feel somewhat cheated when the prices drop. To avoid negative responses, some firms differentiate their products in some way. Ex: release a new book first in hardcover and later in softcover (cheaper)
B352 Marketing Tues. Oct. 22. 2013. 8 | N a t a s h a P a r k Market Penetration Pricing Market penetration pricing: set the initial price low for the intro of the new product or service. objective is to build sales, market share, and profits quickly Encourages consumers to purchase the product immediately rather than waiting for price to drop. with penetration pricing, profits flow through volume (vs. through margin like price skimming) Experience curve effect many firms expect the unit cost to drop significantly as the accumulated volume sold increases as sales grow, the costs drop, allowing even further reductions in the price. Discourages competitors from entering the market because the profit margin is relatively low. If the costs to produce the product drop because of the volume, new entrants (competitors) later will face higher unit costs, at least until their volume catches up with the early entrant. Drawbacks: 1) Must have the capacity to satisfy a rapid rise in demand — or be able to add that capacity quickly. 2) Low price does not signal high quality . Of course, a price below their expectations decreases the risk for consumers to purchase the product and test its quality for themselves. 3) Bad strategy if some market segments are willing to pay more ; “leaving money on the table.” PSYCHOLOGICAL FACTORS AFFECTING VALUE-BASED PRICING STRATEGIES Understanding the psychology underlying the way consumers arrive at their perceptions, make judgments, and make choices is critical to effective pricing strategies When consumers are exposed to a price, they assign meaning to it by placing it into a category factors that influence this psychological process of evaluating price : 1) Reference price: price against which buyers compare the actual selling price of the product facilitates their evaluation process. o Sometimes, the seller provides an external reference price, a higher price to which the consumer can compare the selling price to evaluate the deal. Typically, the seller labels this price as the “regular/original price” so consumer perceptions of th e “sale price” value of the deal will in crease. o Consumers also rely on an internal reference price to judge a price offering by accessing price info stored in their memory — perhaps the last price they paid or what they expect to pay. o A more complex element of reference prices is the relationship among them: external reference prices influence internal reference prices. When consumers are repeatedly exposed to higher reference prices, their internal reference prices shift toward the higher external reference prices (assuming their initial internal reference price was not too far from it.) consumers will perceive the product to have a relatively lower price, and it thus becomes a better deal in their perceptions.
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