, that require changes in pricing strategy.
Kotler, P., & Armstrong, G. (2013).Principles of Marketing.Chennai: Pearson India Education Services Pvt Ltd.