230 CHAPTER12 DESIGNINGPRICINGSTRATEGIES ANDPROGRAMS
➤ Two-part pricing,which is practiced by many service firms, consists of a fixed fee plus
a variable usage fee. As an example, telephone users pay a minimum monthly fee
plus charges for calls beyond a certain area. The challenge is how much to charge
for the basic service and how much for the variable usage. The fixed fee should be
low enough to induce purchase; the profit can then be made on the usage fees.
➤ By-product pricing.The production of certain goods—meats, chemicals, and so on—
often results in by-products, which can be priced according to their value to
customers. Any income earned on the by-products will make it easier for the company
to charge less for the main product if competition forces it to do so. Sometimes
companies do not realize how valuable their by-products are. Until Zoo-Doo Compost
Company came along, many zoos did not realize that one of their by-products—their
occupants’ manure—could be an excellent source of additional revenue.^24
➤ Product-bundling pricing.Sellers often bundle their products and features at a set
price. An auto manufacturer, for instance, might offer an option package at less
than the cost of buying all of the options separately. Because customers may not
have planned to buy all of the components, the savings on the price bundle must be
substantial enough to induce them to buy the bundle.^25INITIATING AND RESPONDING TO PRICE CHANGES
After setting initial prices and creating a pricing structure for their products, firms
may need to cut or raise prices in certain situations. Here we will examine the chal-
lenges of initiating price cuts, initiating price increases, reacting to price changes, and
responding to competitors’ price changes. For an overview of strategic pricing options
involving marketing-mix variables, see Table 4.6.Initiating Price Cuts
Several circumstances might lead a firm to cut prices. One is excess plant capacity:If the
firm needs additional business but cannot generate it through increased sales effort or
other measures, it may initiate a price cut. In doing so, however, the company risks
triggering a price war. Another circumstance is a declining market share,which may
prompt the firm to cut prices as a way of regaining share. In addition, companies
sometimes initiate price cuts in a drive to dominate the market through lower costs.Either
the company starts with lower costs than those of its competitors or it initiates price
cuts in the hope of gaining market share and lower costs.
When considering price-cutting, marketers need to be aware of three possible
traps: (1) Customers may assume that lower-priced products have lower quality; (2) a
low price buys market share but not market loyalty because the same customers will
shift to any lower-price firm; and (3) higher-priced competitors may cut their prices
and still have longer staying power because of deeper cash reserves.Initiating Price Increases
A successful price increase can raise profits considerably. For example, if the com-
pany’s profit margin is 3 percent of sales, a 1 percent price increase will increase prof-
its by 33 percent if sales volume does not drop. In many cases, firms increase prices just
to maintain profits in the face of cost inflation.This occurs when rising costs—
unmatched by productivity gains—squeeze profit margins, leading firms to regularly
increase prices. In fact, companies often raise their prices by more than the cost
increase in anticipation of further inflation or government price controls in a practice
calledanticipatory pricing.