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Journal of Product & Brand Management
Matching Appropriate Pricing Strategy with Markets and Objectives
Charles R. Duke
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Charles R. Duke, (1994),”Matching Appropriate Pricing Strategy with Markets and Objectives”, Journal of Product & Brand
Management, Vol. 3 Iss 2 pp. 15 – 27
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Paul T.M. Ingenbleek, Ivo A. van der Lans, (2013),”Relating price strategies and price-setting practices”, European Journal of
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Alistair Davidson, Mike Simonetto, (2005),”Pricing strategy and execution: an overlooked way to increase revenues and
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Nigel F. Piercy, David W. Cravens, Nikala Lane, (2010),”Thinking strategically about pricing decisions”, Journal of Business
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Pricing is a daily challenge for brand and
product managers since it is completely
intertwined with product development and
management issues. But the use of pricing has
developed as a seat-of-the-pants activity for
most managers with few clear guidelines to
approach product pricing problems
(McCarthy and Perrault, 1993). Although
pricing has received some attention in both
academic and practitioner journals, the
application of this research to practice has not
progressed as quickly as other facets of
product management (Duke, 1991).
Additionally, only a few of the needed areas
of research are being addressed (Duke, 1989).
This interest in pricing at a research level
has not substantially impacted the way
pricing issues are relayed to those new to the
subject or to those needing quick assistance in
pricing philosophies, such as newly assigned
product managers. Product managers have no
guidelines for choosing quickly and with
confidence, the appropriate pricing tactics for
a specific set of consumer characteristics
combined with varied company objectives.
Educational materials generally present
pricing as a linear decision that isolates
separate portions of the pricing decision
without consideration for their
interrelationships. This “linear” method offers
an opportunity to overlook the interaction of
firm objectives with customer characteristics.
That is, a mismatch of company objectives
with the market may occur because linear
pricing modules do not regard the “steps” as
iterative or interactive. The appropriateness of
firm objectives as well as specific pricing
tactics within a given set of market
circumstances is seldom discussed in pricing
literature.
This article offers a modification of Tellis’
Price Strategy Matrix framework to be used
by managers so that they can judge quickly
the appropriateness of pricing objectives and
strategies for the special circumstances of
either entire markets or special segments.
This pricing strategy matrix considers a
match of consumer characteristics with
company objectives and the competitive
situation. It unifies consumer characteristics
and company strategic objectives given the
competitive situation and makes pricing
strategies and tactics easier to grasp and
apply. Given the circumstances of each
decision, the manager can choose appropriate
pricing techniques. This framework is not
intended to replace current training or
VOLUME 3 NUMBER 2
1994
15
Matching Appropriate Pricing
Strategy with Markets and
Objectives
Charles R. Duke
Journal of Product & Brand Management, Vol. 3 No. 2, 1994, pp. 15-27
© MCB University Press, 1061-0421
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customary pricing tactics. Rather, it provides
a supplementary structure to help understand
current operations, express to management
the reasons for pricing movements in the past
as well as price forecasts, and illustrate
appropriate tactics for varied issues. In this
article, the common techniques used to
discuss pricing decisions will be reviewed, an
alternative pricing strategy matrix will be
discussed, and applications of the matrix will
be considered.
Conventional Pricing Strategy
Framework
Most pricing discussions are based on either
highly sophisticated econometrics or standard
rules of thumb such as those developed by
retailers handling thousands of items. These
discussions tend not to consider beginning
with or matching appropriate actions with an
overall strategy that considers the type of
market competition, company objectives, and
the basic characteristics of the consumer
(Tellis, 1986). Some recent articles have
discussed price signaling and filtering but
have not considered the overall strategy
implications of these narrow tactics (Alpert et
al., 1993; Kamen, 1992).
Most firms are not using optimum pricing
methods although some are more
sophisticated in data collection. Large
retailers were early users of scanner
information to enhance and develop pricing
policy rather than simply adding a standard
mark-up to the average cost of a product as
many firms still do (McCarthy and Perrault,
1993). This is credited with enhancing their
profitability and success by encouraging sales
of volume products. Other firms similarly
track product sales levels but are successful at
premium pricing for unique offerings that
meet customer needs (Kotler and Armstrong,
1994). Most retailers, however still use
standard mark-up pricing as a method of
trying to deal with the large numbers of items
that they must handle (cf. Wahl, 1993). This
type of standard mark-up may penalize some
products by putting too high a price on them
and discourage sales. Alternatively, it may
neglect potential profit from products that
would bear a higher price in the market.
Average costing, which is used as a basis in
standard mark-up, can be misleading as
various components of fixed or variable costs
change with altered demand (Tellis, 1986).
Target return pricing suffers the same
problems as average costing. Simple breakeven
analysis disregards the idea that each
price produces a different break-even point
(McCarthy and Perrault, 1993). Few
companies are sophisticated enough to have
reliable and up-to-date information to
calculate sophisticated pricing information
such as marginal cost or contribution margins,
and some companies do not account
adequately for basics such as break-even
analysis (Kotler, 1993). These common
practices, developed from the pressures of
daily work productivity, suggest the need for
more widespread and easy-to-use pricing
techniques. The generally accepted method of
developing pricing decisions will be reviewed
briefly here to illustrate the usefulness of a
different framework.
Current Pricing Decision Analysis
The most common methods of describing a
pricing decision attempt to tie overall
company issues with pricing tactics by
presenting general pricing policies and then
narrowing down to precise tactics. The
integration of the many issues involved is not
clear from this discussion of terms and
practices. Those who have studied pricing
issues in depth may have an intuitive feel for
the interrelationships. But most professionals,
for whom pricing is not a primary function or
area of interest, do not have the time or
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energy to devote to this integration. A
framework which can better integrate pricing
issues into the real world of product
management would give managers more
confidence in their decisions and should
provide consistency and rationale to the
company’s pricing approaches.
In trying to make sense of the variety of
pricing subjects that need to be covered,
marketing textbooks have attempted to
distill pricing decision making into a linear
model that progresses one step at a time
toward pricing decisions (e.g. Kotler, 1993;
Kotler and Armstrong, 1994; McCarthy and
Perrault, 1993; Zikmund and D’Amico,
1992). This standard “textbook” approach
to setting prices distilled from a
convenience sample of current textbooks
shows a convergence of general thoughts
on a relatively linear approach to pricing
decisions (see Figure 1).
? The objectives of the company are
considered in terms of what philosophy
the company uses to determine prices.
Some philosophies or goals for a
company that are normally included are
profit maximization, sales volume, market
share, target return on investment level,
status quo, and survival.
? Pricing policies generally describe some
plan or course of action for achieving
pricing objectives. Common policies
include price skimming, penetration
pricing, life-cycle pricing, above/at/below
competitors, and customer value.
? These objectives and policies are used to
develop list (or base) prices for
publication. These are described as being
developed using cost-based, competitivebased,
or demand-based methods of
calculations.
VOLUME 3 NUMBER 2
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Company pricing
objective
(maximize profit,
sales volume, market
share, etc.)
Company
policy
(skimming,
penetration,
above/at/
below, etc.)
List
price
(cost
based,
demand
based,
etc.)
Discounts
(quantity,
seasonal, credit,
sales, allowances,
etc.)
Adjustments
(geographic,
etc.)
Final
price
Standard linear approach
Strategy matrix approach
A
B
C
Customer characteristics
Company objectives
and
competitive situation
A B C
Appropriate pricing issues and
alternatives
Figure 1.
Comparison of Pricing Decision Approaches: Standard Linear Approach versus Strategy Matrix Approach
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? Reductions from list prices are made with
discounts to different consumers
depending on the situation. Discounts are
commonly given for variations in
quantity, season, credit, special sales, or
for allowances to the distribution channel
to perform services (such as advertising,
stocking, trade-in, etc.).
? Finally, adjustments are made for
geographic considerations. This brings
into play the considerations of uniform
pricing versus shipping zones as well as
other distribution-related tactics.
The advantage of this linear approach is that
it permits a delineation of the various pricing
issues so that authority for actions can be
distributed within an organization. One major
disadvantage of this presentation is that it
does not bring all of the pricing issues
together under a cohesive framework that
coordinates the pricing either for a product or
for the firm. There is little discussion of when
each of the pricing tactics considered in the
linear decision model is actually appropriate
for the situation facing the firm or for the
product.
Specific education in pricing other than
basic supply-demand curves and break-even
analysis is not available to product managers
through normal sources such as universities,
popular books or commercial short-courses.
Pricing tends to be learned on the job with
some excellent rules of thumb, along with
some erroneous impressions. Newly assigned
product managers are initially “thrown-to-thewolves”
and begin pricing products by gut
feel or by using guidelines developed inside
an individual organization.
Strategy-based Pricing Decisions
In a strategy approach to pricing, a firm’s
objectives are developed and are then refined
by constraints placed on the firm from
external environments (such as competition)
and consumer characteristics (Figure 1).
These considerations lead to a finite set of
pricing issues that are effective or appropriate
in specific situations. The price strategy
matrix offers a structure to discuss basic
pricing strategies based on economic theory
and practice. It combines basic company
strategies with basic market descriptions. This
permits the manager to acknowledge the
market (or segment) being considered in the
pricing decision as a primary determinant in
pricing decisions. Additionally, it permits the
manager to select appropriate pricing issues
within the framework of current competitive
operations. Key to this framework is the idea
that different firm objectives and individual
consumer characteristics can be defined
which combine to create special strategic
situations in each cell of the matrix. In each
situation, certain types of pricing actions are
appropriate whereas others are not practical.
A first step in preparing strategy-based
pricing is to select a framework to use in the
approach. The price strategy matrix proposed
by Tellis (1986) is used as the basis for the
discussions here. Strategy approaches are
intended to augment, not to replace, the
normal decision processes for price
determination. By using a structure that
integrates multiple pricing ideas, managers
can quickly develop and examine alternative
approaches which may help to generate
successful product campaigns.
A Price Strategy Matrix
Tellis (1986) suggested a taxonomy that
unifies classic pricing strategy issues. Key to
this system is the concept of “shared
economies”. These result from one consumer
segment bearing more than the average cost
of a product compared with other segments.
Average price across all segments should
reflect an acceptable profit. A shared
economy may be triggered by differences
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among consumers, firms, or product-mix
elements. Company pricing objectives,
making up one dimension of the matrix, are
described in three major classes: differential
pricing, competitive pricing and product line
pricing. Differences in consumer
characteristics make up the second dimension
and are grouped into three categories: high
search costs, low reservation prices and
special transaction costs. The basics of the
matrix classification system (see Table I) can
be used by managers to assist in
understanding options and issues for any
given pricing decision. In addition, Table I is
intended to be used as a framework by
anyone involved in discussing pricing issues.
Matrix Dimensions
Constraints on a firm lead to implicit or
explicit company objectives that make up the
horizontal dimension of the price strategy
matrix (see Table I).
? Differential pricing objectives exist when
one product is sold to different consumer
segments at different prices, with each
segment providing some benefit to the
other. For example, customers who are
willing to pay higher prices help to
subsidize the lower costs to pricesensitive
consumers; at the same time, the
price-sensitive segment provides an outlet
for over-production and may lower the
price to all consumers.
? Competitive pricing objectives use
product prices to take advantage of some
competitive position that exists with
similar (not identical) brands.
? Product line pricing is more complex
ranging across multiple products in the
same or different segments. Shared
production costs in the product line
should be considered as well as marketing
and promotion synergy.
In each market, some of the consumers have
dominant characteristics that segment the
market permitting different prices to be used.
These consumer characteristics make up the
vertical dimension of the price strategy matrix
(see Table I). In “high search costs”, one
group places high importance on time and
searches very little for product information.
These consumers are relatively uninformed,
and buy randomly (most often at higher
prices). The other group of consumers in this
first row of the matrix is willing to search for
more information and can take advantage of
available discount offerings. “Low
reservation price”, the second consumer
characteristic, deals with the differing
demand for the product based on price. One
segment wants the product and is willing to
pay a higher price even though a lower price
is expected to occur at a later time. Another
segment is price sensitive, has no urgent need
for the product, and buys the product as the
price decreases. With the third consumer
characteristic, consumers can be segmented
across “special transaction costs” which deal
with situations in which all of the consumers
are affected by some other specific issue that
is critical to the completion of the marketing
exchange. These issues might include such
things as travel cost, investment risk, cost of
money, switching costs, etc.
The combination of the two dimensions
(company objectives and consumer
characteristics) yields special situations that
can be addressed by specific pricing
strategies. The following discussion considers
the limitations of this approach, the extension
of ideas into managerial issues, and then
considers the specific characteristics of each
cell of the price strategy matrix.
Extending the Price Strategy Matrix
The strength of the matrix is that it provides a
way to discuss a wide range of pricing
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Table I.
Price Strategy Matrix: Dimensions and Characteristics Differential pricing Competitive pricing Product line pricing
Same product Similar products Different products
Consumer characteristics Different prices to each segment Pricing for competitive economic advantage Pricing within same or multiple segments
High search costs Random discounting Price signaling Reference pricing Image pricing
Some view cost of search Unpredictable timing Differentiated brands Differentiated brands Similar models but substitutes
as too high and remain less Uninformed pay higher prices Price info easier to get Price info easier to get Image difference
informed Informed give market incentive for lower price than quality than quality Price info easier to get than quality
Some are willing to search Uninformed use price Uninformed use reference Only some want low price model
and are more informed to indicate quality in decision
Variants: Variants: Variants: Variants:
Coupons Price/quality Reference pricing Image pricing
Cents-off Prestige pricing (across Prestige pricing (across a single product
Trade promotions brands)a line)a
Various other promotions Sale pricinga
Customary pricinga
Above/at/below marketa
Even/odd pricing
(psychological)a
Low reservation price Periodic discounting Penetration Experience curve Price bundling
Some are price-sensitive Predictable/known discounts Cost advantages Cost advantages Independent goods
Some are willing to pay Discounts available to all Price-sensitive group Price-sensitive lowers “Perishable”
high price All are informed Low price keeps out price to all Differing demand for each product
Price-sensitive users buy at end of period competition Low price keeps out
Average price higher competition Variants:
than average cost Large cost gains through Price bundling
increased production
Variants: Variants: Variants: Premium pricing
Skimmimg Trade-insa Penetration pricing Experience curve Similar models but substitutes
Seasonal discountsa Some trade discountsa Cost plusa Learning curve Price sensitive across features
Prime-time/matineea Quantity discountsa Target pricinga Variants
Peak load pricing Senior’s discountsa Standard mark-upa Premium pricing
Cash discounts Sealed bida Price lining
Special transaction costs Second market discounting Geographic pricing Complementary pricing
Situations leading to high Unused capacity Some want convenience Transaction costs vary across
cost of purchase Separated segments Distribution efficiencies products (not across segments)
Second market provides outlet Losses covered by another product
Variants: Variants: Variants:
Domestic vs foreign FOB vs CIF Captive pricing
Manufacturer brand vs private labela Uniform-delivered price Two-part pricing
Other price discrimination methodsa Zone pricing Loss leaders
Freight absorption
Note: aSubjects added here but not originally classified by Tellis (1986)
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strategies and tactics that have been discussed
previously as individual issues. This approach
permits comparison and application of varied
strategies based on issues that can be
identified and evaluated by both practitioners
and academics. Because Tellis intended to
integrate economic theory only, the major
drawback of the original matrix is that it
intentionally excluded “managerial” issues
such as psychological pricing, standard markups,
or seasonal discounts that are rooted in
behavior rather than in purely economic
theory (Tellis, 1986). Thus the original matrix
provides a beginning for strategy analysis but
stops short of a comprehensive classification
of subjects that relate to managerial pricing
approaches, price implementation, and
estimation of price, cost, or demand. The
extended matrix shown in Table I illustrates
additional pricing techniques appropriate for
the objectives and consumer characteristics
involved for each cell. Not only are the
original subjects categorized by Tellis shown,
but also other issues commonly discussed in
product management as well as in marketing
textbooks have been added to complete the
classification (see note in Table I). This
extends the original matrix to include issues
that are critical to daily marketing operations.
A second drawback to the original Tellis
matrix might be the impression that a single
cell should be used to describe all of the
strategy options for a certain situation. That
is, a company may find itself concerned with
more than one set of issues at the same time.
For example, internal product line issues must
be solved along with external (i.e.
competitive or differential pricing) issues.
Managers should understand that the matrix
provides a checklist of potential pricing issues
but that the cells are not meant to indicate an
exclusive, or singular, approach to price
management. Rather, it indicates the
appropriateness of various pricing issues
applied to consumer characteristics and to
company objectives given the competitive
situation. In any real life decision, multiple
issues may exist coincidentally, and each
issue may require a different action.
Differential Pricing Objectives
In the three cells dealing with differential
price objectives, prices vary across consumer
segments because the segments have varied
objectives regarding price. The products
offered are generally perceived to be the same
by the customer.
Random Discounting
Random discounting strategies (differential
pricing/high search costs) account for
unpredictable pricing methods such as the use
of coupons or other promotions. Uninformed
consumers unwilling to pay the cost of
searching for coupons or other “deals” do not
consistently benefit from random lower prices
and may be disadvantaged by them.
The primary price technique used in
random discounting is couponing. Consumers
who wish to search can buy at reduced prices.
Additionally, other pricing techniques include
“cents-off” promotions as well as various
trade discounts which are truly random.
Consumers are not aware of any pattern in
promotional discounts. That is, no timing
such as month-end or seasonal discounts
should be obvious. Also, some segment of the
market does not take advantage of the
discount when it appears.
Periodic Discounting
Periodic discounting strategies (differential
pricing/low reservation price) result in
predictable discounting patterns that are
known to the consumers (such as a schedule
or some commonly accepted practice within
an industry). Some consumers pay a higher
price even though a lower price is expected to
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occur. Reasons for buying at the higher price
include convenience, indifference, or an
immediate need. Other consumers are willing
to wait for the lower price. For example,
innovative early purchasers of electronic
equipment pay high prices for new products
whereas later purchasers pay less as the
technology becomes more accepted. Also,
consumers willing to purchase during “offpeak”
periods pay less for the same product.
Known discounts in markets that are
segmented by price sensitivity include all
types of time-oriented discounts (i.e.
seasonal, prime-time versus matinee, utility
“peak-load” pricing, cash discounts, trade-ins,
etc.). Timing of price schedules is generally
known or is predictable, but some consumers
will buy even when prices are highest. Price
skimming also fits well into this category
since some consumers will pay higher prices
to obtain the product early whereas other
consumers choose to wait until prices drop.
Published trade discount schedules based on
differences in volume, credit terms, or time of
month are also appropriate here. For example,
moving companies charge more in the
summer than in the winter, but also charge
more at the end or beginning of a month
(when demand is highest) than during the
middle of the month (when fewer people
move). Some companies may implicitly and
erroneously use this strategy by trying to
charge too much for their commodities at the
beginning of the period with a requirement
(known to their customers) to reduce prices
drastically at the end of the period. This is
especially true if the manufacturer is
operating a continuous “stream” process
(instead of batch) and has limited inventory
storage relative to daily production, such as
petroleum refining or paper production.
Second Market Discounting
In second market discounting (differential
pricing/special transaction costs), unused
production capacity is available beyond the
needs of the primary market. The first market
provides the primary incentive to produce.
The second market provides an additional
outlet that allows production at better
economies of scale.
Other types of differential pricing occur
when situations other than random or periodic
discounts relate more to other marketing
strategies than to pricing terms. Mixed
branding strategies allow a company to
segment between the first market (i.e.
manufacturer’s brand) and the generic, lower
priced (i.e. private label) secondary market.
Other segmentation issues may use
demographics (old versus young, high income
versus low income, etc.) to discriminate
pricing to a second market. Perhaps the
easiest example of this cell is the practice of
maintaining a primary domestic market and a
secondary export segment. The foreign goods
are viewed as incremental and are required to
return only marginal costs. Legitimate
domestic versus foreign pricing can be
defended by ethical competitors. However, if
the foreign price is below the average cost of
all production, then illegal “dumping” is
considered to occur.
Competitive Pricing Objectives
Under competitive pricing strategies, the
products are similar, but some advantage
exists which permits one company to
differentiate itself from others. Many
managers may assume that this cell represents
their primary concern and strategy. But often,
other pricing issues are equally important or
even supersede these.
Price Signaling and Reference Pricing
Price signaling and its variant, reference
pricing (competitive pricing/high search
costs), relate to price/quality issues where
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consumers value their time and do not want to
search for information or products. The price
signaling category differentiates products
with high search costs which not all
consumers are willing or able to absorb.
Quality varies and is perceived to be
important. However, information about
quality is more difficult to obtain than
information about price. Uninformed
consumers use price as an indicator of quality
and very often overpay to get the high quality
they prefer. In these markets, similar products
are differentiated within a category so that
price differences can be maintained. Also,
some consumers have high search costs. This
type of market is evident for durables, some
services, or wherever new buyers (or
amateurs) are entering the market. High
technology products (such as electronics) or
specialty products (such as wine) may be
good examples. Automobile and housing
industries are likely to use price signaling for
varied market segments.
In reference pricing, the differences
between two brands (models) of the same
product are compared and evaluated by the
consumer. For example, an extremely highpriced
brand can be offered along with a
moderately priced one to indicate the value of
the moderate price. Risk-averse, uninformed
consumers may purchase the moderate-price
brand inferring acceptable quality from the
higher-priced “referent”. By leveraging the
idea of reference prices as strategy,
companies may offer high prestige prices or
sales with noticeable reductions.
Most often, this strategy cell includes
comparison of prices with other competing
products. Companies may use higher-priced
competitor brands to indicate the value of
their moderately priced models where search
costs are high for some consumers. Some
consumers purchase the high-priced brand
without regard to the extra financial risk
involved (prestige pricing). Another example
is the enhanced image of savings made by
comparing “sale” prices to perceived higher
regular prices. Arguably, reference pricing is
one of the retail tactics of generic (or store)
brand prices when products are placed next to
manufacturers’ brands.
Within this cell of the matrix, other
managerial pricing issues related to reference
pricing can be discussed. For example,
customers may feel that the product is so
widely distributed and easily available that
they may choose a “customary” price as an
absolute, rather than relative, reference point
(i.e. vending machines with soft drinks or
candy bars). Benchmarks are also used in
many industries to distinguish brands with
“above-, at-, or below-market” pricing
structures. Lastly, “even/odd” pricing can be
considered as a reference if the consumer has
a psychological barrier at the next higher
“even” price level.
Penetration and Experience Curve
Penetration pricing and experience curve
pricing (competitive pricing/low reservation
price) are derived respectively from a
company’s advantage in cost structure from
production scale or cumulative production.
Generally, costs decrease by as much as 20
percent each time cumulative production is
doubled (McCarthy and Perrault, 1993).
Enough price-sensitive consumers exist in the
market that higher volumes of sales are
expected at the lower prices. If higher prices
or periodic discounts were used (such as
skimming techniques discussed under
“Differential Pricing Objectives”), then other
producers would be attracted to the market.
Experience or learning curve pricing takes
advantage of lower costs to gain market
share. Leaders set prices at levels lower than
production costs early in the life cycle to gain
as much market share as possible. Consumers
who purchase early get the product at lower
profit margins or even losses for the firm and
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encourage production to continue. Later
purchasers provide the higher profit
anticipated by the firm. Related methods
include cost plus, mark-up, and sealed-bid
pricing since the company with the greater
experience and lower costs should be able to
maintain an advantage in pricing or can
garner higher profit at the same price.
Where differentiated products are sold into
price-sensitive markets, cost advantages
allow producers to take aggressive pricing
actions. Penetration pricing requires that
average price must be greater than average
cost. This strategy assumes that an average
per-unit profit will exist even if it is a small
one. Prices are set carefully with heavy
emphasis on cost of the product. This cell of
the matrix is the only one in which Tellis
(1986) explicitly refers to costs of goods sold.
Where cost is used as a price basis, other
managerial pricing decisions may be inferred.
Implicitly, managers are making a decision on
whether to use penetration pricing when
prices are set by any cost-plus (cost-plus
fixed fee or cost plus percentage), standard
mark-up, or sealed-bid methods.
Additionally, cost is the primary determinant
of pricing levels when any type of target
pricing (target profit, target return on sales,
or target return on investment) is done. Use
of cost-based pricing may implicitly place
the high-cost producer at a disadvantage if
lower-cost firms are using penetration
pricing strategies.
Geographical Pricing
Geographical pricing (competitive
pricing/special transaction costs) permits
the company to take advantage of some
special distribution capabilities or the
consumer’s willingness to pay for
geographic convenience. Freight issues
involve some consideration of local versus
distant consumer prices where one group
will subsidize the other. These include FOB
versus CIF, uniform delivered price, zone
pricing, freight-absorption pricing and
basing point pricing. Competitive
advantages are gained through marketing
decisions on transportation. Substantial
discussions of these logistics-based pricing
issues are available in textbooks and
journals.
Product Line Pricing Objectives
With product line pricing strategies, a firm
must make decisions across a set of its own
related products. The differences among the
strategies in this section are caused by the
type of demand for products and the
interrelationships of cost and demand within
the product line. This is a difficult subject
area to research and has received little
attention by academics. As a result,
practitioners have developed rules of thumb
and creative line pricing management
techniques from experience.
Image Pricing
Image pricing (product line pricing/high
search cost) might be considered a pricequality
issue within the product line. Some
consumers have high search costs and infer
quality from prices of substitutes within the
product line. Similar products (models) within
the product line are differentiated according to
image or positioning. Prestige pricing may also
be used where products are referenced to
others within the product line.
When a company must make pricing
decisions within its own product line, internal
pricing policies must be evaluated. If the
consumers are segmented across search costs,
then image pricing techniques are
appropriate. Some products are positioned
and sold at higher prices similar to pricequality
issues in price signaling when some
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models are promoted heavily as being
“upscale”. Prestige pricing may also be
discussed in this cell since a model within the
product line can be used as a reference to
indicate perceived value across the product
line. Higher-priced models will appeal to
non-searching consumers who use other
product prices as the reference to value.
Price Bundling and Premium Pricing
In price bundling (product line pricing/low
reservation price), price sensitive consumers
are attracted to purchase more goods and
services by bundling independent products.
The seller tries to cross over segment
differences by selling a combination of
separate products at the highest package price
acceptable to all segments. In a price-sensitive
market, independent products are bundled and
priced to gain more profit than would be
obtained by individual sales of the products.
Bundling is common in automobile options as
well as industrial services. Also, the products
must have a “perishable” component (such as
food, seats at a concert, etc.) or some critical
time element. For example, personal
computers are purchased infrequently with a
lower probability of added features being
purchased at the same store at a later date. This
situation suggests that options may best be
offered at the time of sale. This perishable
component reduces the effectiveness of
periodic or random discounting.
Premium pricing addresses price-sensitive
consumer demand differences with substitute
products that can benefit from joint
production, marketing, or other economies of
scale. The seller tries to take advantage of
different segments by pricing substitutes at
different levels (for example, “good, better
and best” designations of appliances or tools).
Profits from the premium-priced products
may be used to subsidize lower profits on the
lower-priced product in the form of joint
economies of production. Although there are
many examples of product line premium
pricing, the issue of price lining fits well into
this cell. The products are substitutes and are
sold at differing price levels according to
consumer demand for various features.
Examples of price lining can be found in
home electronics and appliances.
Complementary Pricing
Complementary pricing (product line
pricing/special transaction costs) relates to
special transaction costs across models in a
product line that are used jointly but are sold
separately. Low profits from the sale of one
product may be covered by profits from the
sale of a complementary product. Transaction
costs vary across the complementary products
instead of across consumer segments. For
example, cameras are sold along with lowpriced
film, or computer software is provided
at low cost along with hardware purchases.
Other segmentation issues are combined in
this cell and involve differing transaction
costs across products within the product line.
In captive pricing, the customer must return
to the seller for supplies, parts, or future
upgrades to the original product. Examples
might be computers, video equipment, other
electronics, automobiles, etc. The seller must
consider the price for the original equipment
in association with the price of the subsequent
accessories, supplies and service. The
transaction cost for the consumer might
include the ability to pay a high price at the
beginning of the use period (to gain added
features or extra warranty protection) or
uncertainty of performance satisfaction.
When similar issues are applied to services,
the term “two-part” pricing is used because
there is an up-front fixed fee with variable use
fees associated. Loss leaders are used to
increase store traffic in the hope that the
buyer will purchase other items that will
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offset the losses on the advertised products.
Consumers perceive that the cost of making
the shopping trip is offset by the reduced
price. Rain check policies increase the
credibility of the store but also increase the
amount of loss that must be offset.
Managerial Implications and
Recommendations
Implementing this price strategy matrix
requires product managers to consider jointly
the market-based consumer characteristics
along with the strategy approaches that are
appropriate in a particular situation. Strategybased
pricing approaches provide a method
for organizing pricing subject matter on
different levels. Managers can integrate the
pricing information with other marketing
strategies and may relate pricing options more
easily to other marketing mix decisions.
Pricing specialists or researchers can use the
matrix to organize current activities in market
research to develop a better understanding of
pricing interrelationships, especially in less
researched areas such as product line pricing
(Duke, 1989).
To implement the price strategy matrix as a
proactive tool, managers can examine their
current pricing strategies and consider
whether market and competitive descriptions
as well as consumer market characteristics
match those of the products concerned. By
comparing consumer characteristics with
company objectives, product managers can
quickly review which strategies might be
appropriate for the customer segments being
used to fulfill company objectives. If
discrepancies are found, then managers can
reconsider some of their standard practices. If
the strategies are appropriate for the market
but are not compatible with currently
expressed company directions, then the firm
must consider either changing market
strategies or changing company objectives.
As an analysis tool, marketers can review
current practices in pricing to understand
what implicit assumptions are being made in
current pricing tactics for consumer
characteristics and company objectives. More
likely, managers can clearly define and
review their policies and consider
contingency options for markets and
positioning products. The framework can be
spread among others in an organization to
raise awareness of different pricing situations
and issues quickly.
This matrix provides a better structure for
understanding the application of pricing
issues. At the very least, it can be used to help
avoid blatant errors in choosing price
strategies. For example, the distinction
between skimming (segmenting customers
by gradually lowering prices) and
penetration pricing (holding prices low in
the hope of increased profits from lowered
future costs) is often thought of as a distinct
choice. Instead, it should be considered as a
difference in competitive situations
(competitive pricing) and customer
segmentation (differential pricing).
The matrix does not show cells that are
always mutually exclusive. For example
geographic pricing issues exist in parallel
with other competitive pricing issues. Also,
a company may face product line issues at
the same time as it considers second market
discounting on a specific single product. By
using this matrix, these multiple issues can
be teased apart and their interactions can be
considered logically.
Pricing issues will never be simple, but
the problems involved in pricing dilemmas
can be eased with a structured strategy
approach. Most situations can be considered
more logically by matching descriptions of
markets with company objectives. Some
classifications of pricing issues presented
here may be controversial and will generate
discussions. For example, managerial
decisions which create implicit assumptions
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about consumers or objectives were not
originally a part of Tellis’ matrix but extend
its usefulness. The idea of strategy-based
pricing decisions will undergo development
and change as these discussions point out
strengths and weaknesses. As product and
brand managers become more accustomed
to the technique and use it to present
information to upper management, then
other area managers (such as manufacturing
or distribution) may become more aware of
the influence or limitations that their areas
have on pricing decisions. Higher awareness
of pricing issues throughout the
organization should help product managers
to accomplish their goals.
¦
References
Alpert, F., Wilson, B. and Elliott, M.T. (1993),
“Price Signalling: Does it Ever Work?”,
Journal of Product & Brand Management,
Vol. 2 No. 1, pp. 29-41.
Duke, C.R. (1989), “Towards Classifying Current
Trends in Pricing Research”, in King, R.L.
(Ed.), Marketing: Positioning for the 1990s ,
Southern Marketing Association, Charleston,
SC.
Duke, C.R. (1991), “Price Presentations
Structured with Strategy ”, Journal of
Marketing Education , Vol. 13 No. 3 ,
pp. 52-65.
Kamen, J. (1992), “Price Filtering: Restricting
Price Deals to Those Least Likely to Buy
Without Them”, Vol. 1 No. 3, pp. 45-51.
Kotler, P. (1993), Marketing Management , 8th
ed., Prentice-Hall, Englewood Cliffs, NJ.
Kotler, P. and Armstrong, G. (1994), Marketing:
An Introduction , 6th ed., Prentice-Hall,
Englewood Cliffs, NJ.
McCarthy, E.J. and Perrault, W.D. (1993), Basic
Marketing: A Managerial Approach , 11th
ed., Irwin, Homewood, IL.
Tellis, G.J. (1986), “Beyond the Many Faces of
Price: An Integration of Pricing Strategies”,
Journal of Marketing , Vol. 50, October, pp.
146-60.
Wahl, M. (1993), “Everything You Always
Wanted to Know about Supermarkets”, In
Store Marketing , Sawyer, New York, NY.
Zikmund, W. and D’Amico, M. (1992),
Marketing , 4th ed., West, Minneapolis/St.
Paul, MN.
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Charles R. Duke is Assistant Professor,
Department of Marketing at the College of
Commerce and Industry, Clemson University,
South Carolina.
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