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Four Common Pricing Strategies

Price Skimming: Charging a high introductory price in tandem with heavy

promotion and later slowly dropping the price.

Price skimming is most effective when a product has a strong unique

advantage that is not easily copied. If competitors can market a similar

product, they will probably jump into your market when they see you

skimming big profits. This new competition can take away your sales.

Price skimming is often necessary when it took a large investment to

develop and launch a new product. Apple spends lots of money

researching and developing their iPhone. They cannot afford to launch it

at low prices. Developing new technology is expensive.

Penetration Pricing: When a company charges a low price for their product initially

in order to reach the largest amount of their target market.

Best when demand is price sensitive and consumer will buy more at the

lower price. Low penetration prices often keeps competitors from selling

similar products as they may not make high enough profits. Done right,

you have the market to yourself.

Penetration can be a problem if customers demand more than you can

supply. If your penetration pricing is too low and you sell out of product,

people may be angry at you and your brand.

When penetration pricing is used for prestigious brands, it makes some

customers believe your brand is worth less. For example, GM's Cadillac

Division once offered a low priced car called the Cimarron. This product

did not sell well and was quickly discontinued.

Status Quo Pricing -- also called being a "price taker": This begins by carefully

researching prices and determine what the typical price people expect to pay is. While

this is common and often necessary, sometimes marketers have products that are so

new and unique, there is no similar products to compare prices to.

Some products are so widely available that buyers expect to pay certain

prices. A price that is higher may mean there are no sales. A price that is

too low may mean that you run out of product to sell. This may upset

customers.

A price that is too low that is too low also leaves money on the table.

When people expect to pay a higher price, they have planned to spend that

money. Marketers must be careful. Can you afford to accept less money

than people planned to spend?

Loss-Leader Pricing. When a marketer has many products to sell, offering some of

them at a very low price can be an effective strategy. Sometimes, it is effective to sell

some products at a loss.

Loss-Leader pricing works when customers buy other products and

services. For example, manufactures of printers have learned that the

make more money using the printer as a “loss leader” and earning their

profits on inks, toners, and other supplies.

1. Tech Now! a new company has developed an exciting new pair of earbuds. Not only do they sound

great when you listen to your favorite music, but they let you to control your smartphone by simply

imagining what you want it to do. There is no need to swipe and touch – you think a command

and your smartphone does it. This amazing technology cost $1 million to develop. What pricing

strategy should they use to price this product? YOU MUST EXPLAIN YOUR ANSWER TO EARN

CREDIT.

2. Farmer Brown grows sweet corn and brings it into a Milwaukee local farmer’s market. Every day,

there are other farmers there selling sweetcorn. They always sell it for $3.00 per dozen. The sweet

corn always sells out by the end of the day, which is good. The corn loses its sweetness and no

longer tastes great when it is a day old. What pricing strategy should they use to price this

product? YOU MUST EXPLAIN YOUR ANSWER TO EARN CREDIT.

3. Comic Parade sells new, used, and collectible comic books. Most of their customers buy used and

collectible comic books. This is where they make the most money. The new comic books bring

new customers into the store, but new comic book readers eventually subscribe to have new comic

books mailed to their homes. The people that come in to buy new comic books and nothing else,

never become regular customers, but some of the new comic book customers look around the

store, buy used or collectible items, and become regular customers. What pricing strategy should

they use to price new comic books? YOU MUST EXPLAIN YOUR ANSWER TO EARN CREDIT.

4. Comic Parade also sells soda in a machine. This is easy to stock and does not require the

store’s clerks to do anything. A 16-oz bottle of soda is commonly sold in the neighborhood

for $1.25. There is even a machine in front of the store across the street. It sells the same

soda for $1.25. What pricing strategy should they use to price the machine’s soda? YOU

MUST EXPLAIN YOUR ANSWER TO EARN CREDIT.

5. The summer fashions will be available in stores in a May. Spring fashions will be cleared out of the

stores by the beginning of June. Which of the 4 pricing strategies should a local retailer use for

the new summer clothing lines? What do you expect they will do with the remaining spring

fashions when the new line comes out? You must answer BOTH questions, explaining “why” for

each answer to earn credit.

6. A family likes to back pies and they are very good. They take them to an area farmers market and

sell them. The pies are best fresh and the family does not want to take any unsold pies home. The

pies never cost more than $2.00 to make and other vendors at the market sell pies for $5. All the

pies at the market are good, are made with fresh fruit, and no one ever has leftover fruit pies at the

end of the day. What pricing strategy should the family use to price pies? YOU MUST EXPLAIN

YOUR ANSWER TO EARN CREDIT.

7. Tidy Lawns, a new lawn care business is opening. They know that this will be a tough first year as

most homeowners and business with lawns to care for already have hired a lawn care company or

choose to do the lawn work themselves. What pricing strategy should they use? YOU MUST

EXPLAIN YOUR ANSWER TO EARN CREDIT.

8. McDonalds and Burger King restaurants are mostly owned by local owners and not by their parent

company. While each chain recommends selling prices and sells restaurants everything they need

to operate at costs that should allow each restaurant to be profitable at the recommended prices.

The prices at McDonalds and Burger King for similar products are very similar. If a new Burger

King is opening across the street from an existing McDonalds, what pricing strategy should they

use? YOU MUST EXPLAIN YOUR ANSWER TO EARN CREDIT.

Rubric: 4: 8 answers are fully-explained and consistent with the notes on page 1

3: 7 or 6 answers are fully-explained and consistent with the notes on page 1

2: 5 or 4 answers are fully-explained and consistent with the notes on page 1

1: Less than 4 answers are fully-explained and consistent with the notes on page 1

0: Nothing turned in or answers are not explained

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