Basic Marketing: A Global Managerial Approach

Perreault−McCarthy: Basic

Marketing: A

Global−Managerial

Approach, 14/e

18. Price Setting in the
    Business World

Text © The McGraw−Hill

Companies, 2002

536 Chapter 18

item. The Federal Trade Commission considers this type of bait pricing a deceptive

act and has banned its use in interstate commerce. Even well-known chains like

Sears have been criticized for bait-and-switch pricing. But some unethical retailers

who operate only within one state continue to advertise bait prices on products they

won’t sell.

Psychological pricingmeans setting prices that have special appeal to target cus-

tomers. Some people think there are whole ranges of prices that potential customers

see as the same. So price cuts in these ranges do not increase the quantity sold. But

just below this range, customers may buy more. Then, at even lower prices, the

quantity demanded stays the same again—and so on. Exhibit 18-13 shows the kind

of demand curve that leads to psychological pricing. Vertical drops mark the price

ranges that customers see as the same. Pricing research shows that there aresuch

demand curves.^13

Odd-even pricingis setting prices that end in certain numbers. For example,

products selling below $50 often end in the number 5 or the number 9—such as

49 cents or $24.95. Prices for higher-priced products are often $1 or $2 below the

next even dollar figure—such as $99 rather than $100.

Some marketers use odd-even pricing because they think consumers react

better to these prices—perhaps seeing them as “substantially” lower than the

next highest even price. Marketers using these prices seem to assume that they

have a rather jagged demand curve—that slightly higher prices will substantially

reduce the quantity demanded. Long ago, some retailers used odd-even prices to

force their clerks to make change. Then the clerks had to record the sale and

could not pocket the money. Today, however, it’s not always clear why firms use

these prices or whether they really work. Perhaps it’s done simply because every-

one else does it.^14

Price liningis setting a few price levels for a product line and then marking all

items at these prices. This approach assumes that customers have a certain refer-

ence price in mind that they expect to pay for a product. For example, many

neckties are priced between $20 and $50. In price lining, there are only a few prices

within this range. Ties will not be priced at $20, $21, $22, $23, and so on. They

might be priced at four levels—$20, $30, $40, and $50.

Price lining has advantages other than just matching prices to what consumers

expect to pay. The main advantage is simplicity—for both salespeople and cus-

tomers. It is less confusing than having many prices. Some customers may consider

items in only one price class. Their big decision, then, is which item(s) to choose

at that price.

Colgate offers different lines of
toothbrushes, with “good,”
“better” and “best” quality, at
different price levels to meet the
needs of different market
segments.

Price lining—a few
prices cover the field

0 Quantity

D

Price ($)

Exhibit 18-13
Demand Curve When
Psychological Pricing Is
Appropriate

Psychological
pricing—some prices
just seem right