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The price range July 7, 2009

Posted by mariobarreiro in Marketing.
2 comments

Set the price is the fourth step in the determination of price range process. There are three main pricing methods: cost-volume-profit relationship, demand-based and competition-based (Brassington & Pettitt, 2003: 431-441). This essay will develop the demand-based pricing, focusing in psychological pricing (the demand and price elasticity were covered earlier) and following the Brassington & Pettit (2003) classification.

Prestige pricing

Prices are perceived by consumers as measurement of quality in products. High prices attract customers for whom price is no object. Examples are the Danish company Bang & Olufsen with its audio and video devices and clothing companies such as Ralph Lauren or Lacoste.

Odd-even pricing

This technique achieves that customers see the product price lower that it is. To do it, the product price simply needs to finish with a 9. For instance, a price of 4.99 is perceived closer to 4 than 5.

This is a spread technique used from grocery, clothing and technology to cars and houses, even when the prices for the last ones are above 10,000 pounds.

currys
Odd-even pricing
Source:
http://www.currys.co.uk/

Price lining

This method creates separation between different models of a product only using price, even when the cost is the same. For instance, the Celtic Football Club away shirt is half price than the home shirt (http://www.kitbag.com/stores/celtic/products/kit_selector.aspx?selector=217&nav=Replica, Accessed 11 April 2009). The reason could be that people is likely to buy the home shirt as is the main one and mostly used, and therefore they try to encourage sales of the away shirt.

Bundle pricing

It is a technique applied when manufacturers or retailers sale products in a single package. There are two reasons to use the bundle pricing method. Firstly, a bundle can help the consumer to start using a new product with all the features and accessories from the beginning, for instance when they buy a computer with a printer and a full software package. Secondly, it is also handled to sell surpluses. For example, in music/movies/games shops like HMV it is easy to find bundles including new releases and old non best sellers.

Promotional pricing

It is used to attract consumers’ attention. For instance, grocery and technology retailers like to create promotions even when they do not make any profit with the discounted product, because customers can spend the money saves in full prices items and it is also a tool to promote the company.

Time-specific markdowns

There is a level of psychological excitement created by limited number of available goods or deadlines, and customers feel that the opportunity will be never back. This is a spread method also in retailers, and also common used in business to business (B2B) situations. In my last experience as a sales person in an IT company, we used to highlight the deadline and that our offer was the best we could give, and it achieved better results than when we did not use these keywords.

Price differentiation

It occurs when the company uses different prices in different environments. For instance, the price of a soft drink (e.g. Coke) is not the same in Tesco, a restaurant, a vending machine or in a football stadium.

Dan Ariely (2008), professor or Behavioural Economics at Duke University, found two extra interesting points to complete the Brassington & Pettit (2003) classification related to consumer behaviour and price decision: the power of free and the role of choices managed influence to take a decision about price.

It’s free!

There was a web business that sold cheap gadgets which cost around five dollars including delivery. They gave the following options to customers:

free

Source: http://www.youtube.com/watch?v=LmJzQ3cVt88

Even when the financial situation was the same, people tend to choose the last one because the product was free (Ariely, 2008).

The third option which no one would take

There is an example with a subscription to The Economist.

economist

Source: http://www.youtube.com/watch?v=VZv–sm9XXU

The price of the print and the print & online subscription was the same while the online subscription was much cheaper. Ariely (2008) run an experiment giving these three options and most of people took the print & online one (of course, no one took the printed only). Then, they run the same experiment but without the printed only option. The percentages turned in favour to the web subscription. The conclusion is that the “no-one-would-take” option that is close to one of the others makes that one better.

Web Articles:

Books:

  • F. Brassington and S.Pettitt. 2000. Principles of Marketing. 2nd ed. Prentice Hall
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