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:
- 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,
- 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.
- 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.
- 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.
- Special-Event Pricing. Sellers will establish special prices in certain seasons to draw in more customers.
- 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.
- 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.
- 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.”
- 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:
- 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.
- Product-Form pricing. Here different versions of the product are priced differently but not proportionately to their respective costs.
- 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.