Promotional and Differential Pricing

Companies can use several pricing techniques to stimulate early purchase:

Loss leader pricing: Supermarket and department stores often drop the price on well-known brands to stimulate additional store traffic. This pays if the revenue on the additional sales compensates for the lower margins on the loss-leader items. Manufacturers of loss-leader brands typically object because this practice can dilute the brand image and bring complaints from retailers who charge the list price. Manufacturers have tried to restrain intermediaries from loss-leader pricing though lobbying for retail-price maintenance laws, but these laws have been revoked.

Special event pricing: Sellers will establish special process in certain seasons to draw in more customers. Every August, there are back-to-school sales.
Cash rebates: Auto companies and other consumer-goods companies offer cash rebates to encourage purchase of the manufacturers’ products within a specified time period. Rebates can help clear inventories without cutting the stated list price.
Low-interest financing: Instead of cutting its piece, the company can offer customers low-interest financing. Automakers have even announced no-interest financing to attract customers.
Longer payment terms: Sellers, especially mortgage banks and auto companies, stretch loans over longer periods and thus lower the monthly payments. Consumers often worry less about the cost (i.e. the interest rate) of a loan and more about whether they can afford the monthly payment.
Warranties and service contracts: Companies can promote sale by adding a free or low-cost warranty or service contract.
Psychological discounting: This strategy involves setting an artificially high price and ten offering the product at substantial savings; for example, “Was $359, now $299.” Illegitimate discount tactics are fought by the Federal Trade Commission and Better Business Bureaus. Discount from normal prices are a legitimate form of promotional pricing.

Promotional-pricing strategies are a zero-sum game. If they work, competitors copy them and they lose their effectiveness. If they do not work, they waste money that could have been put into other marketing tools, such as building up product quality and service or strengthening product image through advertising.

Differentiated Pricing:

Companies often adjust their basic price to accommodate differences in customers, products, locations, and so on. Lands’ End creates men’s shirts in many different styles, weights, and levels of quality. A men’s white button-down shirt may cost as little as $18.50 or as much as $48.00.

Price discrimination occurs when a company sells a product or service at two or more prices that do not reflect a proportional difference in costs. In first degree price discrimination, the seller charges a separate price to each customer depending on the intensity of his or her demand. In second-degree price discrimination, the seller charges leads to buyers who buy a larger volume. In third degree price discrimination, the seller charges different amounts to different classes of buyers, as the following cases:

Customers segment pricing: Different customer groups are charged different prices for the same product or service. For example, museums often charge a lower admission fee to students and senior citizens.
Product form pricing: Different versions of the product are priced differently but not proportionately to their respective costs. Evian prices a 48-ounce bottle of its mineral water at $2.00. It takes the same water and packages 1.7 ounces in a moisturizer spray for $6.00. Through product form pricing, Evian manages to charge $3.00 an ounce in one form and about $0.04 an ounce in another.
Image pricing: Some companies price the same product at two different levels based on image differences. A perfume manufacturer can put the perfume in one bottle, give it a name and image, and price it at $10 an ounce. It can put the same perfume in another bottle with a different name and image and price it at $30 an ounce.
Channel pricing: Coca-Cola carries a different price depending on whether it is purchased in a fine restaurant, a fast restaurant or vending machine.
Location pricing: The same product is priced differently at different locations even though the cost of offering at each location is the same. A theater varies its seat process according to audience preferences for different locations.
Time pricing: Prices are varied by season, day, or hour. Public utilities vary energy rates to commercial users by time of day and weekend and versus weekday. Restaurants charge less to “early bird” customers. Hotels charge less on weekend.