Chapter 14 - Arriving at the Final Price

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Chapter 14 - Arriving at the Final Price


When Ratan Tata, chairman of Tata Motors, announced his dream of selling a car at one lakh (100,000 rupees or approximately US$2,500), many scoffed. Leaders in the automobile industry around the world questioned the logic of such a proposition. Tata’s car is expected to change the face of the automobile industry, both in India and around the world. It is the first time a two-cyclinder gasoline engine is used in a car with a single balancer shaft. Many are concerned that a car so cheap may not be safe. The company has assured consumers that the car has passed all safety tests, including a full-frontal crash test. The Nano is half the price of current low-priced cars—China’s Chevy and India’s Maruti 800. The Maruti engine is considered old while the Nano’s twin-cyclinder engine is seen as considerably more advanced. Although the car is fuel efficient, environmentalists are concerned that increased numbers of cars made more available to consumers will only result in more pollution.

A key to a marketer’s setting a final price for a product is to find an approximate price level to use as a reasonable starting point. There are four common approaches to helping find this approximate price level. A. Demand-Oriented Pricing Approaches Demand-oriented approaches weigh factors underlying expected customer tastes and preferences more heavily than such factors as cost, profit, and competition when selecting a price level. 1. Skimming Pricing. a. A firm introducing a new or innovative product can use skimming pricing, setting the highest initial price that customers really desiring the product are willing to pay. • These customers are not very price sensitive. They weigh the new product’s price, and quality against the same characteristics of substitutes.


Chapter 14 - Arriving at the Final Price

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As consumer demand is satisfied, the firm lowers the price to attract another, more price-sensitive segment. Skimming pricing gets its name from skimming successive layers of “cream,” or customer segments, as prices are lowered in a series of steps.

b. Skimming pricing is an effective strategy when: • • • • • Enough customers are willing to buy the product at the high initial price to make these sales profitable. The high initial price will not attract competitors. Lowering price has only a minor effect on increasing the sales volume and reducing the unit costs. Customers interpret the high price as high quality. These four conditions are most likely to exist when patents or copyrights protect the new product or its uniqueness is understood and valued by consumers.

2. Penetration Pricing. a. Setting a low initial price on a new product to appeal immediately to the mass market is penetration pricing, the exact opposite of skimming pricing. b. The conditions favoring penetration pricing are: • • • Many segments of the market are price sensitive. A low initial price discourages competitors from entering the market. Unit production and marketing costs fall dramatically as production volumes increase.

c. A firm using penetration pricing may: • • Maintain the initial price for a time to gain profit lost from its low introductory level. Lower the price further, counting on the new volume to generate the necessary profit.

d. Penetration pricing may follow skimming pricing: • A firm might initially price a product high to attract price-insensitive consumers as well as recoup initial R&D costs and introductory promotional expenses. Then, penetration pricing is used to appeal to a broader segment of the population and increase market share.


Chapter 14 - Arriving at the Final Price

3. Prestige Pricing. a. Prestige pricing involves setting a high price so that quality- or statusconscious consumers will be attracted to the product and...
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