224 CHAPTER12 DESIGNINGPRICINGSTRATEGIES ANDPROGRAMS
Value Pricing
Value pricingis a method in which the company charges a fairly low price for a high-
quality offering. Value pricing says that the price should represent a high-value offer to
consumers. This is a major trend in the computer industry, which has shifted from
charging top dollar for cutting-edge computers to offering basic computers at lower
prices. For instance, Monorail Computer started selling PCs in 1996 for as little as $999
to woo price-sensitive buyers. Compaq and others quickly followed suit. More recently,
eMachines began selling its PCs for less than $500 without a monitor, targeting the 55
percent of computerless households with annual incomes of $25,000 to $30,000.^13
Value pricing is not a matter of simply setting lower prices on one’s products
compared to those of competitors. It is a matter of reengineering the company’s oper-
ations to become a low-cost producer without sacrificing quality, and lowering prices
significantly to attract a large number of value-conscious customers. An important type
of value pricing is everyday low pricing (EDLP),which takes place at the retail level.
Retailers such as Wal-Mart and Amazon.com use EDLP pricing, posting a constant,
everyday low price with few or no temporary price discounts. These constant prices
eliminate week-to-week price uncertainty and can be contrasted to the “high-low” pric-
ing of promotion-oriented competitors. In high-low pricing,the retailer charges higher
prices on an everyday basis but then runs frequent promotions in which prices are
temporarily lowered below the EDLP level.^14
Retailers adopt EDLP for a number of reasons, the most important of which is
that constant sales and promotions are costly and erode consumer confidence in the
credibility of everyday prices. Consumers also have less time and patience for such
time-honored traditions as watching for specials and clipping coupons. Yet promo-
tions are an excellent way to create excitement and draw shoppers. For this reason,
EDLP is not a guarantee of success. As supermarkets face heightened competition
from store rivals and alternative channels, many are drawing shoppers using a combi-
nation of high-low and EDLP strategies, with increased advertising and promotions.^15Going-Rate Pricing
Ingoing-rate pricing,the firm bases its price largely on competitors’ prices. The firm
might charge the same, more, or less than its major competitor(s) charges. In oligop-
olistic industries that sell a commodity such as steel, paper, or fertilizer, firms normally
charge the same price. The smaller firms “follow the leader,” changing their prices
when the market leader’s prices change rather than when their own demand or costs
change. Some firms may charge a slight premium or slight discount, but they typically
preserve the amount of difference. When costs are difficult to measure or competitive
response is uncertain, firms feel that the going price represents a good solution, since
it seems to reflect the industry’s collective wisdom as to the price that will yield a fair
return and not jeopardize industrial harmony.Sealed-Bid Pricing
Competitive-oriented pricing is common when firms submit sealed bids for jobs. In
bidding, each firm bases its price on expectations of how competitors will price rather
than on a rigid relationship to the firm’s own costs or demand. Sealed-bid pricing
involves two opposite pulls. The firm wants to win the contract—which means submit-
ting the lowest price—yet it cannot set its price below cost.
To solve this dilemma, the company would estimate the profit and the probabil-
ity of winning with each price bid. By multiplying the profit by the probability of win-
ning the bid on the basis of that price, the company can calculate the expected profit
for each bid. For a firm that makes many bids, this method is a way of playing the odds