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

Price Setting in the Business World 535

want consumers to use the manufacturer’s list price as the reference price, even if

no one anywhere actually pays that list price.

Leader pricingmeans setting some very low prices—real bargains—to get

customers into retail stores. The idea is not only to sell large quantities of the

leader items but also to get customers into the store to buy other products. Cer-

tain products are picked for their promotion value and priced low—but above

cost. In food stores, the leader prices are the “specials” that are advertised regu-

larly to give an image of low prices. Leader items are usually well-known, widely

used items that customers don’t stock heavily—paper towels, laundry detergent,

ice cream, or coffee—but on which they will recognize a real price cut. In other

words, leader pricing is normally used with products for which consumers do have

a specific reference price.

Leader pricing may try to appeal to customers who normally shop elsewhere.

But it can backfire if customers buy only the low-priced leaders. To avoid hurting

profits, managers often select leader items that aren’t directly competitive with

major lines—as when bargain-priced videotapes are a leader for an electronics

store.^12

Bait pricing is setting some very low prices to attract customers but trying to

sell more expensive models or brands once the customer is in the store. For exam-

ple, a furniture store may advertise a color TV for $199. But once bargain hunters

come to the store, salespeople point out the disadvantages of the low-priced TV

and try to convince them to trade up to a better, and more expensive, set. Bait

pricing is something like leader pricing. But here the seller doesn’tplan to sell

many at the low price.

If bait pricing is successful, the demand for higher-quality products expands. This

approach may be a sensible part of a strategy to trade up customers. And customers

may be well served if—once in the store—they find a higher-priced product offers

better value, perhaps because its features are better suited to their needs. But bait

pricing is also criticized as unethical.

Extremely aggressive and sometimes dishonest bait-pricing advertising has given

this method a bad reputation. Some stores make it very difficult to buy the bait

Leader pricing—make

it low to attract

customers

High

High

Low

Low

Target

customer’s

reference

price

Seller’s actual price

Perceived

inferior

Customer’s perceived fair value linevalue

High

High

Low

Low

Benefits target

customer sees in

marketing mix

Costs target

customer sees to

obtain benefits

Perceived

superior

value

Perceived

inferior

Customer’s perceived fair value linevalue

Perceived

superior

value

Exhibit 18-12 How Customer’s Reference Price Influences Perceived Value (for a marketing mix with a given set of

benefits and costs)

Bait pricing—offer a

steal, but sell under

protest

Is bait pricing ethical?