Most companies adjust their basic price to reward customers for certain responses, such as paying bills early, volume purchases, and off-season buying. These price adjustments—called discounts and allowances—can take many forms.

One form of discount is a cash discount, a price reduction to buyers who pay their bills promptly. A typical example is “2/10, net 30,” which means that although payment is due within 30 days, the buyer can deduct 2 percent if the bill is paid within 10 days. A quantity discount is a price reduction to buyers who buy large volumes. A seller offers a functional discount (also called a trade discount) to trade-channel members who perform certain functions, such as selling, storing, and record keeping. A seasonal discount is a price reduction to buyers who buy merchandise or services out of season.

Allowances are another type of reduction from the list price. For example, trade-in allowances are price reductions given for turning in an old item when buying a new one. Trade-in allowances are most common in the automobile industry, but they are also given for other durable goods. Promotional allowances are payments or price reductions that ­reward dealers for participating in advertising and sales-support programs.

Companies will often adjust their basic prices to allow for differences in customers, ­products, and locations. In segmented pricing, the company sells a product or service at two or more prices, even though the difference in prices is not based on differences in costs.

Segmented pricing takes several forms. Under customer-segment pricing, different customers pay different prices for the same product or service. For example, museums, movie theaters, and retail stores may charge lower prices for students and senior citizens. Kohl’s offers a 15 percent discount every Wednesday to “customers aged 60 or better.” And Walgreens holds periodic Senior Discount Day events, offering 20 percent price reductions to AARP members and to its Balance Rewards members age 55 and over. “Grab Granny and go shopping!” advises one Walgreens ad.

Under product form pricing, different versions of the product are priced differently but not according to differences in their costs. For instance, a round-trip economy seat on a flight from New York to London might cost $1,100, whereas a business-class seat on the same flight might cost $3,400 or more. Although business-class customers receive roomier, more comfortable seats and higher-quality food and service, the differences in costs to the airlines are much less than the additional prices to passengers. However, to passengers who can afford it, the additional comfort and services are worth the extra charge.

Using location-based pricing, a company charges different prices for different locations, even though the cost of offering each location is the same. For instance, state universities charge higher tuition for out-of-state students, and theaters vary their seat prices because of audience preferences for certain locations. Finally, using time-based pricing, a firm varies its price by the season, the month, the day, and even the hour. For example, movie theaters charge matinee pricing during the daytime, and resorts give weekend and seasonal discounts.

For segmented pricing to be an effective strategy, certain conditions must exist. The market must be segmentable, and segments must show different degrees of demand. The costs of segmenting and reaching the market cannot exceed the extra revenue obtained from the price difference. Of course, the segmented pricing must also be legal.

Most important, segmented prices should reflect real differences in customers’ perceived value. Consumers in higher price tiers must feel that they’re getting their extra money’s worth for the higher prices paid. Otherwise, segmented pricing practices can cause consumer resentment. For example, buyers reacted negatively when a New York City Department of Consumer Affairs investigation found that women often pay more for female versions of products that are virtually identical to male versions except for gender-specific packaging:8

The DCA compared the prices of male and female versions for nearly 800 products—including children’s toys and clothing, adult apparel, personal care products, and home goods. It found that items marketed to girls and women cost an average of 7 percent more than similar items aimed at boys and men. In the hair care category, women paid 48 percent more for products such shampoo, conditioner, and gel; razor cartridges cost women 11 percent more. For example, a major drug store chain sold a blue box of Schick Hydro 5 razor cartridges for $14.99; virtually identical cartridges for the Schick Hydro “Silk,” a purple-boxed sister brand, sold for $18.49. In another case, Target sold red Radio Flyer scooters for boys at $24.99; the same scooter in pink for girls was priced at $49.99. Target lowered its price for the pink scooter after the DCA report was released, calling the price mismatch a “system error.” Although no laws prohibit gender-based pricing differences, such glaring disparities can damage a brand’s credibility and reputation.

Companies must also be careful not to treat customers in lower price tiers as second-class citizens. Otherwise, in the long run, the practice will lead to customer resentment and ill will. For example, in recent years, the airlines have incurred the wrath of frustrated customers at both ends of the airplane. Passengers paying full fare for business- or first-class seats often feel that they are being gouged. At the same time, passengers in lower-priced coach seats feel that they’re being ignored or treated poorly.

Price says something about the product. For example, many consumers use price to judge quality. A $100 bottle of perfume may contain only $3 worth of scent, but some people are willing to pay the $100 because this price indicates something special.

In using psychological pricing, sellers consider the psychology of prices, not ­simply the economics. For example, consumers usually perceive higher-priced products as having higher quality. When they can judge the quality of a product by examining it or by calling on past experience with it, they use price less to judge quality. But when they ­cannot judge quality because they lack the information or skill, price becomes an important quality signal. For instance, who’s the better lawyer, one who charges $50 per hour or one who charges $500 per hour? You’d have to do a lot of digging into the respective lawyers’ credentials to answer this question objectively; even then, you might not be able to judge ­accurately. Most of us would simply assume that the higher-priced lawyer is better.

Another aspect of psychological pricing is reference prices—prices that buyers carry in their minds and refer to when looking at a given product. The reference price might be formed by noting current prices, remembering past prices, or assessing the buying situation. Sellers can influence or use these consumers’ reference prices when setting price. For example, a grocery retailer might place its store brand of bran flakes and raisins cereal priced at $2.49 next to Kellogg’s Raisin Bran priced at $3.79. Or a company might offer more expensive models that don’t sell very well to make its less expensive but still-high-priced models look more affordable by comparison. For example, Williams-Sonoma once offered a fancy bread maker at the steep price of $279. However, it then added a $429 model. The expensive model flopped, but sales of the cheaper model doubled.9

For most purchases, consumers don’t have all the skill or information they need to figure out whether they are paying a good price. They don’t have the time, ability, or inclination to research different brands or stores, compare prices, and get the best deals. Instead, they may rely on certain cues that signal whether a price is high or low. Interestingly, such pricing cues are often provided by sellers, in the form of sales signs, price-matching guarantees, loss-leader pricing, and other helpful hints.

Even small differences in price can signal product differences. A 9 or 0.99 at the end of a price often signals a bargain. You see such prices everywhere. For example, browse the online sites of top discounters such as Target, Best Buy, or Overstock.com, where almost every price ends in 9. In contrast, high-end retailers might favor prices ending in a whole number (for example, $6, $25, or $200). Others use 00-cent endings on regularly priced items and 99-cent endings on discount merchandise.

Although actual price differences might be small, the impact of such ­psychological tactics can be big. For example, in one study, people were asked how likely they were to choose among LASIK eye surgery providers based only on the prices they charged: $299 or $300. The actual price difference was only $1, but the study found that the psychological difference was much greater. Preference ratings for the providers charging $300 were much higher. Subjects perceived the $299 price as significantly less, but the lower price also raised stronger concerns about quality and risk. Some psychologists even argue that each digit has symbolic and visual qualities that should be considered in pricing. Thus, eight (8) is round and even and creates a soothing effect, whereas seven (7) is angular and creates a jarring effect.10

With promotional pricing, companies will temporarily price their products below list price—and sometimes even below cost—to create buying excitement and urgency. Promotional pricing takes several forms. A seller may simply offer discounts from normal prices to increase sales and reduce inventories. Sellers also use special-event pricing in certain seasons to draw more customers. Thus, TVs and other consumer electronics are promotionally priced in November and December to attract holiday shoppers into the stores. Limited-time offers, such as online flash sales, can create buying urgency and make buyers feel lucky to have gotten in on the deal.

Manufacturers sometimes offer cash rebates to consumers who buy the product from dealers within a specified time; the manufacturer sends the rebate directly to the customer. Rebates have been popular with automakers and producers of mobile phones and small appliances, but they are also used with consumer packaged goods. Some manufacturers offer low-­interest financing, longer warranties, or free maintenance to reduce the consumer’s “price.” This practice has become another favorite of the auto industry.

Promotional pricing can help move customers over humps in the buying decision process. For example, to encourage consumers to convert to its Windows 10 operating system, Microsoft ran an Easy Trade-Up promotion offering buyers $200 trade-ins on their old devices when purchasing new Windows 10 PCs costing $599 or more at the Microsoft Store. It sweetened the deal to $300 for trade-ins of Apple MacBooks or iMacs. In the past, Microsoft has ­offered customers up to $650 toward the purchase of a Surface Pro when they trade in a MacBook Air. Such aggressive price promotions can provide powerful buying and switching incentives.

Promotional pricing, however, can have adverse effects. During most holiday seasons, for example, it’s an all-out bargain war. Marketers carpet-bomb consumers with deals, causing buyer wear-out and pricing confusion. Constantly reduced prices can erode a brand’s value in the eyes of customers. And used too frequently, price promotions can create “deal-prone” customers who wait until brands go on sale before buying them. For example, ask most regular shoppers at home goods retailer Bed Bath & Beyond, and they’ll likely tell you that they never shop there without a stack of 20-percent-off or 5-dollar-off coupons in hand. As one reporter put it: “Shopping with a coupon at Bed Bath & Beyond has begun to feel like a given instead of like a special treat, and that’s bad news for the chain’s bottom line.” In fact, greater recent coupon redemption rates have increasingly eaten into the retailer’s profit margins.11

A company also must decide how to price its products for customers located in ­different parts of the United States or the world. Should the company risk losing the business of more-distant customers by charging them higher prices to cover the higher shipping costs? Or should the company charge all customers the same prices regardless of location? We will look at five geographical pricing strategies for the following hypothetical situation:

The Peerless Paper Company is located in Atlanta, Georgia, and sells paper products to customers all over the United States. The cost of freight is high and affects the companies from which customers buy their paper. Peerless wants to establish a geographical pricing policy. It is trying to determine how to price a $10,000 order to three specific customers: Customer A (Atlanta), Customer B (Bloomington, Indiana), and Customer C (Compton, California).

One option is for Peerless to ask each customer to pay the shipping cost from the Atlanta factory to the customer’s location. All three customers would pay the same factory price of $10,000, with Customer A paying, say, $100 for shipping; Customer B, $150; and Customer C, $250. Called FOB-origin pricing, this practice means that the goods are placed free on board (hence, FOB) a carrier. At that point, the title and responsibility pass to the customer, who pays the freight from the factory to the destination. Because each customer picks up its own cost, supporters of FOB pricing feel that this is the fairest way to assess freight charges. The disadvantage, however, is that Peerless will be a high-cost firm to distant customers.

Uniform-delivered pricing is the opposite of FOB pricing. Here, the company charges the same price plus freight to all customers, regardless of their location. The freight charge is set at the average freight cost. Suppose this is $150. Uniform-delivered pricing therefore results in a higher charge to the Atlanta customer (who pays $150 freight instead of $100) and a lower charge to the Compton customer (who pays $150 instead of $250). Although the Atlanta customer would prefer to buy paper from another local paper company that uses FOB-origin pricing, Peerless has a better chance of capturing the California customer.

Zone pricing falls between FOB-origin pricing and uniform-delivered pricing. The company sets up two or more zones. All customers within a given zone pay a single total price; the more distant the zone, the higher the price. For example, Peerless might set up an East Zone and charge $100 freight to all customers in this zone, a Midwest Zone in which it charges $150, and a West Zone in which it charges $250. In this way, the customers within a given price zone receive no price advantage from the company. For example, customers in Atlanta and Boston pay the same total price to Peerless. The complaint, however, is that the Atlanta customer is paying part of the Boston customer’s freight cost.

Using basing-point pricing, the seller selects a given city as a “basing point” and charges all customers the freight cost from that city to the customer location, regardless of the city from which the goods are actually shipped. For example, Peerless might set Chicago as the basing point and charge all customers $10,000 plus the freight from Chicago to their locations. This means that an Atlanta customer pays the freight cost from Chicago to Atlanta, even though the goods may be shipped from Atlanta. If all sellers used the same basing-point city, delivered prices would be the same for all customers, and price competition would be eliminated.

Finally, the seller who is anxious to do business with a certain customer or geographical area might use freight-absorption pricing. Using this strategy, the seller absorbs all or part of the actual freight charges to get the desired business. The seller might reason that if it can get more business, its average costs will decrease and more than compensate for its extra freight cost. Freight-absorption pricing is used for market penetration and to hold on to increasingly competitive markets.

Throughout most of history, prices were set by negotiation between buyers and sellers. A  fixed-price policy—setting one price for all buyers—is a relatively modern idea that arose with the development of large-scale retailing at the end of the nineteenth century. Today, most prices are set this way. However, many companies are now reversing the fixed-pricing trend. They are using dynamic pricing—adjusting prices continually to meet the characteristics and needs of individual customers and situations.

Dynamic pricing offers many advantages for marketers. For example, online sellers such as Amazon, L.L.Bean, or Apple can mine their databases to gauge a specific ­shopper’s desires, measure his or her means, check out competitors’ prices, and instantaneously ­tailor offers to fit that shopper’s situation and behavior, pricing products accordingly.

Services ranging from retailers, airlines, and hotels to sports teams change prices on the fly according to changes in demand, costs, or competitor pricing, adjusting what they charge for specific items on a daily, hourly, or even continuous basis. Done well, ­dynamic pricing can help sellers to optimize sales and serve customers better. However, done poorly, it can trigger margin-eroding price wars and damage customer relationships and trust. Companies must be careful not to cross the fine line between smart dynamic pricing strategies and damaging ones (see Real Marketing 11.1).

In the extreme, some companies customize their offers and prices based on the specific characteristics and behaviors of individual customers, mined from online browsing and purchasing histories. These days, online offers and prices might well be based on what specific customers search for and buy, how much they pay for other purchases, and whether they might be willing and able to spend more. For example, a consumer who recently went online to purchase a first-class ticket to Paris or customize a new Mercedes coupe might later get a higher quote on a new Bose Wave Radio. By comparison, a friend with a more modest online search and purchase history might receive an offer of 5 percent off and free shipping on the same radio.12

Dynamic pricing doesn’t happen only online. For example, many store retailers and other organizations now adjust prices by the day, hour, or even minute. For example, Kohl’s uses electronic price tags in its stores to adjust prices instantly based on supply, ­demand, and store traffic factors. It can now stage sales that last only hours instead of days, much as its online competitors do. Ride-sharing services such as Uber and Lyft adjust their fares dynamically during slow or peak times, a practice called “surge pricing.” Similarly, supply and demand dictates minute-to-minute price adjustments these days for everything from theater tickets to parking spots and golf course greens fees. One Dallas highway even shifts toll prices every five minutes depending on traffic—the fare for one 7-mile stretch, for example, ranged between 90 cents and $4.50 in one week.13

Although such dynamic pricing practices seem legally questionable, they’re not. Dynamic pricing is legal as long as companies do not discriminate based on age, gender, location, or other similar characteristics. Dynamic pricing makes sense in many contexts—it adjusts prices according to market forces and consumer preferences. But marketers need to be careful not to use dynamic pricing to take advantage of customers, thereby damaging important customer relationships. Customers may resent what they see as unfair pricing practices or price gouging. For example, consumers reacted badly to reports that Coca-Cola was proposing smart vending machines that would adjust prices depending on outside ­temperatures. And an Amazon.com dynamic pricing experiment that varied prices by purchase occasion received highly unfavorable headlines.

Just as dynamic and online pricing benefit ­sellers, however, they also benefit consumers. For example, thanks to the internet, consumers can now get instant product and price comparisons from thousands of vendors at price comparison sites or using mobile apps such as ShopSavvy, Amazon’s Price Check, or eBay’s RedLaser. For example, the RedLaser mobile app lets customers scan barcodes (or search by voice or image) while shopping in stores. It then searches online and at nearby stores to provide thousands of reviews and comparison prices and even offers buying links for immediate online purchasing.

Such information puts pricing power into the hands of consumers. Alert shoppers take advantage of the constant price skirmishes among sellers, snapping up good deals or leveraging retailer price-matching policies. In fact, many retailers are finding that ready online access to comparison prices is giving consumers too much of an edge. Most store retailers must now devise strategies to deal with the consumer practice of showrooming. Consumers armed with smartphones now routinely visit stores to see an item, compare prices online while in the store, and then request price matches or simply buy the item online at a lower price. Such behavior is called showrooming because consumers use retailers’ stores as de facto “showrooms” for online resellers such as Amazon.com.

Store retailers are now implementing strategies to combat such showrooming and cross-channel shopping or even turn it into an advantage. For example, Best Buy now routinely matches the prices of Amazon and other major online merchants. Once it has neutralized price as a buying factor, Best Buy reasons, it can convert showroomers into ­in-store buyers with its nonprice advantages, such as immediacy, convenient locations, personal assistance by well-trained associates, and the ability to order goods online and pick up or return them in the store. It has also sharpened its own online and mobile marketing. “Showrooming . . . is not the ideal experience,” says a Best Buy marketer, “to do research at home, go to the store, do more research, then…order and hope it arrives on time. There’s a better way.”14 We will revisit the subject of showrooming our discussions of retailing in Chapter 13.

Companies that market their products internationally must decide what prices to charge in different countries. In some cases, a company can set a uniform worldwide price. For example, Boeing sells its jetliners at about the same price everywhere, whether the buyer is in the United States, Europe, or a third-world country. However, most companies adjust their prices to reflect local market conditions and cost considerations.

The price that a company should charge in a specific country depends on many ­factors, including economic conditions, competitive situations, laws and regulations, and the nature of the wholesaling and retailing system. Consumer perceptions and preferences also may vary from country to country, calling for different prices. Or the company may have different marketing objectives in various world markets, which require changes in pricing strategy. For example, Apple uses a premium pricing strategy to introduce sophisticated, feature-rich, premium smartphones in carefully segmented mature markets in developed countries and to affluent consumers in emerging markets. By contrast, it’s now under pressure to discount older models and develop cheaper, more basic phone models for sizable but less affluent markets in developing countries, where even discounted older Apple phones sell at prices three to five times those of those of competing low-price models.

Costs play an important role in setting international prices. Travelers abroad are often surprised to find that goods that are relatively inexpensive at home may carry outrageously higher price tags in other countries. A pair of Levi’s selling for $30 in the United States might go for $63 in Tokyo and $88 in Paris. A McDonald’s Big Mac selling for a ­modest $4.20 in the United States might cost $7.85 in Norway or $5.65 in Brazil, and an Oral-B toothbrush selling for $2.49 at home may cost $10 in China. Conversely, a Gucci handbag going for only $140 in Milan, Italy, might fetch $240 in the United States.

In some cases, such price escalation may result from differences in selling strategies or market conditions. In most instances, however, it is simply a result of the higher costs of selling in another country—the additional costs of operations, product modifications, shipping and insurance, exchange-rate fluctuations, and physical distribution. Import tariffs and taxes can also add to costs. For example, China imposes duties as high as 25 percent on imported Western luxury products such as watches, designer dresses, shoes, and leather handbags. It also levies consumption taxes of 30 percent for cosmetics and 20 percent on high-end watches. As a result, Western luxury goods bought in mainland China carry prices as much as 50 percent higher than in Europe.15

Price has become a key element in the international marketing strategies of companies attempting to enter less affluent emerging markets. Typically, entering such markets has meant targeting the exploding middle classes in developing countries such as China, India, Russia, and Brazil, whose economies have been growing rapidly. More recently, however, as the weakened global economy has slowed growth in both domestic and emerging markets, many companies are shifting their sights to include a new target—the so-called “bottom of the pyramid,” the vast untapped market consisting of the world’s poorest consumers.

Not long ago, the preferred way for many brands to market their products in developing markets—whether consumer products or cars, computers, and smartphones—was to paste new labels on existing models and sell them at higher prices to the privileged few who could afford them. However, such a pricing approach put many products out of the reach of the tens of millions of poor consumers in emerging markets. As a result, many companies developed smaller, more basic and affordable product versions for these markets. For example, Unilever—the maker of such brands as Dove, Sunsilk, Lipton, and Vaseline—shrunk its packaging and set low prices that even the world’s poorest consumers could afford. It developed single-use packages of its shampoo, laundry detergent, face cream, and other products that it could sell profitably for just pennies a pack. As a result, today, 59 percent of Unilever’s revenues come from emerging economies.16

Although this strategy has been successful for Unilever, most companies are learning that selling profitably to the bottom of the pyramid requires more than just repackaging or stripping down existing products and selling them at low prices. Just like more well-to-do consumers, low-income buyers want products that are both functional and aspirational. Thus, companies today are innovating to create products that not only sell at very low prices but also give bottom-of-the-pyramid consumers more for their money, not less.

International pricing presents many special problems and complexities. We discuss international pricing issues in more detail in Chapter 19.