Beyond the Many Faces of Price: An Integration of Pricing Strategies
Author(s): Gerard J. Tellis
Source: Journal of Marketing, Vol. 50, No. 4 (Oct., 1986), pp. 146-160
Published by: Sage Publications, Inc. on behalf of American Marketing Association
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Gerard J. Tellis
Beyond the Many Faces of Price:
An Integration of
Pricing Strategies
The author reviews the field of pricing strategy and constructs a unifying taxonomy of the many str
egies described in the literature. The taxonomy is based on the simple proposition that all the strategi
have a common denominator-shared economies among buyer segments, across firms, or among prod
ucts. The author presents the strategies in comparable terms, emphasizing the principles underlying e
and demonstrating the relationship among strategies, the circumstances in which each can be used,
the legal and policy implications of each.
IN the last two decades the field of pricing strategyand reclassify the various pricing strategies in the lithas made great progress in the form of better the-erature.
oretical explanations, more precise models, and in- The first objective of this article is to present a
novative pricing strategies (see Nagle 1984 for onenumber of pricing strategies, some of which are simreview). However, the rich variety of pricing modelsplifications and others elaborations of strategies deand strategies developed in different time periods andscribed in the literature. A second objective is to state
contexts has resulted in a multiplicity of labels, sev-their underlying principles in comparable terms and
eral overlapping descriptions of strategies, and par- thus demonstrate their relationship to each other and
tially obsolete typologies. Some pricing strategies aretheir practical applications. A third objective is to pronot yet presented adequately in the marketing litera-pose a classification of these strategies that is parsiture (e.g., price bundling, Stigler 1968; random dis- monious, logically derived, and enlightening to the
counting, Varian 1980; or price signaling, Cooper anduser. Such a taxonomy could stimulate alternate
Ross 1984) and others have not been developed for- schemes or general theoretical models or new applimally (e.g., price skimming and penetration pricing,cations of empirical models or new strategies (Hunt
Dean 1951). A more pressing issue, however, is that 1983, p. 348-60).
These objectives are carried out in the following
because the principles underlying each strategy have
order.
First the classification is presented (though it
not been presented together, it has not been possible
to develop a unifying taxonomy of strategies that shows can be fully appreciated only at the end of the article).
their relatedness or differences and immediately sug-Then each strategy is discussed in terms of a pricing
gests the circumstances under which each can beproblem presented in simple numerical form. A paradopted. Thus there is a need to compare, rationalize,ticular pricing strategy is shown to be the only one
that can resolve the problem, given the demand, cost,
competitive, and legal environment. The theoretical
Gerard J. Tellis is Assistant Professor of Marketing, University of Iowa. and welfare aspects of the strategy are summarized
The article benefitted from the comments of Cathy Cole, S. Hariharan,and applications discussed. Finally, the relationship
Timothy Heath, William Robinson, Raja Selvam, and four anonymous
among strategies is explained.
JM reviewers, as well as the editorial assistance of Barbara Yerkes.
This article describes a set of normative pricing
146 / Journal of Marketing, October 1986
Journal of Marketing
Vol. 50 (October 1986), 146-160.
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strategies. A pricing strategy is a reasoned choice from
a set of alternative prices (or price schedules) that aim
at profit maximization within a planning period in response to a given scenario. Thus, the article describes
a set of ideal options one may choose and outcomes
that result from such choices, assuming profit maximization by the strategist. Several important pricing
topics are necessarily excluded from this discussion:
managerial pricing approaches, price implementation,
and price, cost, and demand estimation (see Monroe
1979 or Rao 1984 for excellent reviews).
In the case of consumer behavior, however, allowances are made for non-optimal behavior. Its most
important cause is incomplete information which leads
to three types of behavior: consumers may purchase
randomly, consumers may use a surrogate for an unknown attribute (e.g., price as a surrogate for quality), or consumers may evaluate choices incorrectly
with resultant intransitivity in preferences. On the ba-
sis of this hypothesis, Kahneman and Tversky (1979)
developed prospect theory as an alternative to traditional utility theory and Thaler (1980, 1985) extended
that work. Their work has important implications for
pricing strategy. This article shows the impact of all
three types of information deficiencies on pricing
to search for it. Further, for some of them the opportunity cost of time exceeds the benefit of search,
so that they are willing to purchase without full information. Second, at least some consumers have a
low reservation price for the product. That is, some
consumers are price sensitive or do not need the product urgently enough to pay the high price other consumers pay. Third, all consumers have certain trans-
action costs other than search costs-for example,
traveling costs, the risk of investment, the cost of
money, or switching costs.
The two dimensions-firm objectives and con-
sumer characteristics-each with three categories yield
nine cells into which the strategies discussed here are
classified (see Table 1). Table 2 further compares and
contrasts these strategies on several dimensions and is
discussed in the concluding section. The real world,
however, is more complex and several of the conditions listed (search costs, transaction costs, or demand
heterogeneity) may occur jointly. Accordingly, in
reality a firm may adopt a combination of these strat-
egies. What is demonstrated in the proposed classification is the necessary conditions for each strategy,
conditions that are jointly sufficient to classify them
conveniently. Similarly, in the following discussion
the problems define fairly simple scenarios where "other
strategies.
A Classification of Pricing
Strategies
The underlying principle in all the strategies discussed
here is that the best strategy in certain circumstances
is not apparent until certain shared economies or crosssubsidies are taken into account. In a shared econ-
things are assumed constant" and only factors affecting the choice of a strategy are allowed to vary.
The list of available strategies also is affected by
the legal environment. Because of the potential for
pricing abuses, especially against weak competitors or
weak or uninformed buyers, Congress and the states
have passed laws that regulate the pricing strategies
firms can adopt. These laws generally ensure that there
is no collusion among competitors, no deception of
no explicit discrimination among indusomy, one consumer segment or product bears moreconsumers,
of
trial buyers, or no attempt to manipulate the competthe average costs than another, but the average price
still reflects cost plus acceptable profit. The useitive
of structure. Some of these laws rule out certain
pricing options whereas others include new possibilsuch economies may be triggered by heterogeneity
ities, and these effects are discussed in the appropriate
among consumers, firms, or elements of the product
place. The laws are not always fully explicit, but the
mix. The pricing strategies can be broadly classified
general motivation of the laws and the spirit in which
into three groups based on which of these three factors
affects a firm's use of shared economies: differential
they have been interpreted by the courts indicate that
pricing, whereby the same brand is sold at different no strategy should reduce the impact of competitive
prices to consumers; competitive pricing, whereby forces unless it is to the benefit of consumers (Areeda
prices are set to exploit competitive position; and 1974; Scherer 1980).
product line pricing, whereby related brands are sold
at prices that exploit mutual dependencies. The pricing objective of the firm thus constitutes the first dimension on which this classification scheme is con-
Differential Pricing Strategies
The price strategies discussed here all arise primarily
because of consumer heterogeneity, so that the same
The second dimension is the characteristics of
product can be sold to consumers under a variety of
consumers. Again there are three categories of inter- prices. The three strategies discussed refer to conest. First, at least some consumers are assumed to have sumer heterogeneity along three dimensions: transsearch costs. That is, consumers do not know exactly action costs that motivate second market discounting,
which firm sells the product they want and they have demand that motivates periodic discounting, and search
structed.
Beyond the Many Faces of Price / 147
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~~~~~~~~~~~~~~~~~~~~, , ,,_
TABLE 1
Taxonomy of Pricing Strategies
Objective of Firm
Characteristics of Vary Prices Among Exploit Competitive Balance Pricing Over
Consumers Consumer Segments Position Product Line
Some have high search Random discounting Price signaling Image pricing
costs
Some have low reservation Periodic discounting Penetration pricing Price bundling
price Experience curve pricing Premium pricing
All have special transaction Second market discountin
costs
TABLE 2
Comparison of Pricing Strategies
Differential Pricing Competitive Pricing Product Line Pricing
Penetration
Second
and
Experi-
Market Periodic Random ence Curve Price Geographic Price Premium Complemen-
Criteria Discounting Discounts Discounts Pricing Signaling Pricing Bundling Pricing tary Pricing
Characteristic of
price strategy
varies systematically over:
Consumer
segments
Yes
market
Product mix
No
No
Competitors in
Characteristics of
consumers
Yes
No
No
No
No
Only some
High trans-
with low
action
Yes
No
High search
Some with
costs:
low reser-
some un-
vation
reserva-
physically
tion price: informed price:
about
price senprice sensitive segprice
sitive seg-
segments
No
No
No
No
Yes Yes Yes No No No
No No No Yes Yes Yes
costs:
separated
No
ment
ment
Only some
High search High trans-Some prefer
one prod-
some un- costs:
uct, oth-
prefer basic prod-
informed geographion quality; cally dis-
ers, an-
ucts at
other:
low prices
prefer kets
high qual-
ric demand
costs: portation
uninformed tinct mar-
High trans-
action
costs: risk
aversiveness or
store or
asymmet-
brand
loyalty
ity
Product and cost
characteristics
Unused ca- Economies
Economies
unused
of scale or
unused
capacity
capacity
pacity of scale or
Economies Signaling
experience, higher
or unused costs or
capacity suboptimizes or
cheats on
quality
Higher pro-
Perishable
adjacent
occasion
duction
costs in
of scale or firm has
Patents,
Joint econ-
product or
purchase
omies of
superior
technology
scale
across
products;
market;
features
with low
cost increase relative to
economies
of scale or
unused
capacity
price increase
Variants
Generic pricing,
dumping
Price skim- Variable
ming, price merpeak-load chandispricing, ing, centsprice dis- off, cou-
Limit pricing Reference
crimina- pons
pricing
FOB, base
point, uniform,
zone, and
freight
pricing
Mixed bun-
dling, pure
components,
pure bun-
dling
- Captive pricing, twopart pric-
ing, loss
leadership
tion, priority pricing
Relevant legal con- Explicit price
straints discrimina-
ExplicitExplicit
priceprice Predatory
discrimina-
tion illegal
tion illegal
discrimina- pricing il-
tion illegal legal
- Price collu-
sion, explicit price
discrimina-
tion, pred-
Explicit price
discrimination,
pure bundling illegal
atory pric-
ing illegal
148 / Journal of Marketing, October 1986
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- (Minimum)
retail price
mainte-
nance ille-
gal, tie-ins
illegal
costs that motivate random discounting.' These conditions enable a firm to discriminate implicitly in the
as students, children, or new members.
can meet specific defenses (Scherer 1980, p. 572;
Similarly, for some countries the foreign market
represents an opportunity rather than a threat if the
same theory is applied. Often a firm's selling price or
even current average cost in the home market may be
higher than the selling price in the foreign market.
However, if its variable costs are sufficiently below
the selling price in the foreign market, the firm can
export profitably at a price somewhere between the
Werner 1982). In the consumer market, explicit price
selling price in the foreign market and its variable costs.
Aside from the special motivations for each type of
discounting to be discussed hereafter, discounting in
general has a sales enhancing effect, probably because
consumers overweight the saving on a deal ("the silver lining," Thaler 1985) in relation to the cost still
the latter strategy if the firm's selling price in the for-
prices it charges its consumers. In industrial and
wholesale markets, explicit price discrimination
whereby a firm charges different prices to two competing buyers under identical circumstances is illegal
under the Robinson-Patman Act's (1936) amendment
of the Clayton Act (1914), unless the price-cutting firm
discrimination would lead to the ill-will of consumers.
The term "dumping" is sometimes used to describe
eign market is below its average costs.
The essential requirements for this strategy are that
the firm have unused capacity and consumers have
transaction costs so there is no perfect arbitrage be-
tween the two markets. In terms of profitability, adIf the product were regularly at the discounted price, ditional revenues from the second market should exceed all increases in variable and fixed costs and loss
many of these consumers may not buy it at all!
incurred in buying the product at the discounted price.
Second Market Discounting
Consider a competitive firm that sells 100,000 units
of a product at $10 each, when variable costs are $1
and fixed costs are $500,000 for a capacity of 200,000
units. The firm gets a request to sell in a new market
such that there will be a negligible loss of sales in
the first market and a negligible increase in fixed or
variable costs. What is the minimum selling price the
firm should accept?
This is a classic problem in incremental costing
and the solution is well known. The minimum ac-
of profits from the first market. Note here that the first
market provides an external economy to the second,
because the latter market gets goods at a lower price
than it would otherwise. (For this reason some economists are not critical of dumping. Others, however,
stress that there may be long-term damage to the foreign economy from lost wages and production facilities.) The second market provides neither an economy nor a diseconomy to the first in the short run.
Periodic Discounting
ceptable price would be anything over $1, because anyConsider a firm faced with the following pricing
price over variable costs would make a contribution problem. Average economic costs2 are $55 at 20 units
to this ongoing business. Generics, secondary de-and $40 at 40 units. There are 40 consumers per period that are interested in its product. Half of them
mographic segments, and some foreign markets pro-are fussy and want the product only at the beginning
vide opportunities for profitable use of this strategy.of each period even if they have to pay $50 per unit.
Often pioneering drugs are faced with competition from The other half are price sensitive and would take the
product at any time but will pay no more than $30
identical but much lower priced generics after the ex-per unit. At what price should the firm sell its prod-
piry of the patent. The pioneering firm has the options
uct?
of either maintaining its price and losing share or
Initially it may seem that the firm cannot bring the
dropping price and losing margin. The relevant stratproduct to market profitably because costs exceed acegy would be to enter the generic market segment with
ceptable prices for each segment. However, in effect,
an unbranded product and arrest loss of sales to that
the firm can produce and sell profitably if it exploits
segment without either foregoing margin or position
the consumers' heterogeneity of demand by a strategy
in the branded segment. The same principle also holds
of periodic discounting. It should produce at the level
for a firm changing to a mixed brand strategy after
of 40 units per period at a cost of $40 per unit, price
selling under a manufacturer brand only or a private
at $50 at the beginning of each period, and systemlabel brand only. A second illustration of this strategy
atically discount the product at the end of the period
is the discounts to secondary demographic markets such
to $30. In this way it would sell to the fussy con-
sumers at the beginning and to the rest at the end of
each period. Note that its average selling price is $40,
'There are also other motivations for discounting, the most common
equals its average economic cost.
being damaged goods, overstocking, or quantity purchases. These which
discounts are not considered pricing strategies because they are merely
adjustments for costs, often of an ad hoc nature. The term "price
discrimination" has been used in the literature very broadly to mean
2The term "average economic cost" is used to mean all costs, procharging different customer groups prices not proportionate to costs
duction and marketing, fixed and variable, plus acceptable profit difor the same or related products. It would cover almost all the stratvided by number of units.
egies discussed here (Cassady 1946a,b; Monroe 1979; Scherer 1980).
Beyond the Many Faces of Price / 149
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This is the principle often involved in the temporal
markdowns and periodic discounting of off-season
fashion goods, off-season travel fares, matinee tickets, and happy hour drinks, as well as peak-load pricing for utilities (Hirshleifer 1958; Houthakker 1951;
Steiner 1957; Williamson 1966). Similarly, this is the
principle involved in the discounting of older models
(Stokey 1981), the priority pricing of scarce products
(Harris and Raviv 1981), and the strategy of price
skimming, first suggested as one alternative for new
products by Dean (1950a). Because of the circum-
stances in which this discounting strategy has been
used, it often is referred to by different names. How-
ever, a more general label would be "periodic discounting," because of the essential principle under-
lying this strategy: the manner of discounting is
predictable over time and not necessarily unknown to
consumers (unlike random discounting discussed next)
and the discount can be used by all consumers (unlike
second market discounting).
An interesting issue in periodic discounting is that
both segments of the market provide an external economy to each other.3 The first segment that pays the
higher price can be viewed as providing a sort of
"venture" price to the firm to produce the product,
whereas the second segment can be viewed as providing a "salvage" price to the firm for unsold items
at the period's end. This intuition suggests that, even
if the demand for the product is not exactly known,
a strategy of pricing high and systematically discounting with time is likely to ensure that the firm covers
its costs and makes a reasonable profit. However, the
pays $40 for the product. Then on average a consumer who searches and is informed saves $10 (40
- 30). Hence consumers whose opportunity cost of
time is more than $10 should not shop and the rest
should. Let us assume that at least some consumers
search and others buy randomly. What strategy should
the firm with an average economic cost of $30 adopt?
The answer is a strategy of random discounts, which
involves maintaining a high price of $50 regularly an
discounting to $30. However, the manner of discount
ing is crucial. It should be undiscernible or "random
to the uninformed consumers and infrequent, so tha
these consumers do not get lucky too often. The un
informed consumers will not be able to second gues
the price; they will buy randomly, usually at the hig
price. In contrast, the informed will look around or
wait until they can buy at the low price. In this wa
the firm tries to maximize the number of informed at
its low price instead of at a competitor's low price,
while maximizing the number of uninformed at its high
rather than its low price. Research on the intransitivity
of preferences indicates some interesting twists to the
appeal of discounts and coupons. First, searchers are
likely to oversearch. They spend more time shopping
than is justified by their gains, the result of what Thaler
(1980) calls the "endowment effect." The real saving
from the discounts is overweighted in relation to the
opportunity cost of time. In contrast, nonsearchers are
likely to undersearch for high cost products. This behavior can be explained by the psychophysics of pric-
ing (Thaler 1980). Consumers relate the benefits of
search to the cost of the good rather than to the cost
of the time it takes to search.
first segment provides a greater external economy than
Most discounting today by specialty stores, de-
the second, because it bears more of the production
partment stores, services, and especially supermarkets
costs.
Random Discounting
is of this type (referred to as "variable price merchandising" by Nelson and Preston 1966; Preston
1970). Out-of-store coupons or features are of this type
Consider a firm that has a minimum average eco- unless motivated by periodic discounting, inventory
nomic cost of production of $30. Assume a distri- buildup, or damaged goods.
bution of prices for the same product between $30
The vast volume of business in this category has
and $50 because there are several other firms with
increased
the importance of understanding the issues
other cost structures and $50 is the maximum coninvolved. A static model of interfirm price variation
sumers will pay for it. It takes one hour to search for
the lowest price, $30. If a consumer does not search
due to consumer search costs first was developed by
but buys from the first seller, he/she may if lucky
Salop and Stiglitz (1977) in their well-known piece,
get a $30 seller but if unlucky may get a $50 seller.
Further, assume consumers' opportunity cost of time
ranges from $0 to well over $20 per hour. What is
the best shopping strategy for consumers and the best
pricing strategy for firms? For consumers, the prob-
lem is fairly simple. Let us assume that the distribution of prices is such that on average a consumer
who does not search and is uninformed about prices
3The discussion of welfare applies only to the competitive case as
in the example described. Some of the applications of this strategy
cited above have been to the monopolistic case, in which situation
the price sensitive buyers are the primary beneficiaries. However, as
the example illustrates, monopoly is not a necessary condition for periodic discounting, though some authors mistakenly say so.
"Bargains and Ripoffs." Varian (1980) developed a
dynamic model of random price variation by each firm,
similar to the mechanism described in the last ex-
ample. Since then a whole body of literature has developed pursuing various ramifications of this strat-
egy. The basic condition for this strategy is
heterogeneity of perceived search costs, which enables firms to attract informed consumers by discounting. All consumers know there is a distribution of prices
and have the same reservation price. However, for high
income individuals hunting for the lowest price may
not be worth their time. For others the opposite holds.
150 / Journal of Marketing, October 1986
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The individual firm should adopt a strategy of random discounts if the increased profit from new informed consumers at the discounted price exceeds the
cost arising from the uninformed buying at the discounted price plus the cost of administering the discount (see McAlister 1983 and Neslin and Shoemaker
1983 for profitability models).
It is interesting to examine the implications of this
strategy. First, note that the uninformed consumers
provide a diseconomy to other uninformed consumers
by currently pricing below com
market and thus driving them o
is a strategy of pricing low to h
with the sole objective of establ
conditions and subsequently rais
tice is illegal under Section 2 of
and to informed consumers. Inefficient firms that pro-
the price mechanism developed by
duce above $30 or efficient firms that price above $30
can exist because some consumers do not search. As
pricing for adjacent market segm
a result, prices vary, so that the informed must search
for the lowest price. Similarly, the average price paid
by the uninformed is higher as the proportion of uninformed increases. In contrast, the informed provide
an external economy to the uninformed by encouraging the existence of low price firms, thus lowering
the average price the uninformed pay. From a public
policy perspective, all consumers as well as the efficient firms would benefit if some mechanism could
be provided to disseminate price information in the
market at relatively low cost.
the Robinson-Patman Act of 1
have laws that forbid a firm fro
for extended periods of time. A
signaling,6 whereby a firm explo
strategy, geographic pricing,
Penetration Pricing
Consider the periodic discounting
following two modifications: the ec
at 40 units is $30 and other compe
enter the market with the same co
should the firm price now?
The firm could still adopt a st
discounting, producing 40 units
and selling to the first set of co
the second at $30. Now, howeve
cost price is $30, it would mak
$10 per unit. Given this scenario, a
Competitive Pricing
This category covers a group of pricing strategies based
primarily on a firm's competitive position. Penetration pricing and experience curve pricing attempt to
exploit scale4 or experience5 economies, respectively,
4"Economies of scale" refers to the decline in average total costs
with scale. This effect is generally attributed to superior technology
or more efficient organization or cheaper purchases (Mansfield 1983;
Palda 1969). Average total costs also are believed to increase beyond
a certain point because of the difficulty of managing very large op-
erations.
5"Experience curve" or "experience economies" refers to the decline in average total costs in constant dollars with cumulative volume
(see Figure 1). Define Cl as average costs at volume V1, let V, hold
for n, periods; define C2 as average costs at volume V2, let V2 hold
for n2 periods. Then economies of scale are captured by the elasticity
E, defined by
C2 YlV2V
be willing to come in and sell th
an average price that is less tha
$30. To preempt competition and
firm would have to sell at $30 t
The same logic underlies pen
strategy first proposed for ne
(1950a,b, 1951) as an alternative
ing (or price skimming in Dea
riodic discounting is obviously p
even if its costs are lower than
the modified example here), a
immediate threat of competitive
used for new products, penetrat
V2 = VI, and when V2 # V, may still be d
n, the time parameters. The strategic imp
curve were best documented and populari
ing Group (1972), though the issue was
earlier (e.g., Alchian 1959; Arrow 1962
Keachie 1964). More recent theoretical c
and economies of experience by the elasticity
E, defined and
by
Robinson
Lakhani (1975), Dolan and
(1983).
The
decline in costs due to exper
- n2 nl - e
C, I V2 V1 (1)
C V2i + Vli
C2
_I
,1
(2)
Cl
i=
number of factors, most importantly labo
cess technology (see Abell and Hammon
a complete list). Two important issues to b
are that economies of experience can occu
shown above) and that their decline gener
stantly with cumulative volume. Beca
n2
V2
nli V n, V,
+
creases at a faster rate
in the first few ye
n,VVI
(e)n2V2t
history, experience effects are most not
Because of competitive pressures, prices
6The term is used here to mean firms sig
Note that change in the scale of operation, measured by V2/VI, affects
by price.
It must
be distinguished
from
the value of E, and Ee, which are therefore
related.
However,
E, does
strategies
firms even
may if
use to "implic
not cause Ee or vice versa. Moreover, unlike
E,, Eethat
is defined
Beyond the Many Faces o
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FIGURE 1
Effect of Experience Economies on Pricing
Strategy
strategy for firm A would be to price aggressivel
even below current costs, at $3.75. This strategy h
two advantages. First, it will be uneconomical for firm
B, C, and D, which may have to leave the mark
$
Firm A is then faced with less rivalry. Second, fi
A can benefit from the share of the others and g
experience more rapidly. Indeed, it would sell a
A
mulative volume of 12,000 units as early as yea
Price
and its costs would have dropped by then to $2 pe
unit. In addition, the low price is likely to encour
more consumers to enter the market, giving firm
an opportunity to exploit economies of scale. A
result the firm will soon be profitable again and to
revenue and profits could be much higher in the
ture. The strategy for the other firms is less clear
general, unless there are other competitive adv
tages, it is inadvisable for the others to start a pr
war as they have a cost disadvantage to firm A.
Experience curve pricing, like penetration pricin
is an alternative strategy to periodic discounting.
this strategy the consumers who buy the product earl
in the life cycle gain an external economy from l
buyers, as they buy the product at a lower price th
1
2
3
4
5
6
YEARS
they were willing to pay. They get this discount, ho
ever, because of economies of experience and activ
or potential competition that forces prices down.
The essential requirements for adopting an exp
rience curve pricing strategy
that experience
served
in
the
growth
of are
discoun
fects are strong, the firm has more experience th
solidation
of
manufacturers
competitors,
and that consumers
are vari
price sensitiv
phase
of
the
life
cycle.
A
Typically, these
conditions occur for nonessential
d
ing
that
has
been
closely
stud
rable goods
in the early or growth
stage, when a r
erature
is
limit
pricing
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strong long-run position. The different sources
new entrants.
economies
for penetration pricing and experience cu
Penetration pricing is relevant only when the
avpricing must be clearly understood, because the ci
erage selling price can or does exceed the minimum
cumstances in which they are applicable are often v
average cost. Other essentials for penetration pricing
similar
strategy are price sensitivity on the part of some
con- but the mechanisms for tracking costs
sumers and the threat of competitive entry. In pricing
pene- products are very different.
tration pricing, unlike periodic discounting, the presence of the price sensitive consumers and of competition
Price
Signaling
provides a benefit to the price insensitive segment,
who can now buy the product at a price lower than
Consider a market in which firms can produce products at two different quality levels, under the conthey were willing to pay.
Experience Curve Pricing
Assume a competitive market with experience effects
as shown in Figure 1. There are four firms (A, B,
C, and D), each with per period volume of 2000 units
but the first having the most experience and average
costs of $3.75 per unit. Current prices are $5 per unit.
Consumers are price sensitive and react immediately
to price changes. What would be a good pricing strategy for firm A?
straint that the minimum average economic cost is
$30 for the low quality product and $50 for the high
quality product. Assume that, to avoid image con-
flicts, each firm chooses to produce only one quality
but may sell at either price, $30 or $50. Let us as-
sume for convenience that there are at least a few
firms selling the high quality product for $50 and the
low quality product for $30. Consumers can easily
find the lowest price (in negligible time), say by a
phone call or consulting a price list. They generally
prefer high quality, but it takes them 1 hour of study
and consulting manuals to tell quality differences. Let
these consumers have a distribution of opportunity
Note that currently firm A makes more profit than
costs of time as in the random discounting example.
the others and that, given the projections, cost deWhat are consumers' shopping strategies and firms'
pricing
clines will be less prominent after year 6. A good
strategies?
152 / Journal of Marketing, October 1986
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Firms can choose among three pricing strategies
(no firm would sell the high quality product at less
than $50). First, they could produce the low quality
product and sell it at $30. Second, they could produce
the high quality product and sell it at $50. Third, they
ports, is another illustration of consumers either buying randomly or using price to infer quality.
There are some other variations of price signaling
that firms can adopt to exploit consumer behavior in
other circumstances. Image pricing, discussed sub-
could sell the low quality product at $50, with the
sequently, and reference pricing are two common ex-
intention that some consumers who cannot tell high
quality but want it will be fooled. The latter strategy
is called "price signaling." Consumers also have three
strategies. Those with low costs of time could study
quality and buy the high quality product at $50. Those
amples. In reference pricing, a firm places a high priced
with high costs of time could adopt a risk aversive
strategy and always buy the low priced product, or
could buy the high priced product with the hope of
though consumers who infer quality may buy it. Monroe and Petroshius (1981) document empirical support
for consumers' use of reference prices. Kahneman and
Tversky (1979) provide the rationale for this behavior
in what they call the "isolation effect": a choice looks
getting a high quality product.
Extensive research in marketing has indicated that
consumers may use price to infer quality (Monroe and
Petroshius 1981; Olson 1977), but the equilibrium
properties of such behavior in real markets have only
recently been worked out (Cooper and Ross 1984; Tellis
1985). Three underlying conditions are necessary for
price signaling to be an equilibrium strategy. First,
consumers must be able to get information about price
more easily than information about quality. Second,
they must want the high quality enough to risk buying
the high priced product even without a certainty of
high quality. This motive is especially necessary because consumers underweight the value of uncertain
events (the "certainty effect," Kahneman and Tversky
1979). Third, there must be a sufficiently large number of informed consumers who can understand quality and will pay the high price only for the high quality product. This third condition ensures a sufficiently
positive correlation between price and quality so that
those uninformed consumers who infer quality from
price find it worthwhile to do so on average.
The issue of pricing in the presence of quality
variation and asymmetric consumer information is
typical of durable goods, though not uncommon for
services and nondurable goods where it may involve
less risk. For durables, quality is an important attribute yet consumer information on quality is low because of the difficulty of determining quality by inspection, the large number of brands, and the high
innovation rate relative to repurchase time (Thorelli
model next to a much higher priced version of the
same product, so that the former may seem more at-
tractive to risk aversive uninformed consumers. The
latter model serves primarily as a reference point,
more attractive next to a costly alternative than it does
in isolation. The strategy is sometimes adopted by retailers of durable goods. A more common variation is
for firms to state that a product is on sale, with the
"regular" sticker price adjacent, when actually the
regular price is on for less than half the time. To minimize deception on the part of firms, several states
now define minimum time periods for the regular price.
In this context it is worthwhile to consider the wel-
fare aspects of such strategy. The most important point
is that all consumers would be better off if a mechanism could be devised to provide information on quality
to the market at low cost. Second, those firms that
sell the low quality product for the low price and those
that sell the high quality product for the high price
would also be better off if information on quality were
disseminated, because they would not lose customers
to firms that sell the low quality product at the high
price. The last category of firms would vanish. There-
fore, heterogeneous search costs on quality create
benefits for some firms at the expense of others. Third,
there could be many reasons for firms to sell the low
quality product at the high price. Some could adopt
such a strategy accidentally, others because they are
inefficient producers, and still others because they intentionally cheat. Fourth, consumers who use price to
infer quality may not necessarily be worse off. To the
extent that obtaining information on quality is difficult
for them, the correlation between price and quality is
and Thorelli 1977). One result is the possibility of
positive, and they prefer the high quality product, they
consumers using price to infer quality. However, another result is that the correlation between price and
quality is low (Tellis and Wernerfelt 1985) and con-
may profitably use the high price to infer quality. In
such a situation there is an external economy from the
informed to the uninformed who gather information
via the price mechanism.
sumers in a market, who do not know the quality of
competitive brands but find quality important. The
purchase of a high priced wine by the casual buyer is
a good example. The success of several high priced,
inferior quality brands, as reported by Consumer Re-
strategy of random discounting. Both are used in situations in which consumers have heterogeneous search
costs, but differ on other dimensions. For price signaling, there must be quality differences among products, information on quality must be more scarce than
sumers may often be mistaken. Price signaling is
probably most common for new or amateur con-
Note that price signaling is independent of the
Beyond the Many Faces of Price / 153
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that on price, and quality must be important to consumers; further, each firm need adopt only one price
level always and at least some efficient firms are necessary to establish consumer trust in the price mech-
anism.
Geographic Pricing
Consider two adjacent markets X and Y, of 20 con-
sumers each, where all consumers have a reservation
price of $50 for the product and incur a cost of more
than $10 for purchasing the product in the adjacent
market. A firm operating in market X is faced with
free competitive entry and the following cost structure: the economic cost price for the product is $40
at 20 units and $30 at 40 units, with an added cost
of $10 per unit to ship the product to the adjacent
market. The cost of production is higher in market
Y. What pricing strategy should the firm adopt?
The firm should produce 40 units and sell to both
markets at an average economic cost price of $35 ($30
+ $10 x 20 - 40). To avoid competitive entry, the
firm must set the average selling price over both markets at $35. However, the firm has several options for
pricing the product to the two markets, called "geo-
graphic pricing strategies," depending on the competitive condition in market Y.
If the competitive price in market Y is above $40,
the firm can sell the product at $30 in market X and
$40 in market Y to reflect the transportation costs of
$10 per unit to the latter market. Because price equals
average costs, the price would be profitable yet ward
off entry. This strategy is called "FOB." If the competitive price in market Y is a little over $35, the firm
could sell at $35 in both markets and still achieve the
same competitive effect. This strategy is called "uniform delivered price." Zone pricing is a strategy be-
tween the two when more markets are involved. When
using zone pricing, the firm would charge different
prices for different zones depending on the transportation costs to each, but within each zone it would
charge one price, the average of all costs to all points
in that zone. Basing point is still another variation of
uniform delivered price; the firm chooses a base point
for transportation costs to points other than the point
of production.
If the competitive price is a little over $30 in market Y, the firm could sell profitably to both markets
by pricing at $30 in market Y and $40 in market X.
This strategy is called "freight absorption cost," because market Y bears none of the transportation cost
it incurs for the product. In a monopolistic situation,
the firm may absorb the transportation cost or pass it
on to consumers in market X. However, in a com-
being between price penetration and second market
discounting (see Table 1). As in price penetration, in
geographic pricing the firm seeks to exploit economies of scale by pricing below competitors in a second market segment. As a result, the second market
generally provides a benefit to the first. However, in
geographic pricing the two segments are separated by
transportation costs rather than by reservation prices.
In this respect, geographic pricing is similar to the
strategy of second market discounting, where two
markets are also separated by transaction costs. In
second market discounting, however, the firm explicitly attempts to exploit the differences between the two
segments, providing considerable savings to the second market. By contrast, in geographic pricing the firm
attempts to minimize differences between the two
markets by sharing or "absorbing" the transportation
costs between them. In spite of these transportation
costs and because of economies of scale, the second
market does not provide a diseconomy and generally
provides an economy to the first.
Some of the geographic pricing strategies discussed may be illegal in certain circumstances. Three
general principles can be used to guide policy in this
respect. First, a firm should not discriminate between
competing buyers in the same region (especially in
zone pricing for buyers on either side of a zonal
boundary) because such action may violate the Robinson-Patman Act of 1936. Second, the firm's strategy should not appear to be predatory, especially in
freight absorption pricing, because such a strategy
would violate Section 2 of the Sherman Act of 1890.
Third, in choosing the basing point or zone pricing
the firm should not attempt to fix prices among competitors because such action would violate Section 1
of the Sherman Act.
Product Line Pricing Strategies
Product line pricing strategies are relevant when a firm
has a set of related products. In all of the cases considered, the firm seeks to maximize profit by pricing
its products to match consumer demand. However, in
each of these strategies, the nature of either the demand or the cross-subsidies varies among the firm's
products. A firm uses price bundling when it faces
heterogeneity of demand for nonsubstitute, perishable
products. A firm uses premium pricing when it faces
heterogeneity of demand for substitute products with
joint economies of scale. Image pricing is used when
consumers infer quality from prices of substitute
models. Complementary pricing (including captive
petitive market such as this one, all the transportation pricing, two-part pricing, and loss leadership) is used
when a firm faces consumers with higher transaction
costs are borne by market X.
costs
for one or more of its products.
Geographic pricing strategies can be thought of as
154 / Journal of Marketing, October 1986
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Price Bundling
Assume a distributor of two films, "Romancing the
Stone" and "Places in the Heart," is faced by the
following demand for these films from two movie
houses, Astro and Classic Theatres, that serve the same
market.
Maximum Prices
For:
"Romancing the Stone"
"Places in the Heart"
($'000) Paid By:
Classic Theatres Astro
12
25
18
10
What is the best pricing strategy for the distributor
to adopt if we assume it cannot explicitly discriminate in price or use tying contracts (force a theatre to
buy both movies)?
An explicit price discriminating strategy, charging
each distributor the most it will pay for each movie,
would yield a total revenue of $65K, but this practice
is illegal. Assume the buyers are sufficiently informed
and the products perishable so that differential pricing
by periodic or random discounting is not possible. A
penetration strategy is to price the first movie at $12K
and the second at $10K, but in that case total revenue
is only $44K from both theatres (2 x (12 + 10)). A
"pure components" strategy is to price the first at $18K
and the second at $25K, for a total revenue of $43K.
The best solution is to price the first movie at $18K,
the second at $25K, and offer both at $28K for a total
revenue of $56K. Note that Classic Theatres will take
both movies at no more than $37K and Astro at no
more than $28K. Thus both theatres will accept the
package for $28K, which is the profit maximizing
strategy. This strategy is called "mixed bundling" to
contrast it with a pure bundling alternative in which
case only the package is available for $28K. Pure
bundling may be illegal as a tying contract (Scherer
1980; Werner 1982). The mixed bundling strategy has
the added advantage of creating the reference price
effect: the package is offered at a much lower price
than the sum of the parts.
The economics of price bundling was first analyzed by Stigler (1968) and further developed by Ad-
ams and Yellen (1976), Telser 1979, Spence (1980),
Paroush and Peles (1981), Phillips (1981), and
Schmalensee (1984). Examples of such a strategy are
the lower prices for season tickets, buffet dinners,
packages of stereo equipment, and packages of op-
in the purchase of durable goods is the purchase occasion, at which time it is in the interest of sellers to
maximize revenues within consumers' demand sched-
ule by price bundling. For example, consumers may
buy automobiles once in 3 or 5 years. Each of those
times is an opportunity for a firm to sell a maximum
number of options by appropriate pricing.
The strategy of price bundling must not be confused with that of "trading up," in which consumers
are persuaded to buy more or higher priced models
than they originally intended. As the numerical example shows, a passive strategy of correctly bundling
the prices of related items is all that is needed to maximize profit. It is also in the interest of consumers to
buy at the price bundle. Thus, all consumers and sellers are better off with the mixed bundling strategy than
with the pure components strategy.7
Premium Pricing
Consider a firm faced with the following pricing
problem. There is free entry and average economic
costs (for production and marketing) are $50 at 20
units and $35 at 40 units. At any volume, it costs the
firm an additional $10 per unit to produce and market
a superior version of the product. Assume that any
fixed costs of marketing two products instead of one
are negligible. Forty consumers per period are interested in its product. Half of them are price insensitive
and want the superior version of the product even if
they have to pay $50 per unit. The other half are
price sensitive and want the basic version of the product but will pay no more than $30 per unit. In what
version and at what price should the firm sell the
product?
As in the periodic discounting example, costs seem
to exceed prices if the firm chooses to sell to only one
segment or at only one price. However, it can solve
its problem by a premium pricing strategy that exploits consumer heterogeneity in demand. It should
produce at 40 units, half of which will be of the superior version, for an average economic cost of $40.
It should sell the basic product for $30 and the premium for $50, for an average selling price of $40, at
which price it is profitable and wards off entry. Relative to its costs, the firm takes a premium on its higher
priced version and a loss on its lower priced version.
However, by exploiting joint economies of scale and
tions on automobiles. The basic requirement for mixed
bundling is nonsubstitute (i.e., conlplementary or independent), perishable products with an asymmetric
demand structure. Because the products are not perfect substitutes, it is possible to get consumers to buy
both (or all). Because the products are perishable, the
differential pricing strategies of periodic or random
discounting are not feasible. The perishability of food
items or seats for shows is apparent. The perishability
7In this example all cost issues are ignored, which could lead to at
least three scenarios. One is a monopolistic situation in which the
costs are sufficiently low that any of the pricing options would be
profitable. The second is a cost situation in which only the mixed
bundling option would be profitable. This then would hold either for
monopoly or pure competition. The third is a situation in which costs
are sufficiently low that any option would be profitable, but there is
free entry so firms would use only the penetration pricing strategy
($10 for the first and $12 for the second movie) which is always the
preferable option for consumers.
Beyond the Many Faces of Price / 155
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ferences by pricing substitutes differently, whereas in
using price bundling the firm seeks to bridge segment
differences by selling at the lowest common package
price. The difference between premium pricing and
price signaling is that in the latter each firm produces
only one type of product, which is sold at different
prices to differently informed consumers. In the former, a firm produces two types of products to exploit
the pricing of some nondurable goods such as basic
joint economies of scale and markets them to heterand specialty breads or common and exclusive perogeneous but fully informed consumers.
fumes. A similar strategy is used for the pricing of
The welfare aspects of premium pricing parallel
alternate service plans such as term and preferred inthose of periodic discounting. The main difference is
surance policies, front and rear auditorium seating, and
deluxe and basic hotel rooms. As is well known in
in the fact that in periodic discounting the strategy is
carried out for any one brand and the price variation
the case of autos, firms do not find their lower priced
is over time; in premium pricing, the strategy holds
models "very profitable," but typically make their
for any one time and the price variation is over related
profits on the premium versions. Often these premium
models. As in the periodic discounting example, each
versions differ from the basic only by features and
segment here provides an external economy to the other;
options, whose production costs generally are not high
however, the advantage to the price sensitive segment
enough to justify the higher markup. Why does the
the heterogeneity of demand, it can profitably produce
and sell the product.
Premium pricing applies in a large number of circumstances in markets today. It is used in the pricing
of durable goods, typically appliances, for which multiple versions differing in price and features cater to
different consumer segments. It also could apply for
is greater because they buy a product below its avfirm produce the lower priced version and why do other
erage cost.
firms not enter the market with only the higher priced
version? The preceding explanation is based on hetImage Pricing
erogeneity in demand and joint economies of scale.
Notice that the firm, by using a premium strategy,
By image pricing, a firm brings out an identical versells at exactly its economic cost price, which is comsion of its current product with a different name (or
patible with a competitive market with free entry.8 No
model number) and a higher price. The intention is to
firm could enter and profitably produce only for the
signal quality. This strategy is between price signaling
price insensitive segment.
and premium pricing in that the demand characterisPremium pricing also is used in retail, wheretics
it are similar to those of price signaling and the cost
enables retailers to carry some otherwise unprofitable
aspects are similar to those of premium pricing (see
products desired only by select segments. The pricing
Table 1). Thus the firm uses the higher priced version
of byproducts, though generally considered different
to signal quality to uninformed consumers and uses
from premium pricing, involves the same principle.
the profit it makes on the higher priced version to subA byproduct may carry a cost of disposal to the firm,
sidize the price on the lower priced version. Image
and this may add to the price of the main product. In
pricing differs from price signaling in that the prices
some cases a byproduct may be worth much more than
are varied over different brands of the same firm's
it costs the firm to produce, and this advantage can
product line. It differs from premium pricing in that
be used to subsidize the price of the main product.
differences between brands are not real but only in the
The essential difference between premium pricing
images or positions adopted. This strategy may acand price bundling is that the former applies to subcount for some of the variation in prices of alternative
stitutes and the latter to complementary products. Both
brands of cosmetics, soaps, wines, and dresses that
require heterogeneity in demand, but in using prediffer only in brand names.
mium pricing the firm tries to emphasize segment dif-
Complementary Pricing
Complementary
8In some markets oligopolistic or monopolistic situations exist,
in
which case a firm can market profitably only to the premium segment.
gies-captive
However, there are several reasons for marketing to both segments.
ership.
First, dealers, especially of high priced durables, are more likely to
accept an exclusive dealing strategy if the manufacturer has a com-
pricing includes three related stratepricing, two-part pricing, and loss lead-
plete line of products. Second, with a complete line it is easier toCaptive pricing: Consider a firm that produces a du-
develop brand loyalty, especially as consumers tend to buy better ver-rable good whose economic cost price is $100 and
sions of durables with each subsequent purchase. Third, a low priced life span is 3 years. During that time the product needs
basic version may be used to attract consumers into stores, and thensupplies that have an economic cost price of $.50 a
motivate them to buy the higher priced versions. Since an early notemonth. All consumers are willing to pay at most $50
for the product and $2 per month for supplies. Asby Dean (1950b), there is an extensive literature on alternative theoretical models for premium pricing. However, without formal em- suming all buyers will keep on purchasing supplies
pirical analysis it is not possible to determine which model is relevantregularly and the discount rate for future earnings is
zero, what pricing strategy should the firm adopt?
or what alternatives need to be developed (Katz 1984).
156 / Journal of Marketing, October 1986
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Under the given assumptions, the firm would do
well to price the basic product at $50 and the supplies
at $2. The accumulated premium over the life of the
product would equal $54 (3 x 12 x $1.5) and would
more than compensate for the loss at the time of selling the basic product. In actually computing the minimum price of the product, the firm would have to
include as costs a discount for future earnings and the
risk that consumers would not purchase supplies. The
firm also needs to consider the potential gains from
this strategy. For example, consumers may not view
the basic product they purchased as a sunk cost, and
may try to "recover" their investment by buying the
accessories and using it (the "sunk cost effect," Thaler
1980). Alternatively, they may get involved in the
product and use it more than expected. This possibility has led some authors to label this strategy "captive
pricing" (e.g., Kotler 1984, p. 529).
An interesting question is whether consumers would
buy the package with the product at $100 and the accessories at $.50 if they were informed they were incurring the same cost the other way around. Probably
they would not. A consumer may be reluctant to incur
a big immediate investment (a certain loss) for an un-
certain future satisfaction ("the certainty effect,"
Kahneman and Tversky 1979), or may not have the
funds for the purchase. In either case, the consumer
has a "transaction cost," which the firm apparently
absorbs.
broken into a fixed fee plus variable usage fees (e.g.,
the pricing by telephone companies, libraries, health
or entertainment clubs, amusement parks, and various
rental agencies). The economics of two-part pricing
has been studied by several researchers, more recently
by Schmalensee (1982).
In retailing, the corresponding strategy is called
"loss leadership," and involves dropping the price on
a well-known brand to generate store traffic. The drop
in price should be large enough to compensate consumers for the transaction cost involved in making the
extra trip, switching from their normal place of purchase, or foregoing the cheaper basket of prices they
pay at the alternative store. However, in many cases
the drop in price may not be exactly that high, primarily because consumers may see the price drop as
a real gain while underestimating the transaction costs
(Thaler 1985). Nevertheless, to ensure a success in
this strategy, retailers normally feature several "super
buys," nationally branded products sold below cost.
Manufacturers of nationally branded products have
always disapproved of loss leadership for two reasons. First, a product that is often available on discount may give consumers the impression that the
quality is inferior. Second, specialty stores that depend on the branded products for their source of income may lose sales to discount stores and therefore
cease to distribute the product. Manufacturers have
sought to restrain loss leadership by a strategy of retail
The chief restraint on the use of captive pricing
for durable goods and accessories is that there are often
no major shared economies in the manufacture of the
basic product and its accessories. Thus, if the premium on the accessories is too high, marginal producers of the accessories may enter the market and
drive down prices. In some circumstances, as in the
automobile industry, the accessories are themselves
produced by smaller firms. Consequently this strategy
has limited importance unless consumers are source
loyal and would like to buy supplies from the original
source even at a higher price. In other circumstances,
manufacturers hold patents or are the only source of
the technology for the production of the supplies. In
this case captive pricing is crucial for the success of
the product. Bain (1956) refers to the superior position of these firms as "absolute cost advantages." In
no circumstances may the firm bind the buyer to purchase the supplies from it. Such a strategy of tying
contracts may be illegal under the Sherman Act of 1890
price maintenance. However, (minimum) retail price
maintenance is now illegal under a federal statute, the
Consumer Goods Pricing Act of 1975 (Scammon 1985;
Scherer 1980; Werner 1982).
The reverse case, maintaining maximum retail
prices, is not illegal (Scammon 1985). This situation
occurs when a retailer charges too high a price for a
branded product over which it has exclusive or selective distributorship. In such a case the retailer may
suboptimize the manufacturer's profits (Machlup and
Taber 1960). The manufacturer can control this practice by advertising the "suggested (maximum) retail
price" and then enforcing such a price during the advertizing period. High priced durable goods such as
appliances and automobiles are examples of products
for which this strategy is used.
Complementary pricing is similar to premium
pricing in that the loss in the sale of a product is covered by the profit from the sale of a related product.
However, there are two important distinctions. First,
premium pricing applies to substitutes and comple-
or the Clayton Act of 1914 (Burstein 1960; Scherer
mentary pricing to complements. Second, comple1980; Werner 1982).
mentary pricing requires variation in transaction costs
The well-known examples of captive pricing are
razors and blades, cameras and films, autos and spare over the products whereas premium pricing requires
parts, and videos or computers and software pack- variation in preferences over consumer groups. As a
result there is no sharing of economies among cusages. In the case of services, this strategy is referred
to as "two-part pricing" because the service price is
tomer groups in complementary pricing.
Beyond the Many Faces of Price / 157
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An Integration and Comparison of
Strategies
The preceding discussion demonstrates the variety of
pricing strategies available to a firm. The theory underlying some of them has only recently been analyzed in the economics literature, though they all have
been discussed in some form in the marketing discipline. A major contribution of this article is that all
these strategies are discussed on the same basis and
are compared in a manner that is theoretically rich yet
typologically simple. The most important contribution
is that the strategies are shown to have a common denominator-shared economies. This proposition makes
possible an enlightening classification of the strategies
and a summarization of their underlying principles.
a greater economy to the price insensitive segment. In
geographic pricing, the lower the competitive price in
the adjacent market, the higher the price and hence
the greater the diseconomy borne by the home market.
In the class of product line pricing strategies, the
shared economies are primarily over the production or
marketing of the products in the line. In image pricing, premium pricing, and complementary pricing, one
product is sold at a "loss" which is then recovered
from the higher price of a complementary product sold
to the same segment or of a substitute product sold to
a less price sensitive segment. In price bundling, there
is an asymmetric demand by two consumer segments
over two nonsubstitute products. A firm using the optimum price sells both products at the lower of the
joint reservation prices. In this way the firm sells one
The classification is based on two dimensions: the obproduct below the acceptable price of one segment,
jective of the firm in exploiting these shared econ- but compensates by selling both products to both segments. In all of these cases the creative dimension of
omies and the consumer characteristics necessary for
each strategy (see Table 1).
pricing is to identify the source and pattern of shared
The relevance of the central idea of shared econeconomies that can be exploited for the benefit of the
omies is summarized here with respect to Table 1. Aindividual firm and its consumers.
more detailed explanation is given in the description Besides delineating the classification scheme, this
of the welfare aspects of each strategy. In the class article compares and contrasts the various strategies
of differential pricing strategies, one product is sold
with closely related alternatives. In addition, a sumto two segments at different prices. By this means the
mary comparison based on five criteria is presented
in Table 2. These criteria are the characteristics of the
firm exploits economies of scale and each segment
strategy; the necessary consumer, product, and cost
provides an economy to the other. In addition, in seccharacteristics; the relevant legal constraints; and the
ond market discounting and periodic discounting, one
segment buys the product at a higher price and in sovariants of this strategy. The table demonstrates that
doing incurs more of the production costs so that the
the multiplicity of names distracts from the essential
product can be made available to the other segment similarity among the strategies and the common prinat its lower acceptable price. In random discounting,ciples that unify them. A small, theoretically based
the searchers ensure that the product is available at aset of labels, like the one suggested here, enhances
understanding and communication on the issues.
lower price at random periods, thus providing a lower
Besides the pedagogical and managerial benefits
average price to the nonsearchers.
from
this presentation of pricing strategies, the theoIn the class of competitive pricing strategies, firms
retical
presentation suggests certain research avenues.
sell one product to one or more market segments at
One
would
be to review and further develop pricing
the same price, but the pattern of shared economies
models based on this classification scheme. Different
is more complex. In price signaling, the searchers
provide an economy to nonsearchers, who can get themodels then could be usefully compared, new uses for
quality they desire (either high or low) at an accept-older models identified, and newer models developed.
Another avenue would be to determine to what extent
able risk of an error just by observing prices. In penthese different strategies are carried out in practice,
etration, experience curve, and geographic pricing, the
two segments provide a simple cost economy to eachthe types of firms that use particular strategies, and
the factors that determine empirical success. A third
other, enabling the firm to exploit economies of scale
or experience. In addition, in penetration and expe- avenue is to determine whether the principle of shared
economies is in fact the main explanation for these
rience curve pricing the common price is that of the
strategies, as is proposed here.
more price sensitive segment, which therefore confers
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-AMA a MEMBER
S
What does being an American Marketing Association member mean to you?
The list goes on and on...
H
* A subscription to Marketing News (26 issues)
* A copy of the Marketing Services Guide & AMA Membership Directory (600+ pages)
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Forbes, Harvard Business Review.
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...and on. Contact the AMA Membership Department and find out about joining one
of the most prestigious organizations in the marketing world.
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160 / Journal of Marketing, October 1986
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AMERICAN
AMRKETING
ASOCIATION
Guidelines for
Toolbox Exercise #2: Pricing
Prepare your Toolbox Exercise #2 in
four+ pages, as a business memo.
Due
3/26
1. Read Gerard Tellis, Beyond the Many Faces of Price: An Integration of
Pricing Strategies, AMA, 1986. Find in CSUEB Library: Search JSTOR
2. Select three specific pricing strategies as described in the article.
3. Then identify and research two additional, distinct pricing strategies
not discussed by Tellis.
4. For each of your five chosen pricing strategies,
- Define in your own words the pricing strategy, and how the pricing strategy is intended to fit
with overall marketing strategy.
- Identify one current example of an application for each of your five chosen pricing
strategies. Your examples may come from our text, other scholarly articles, corporate or
non-profit websites, business journals, advertising and promotion for a product or service.
-Explain, for each of your five example strategies:
a) the product or service offer;
b) your analysis of the pricing strategy, referencing your info sources;
c) impact of the pricing strategy on customers, the brand and competition
- Develop conclusions about the success of pricing strategies you’ve identified.
- Cite references you have used at the end of your Toolbox Exercise.
- Include specific evidence for pricing applications: cite webpage, ad, journal, etc.
- Include photos and/or screen shots to illustrate at least distinct three pricing examples.
Submit assignment on Blackboard
©2020 Jeffrey E. Newcomb Red Widget Strategies
Toolbox Exercise #2: Pricing
Rubric
©2020 Jeffrey E. Newcomb Red Widget Strategies
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