Page 234 - DECO101_MICRO_ECONOMICS_ENGLISH

Unit 14: Pricing Decisions

laptop computers. This pricing method requires creation of strong brand image through Notes
promotion programmes that reinforce the brand’s quality and image of total exclusiveness.

Price perceptions are signifi cantly influenced by the brand’s perceived quality and extent of
advertising. Paul W. Farris and David J. Reibstein studied 227 consumer businesses to examine
the relationships among relative price, relative quality, and relative advertising and found that:
1. Brands with high relative advertising but with average product quality were able to charge
premium prices successfully than brands that were relatively unknown.
2. Brands with both high relative advertising and high relative product quality could charge
the highest prices. Brands with low ad budgets and low quality realised the lowest prices.
3. The positive relationship between high relative advertising and high relative product
quality was very strong during later life cycle stages for market leaders.
Odd-even Pricing: Firms sometimes set their product prices that end with certain numbers. The
assumption is that this type of pricing helps sell more of a product. It is supposed that if the price is
` 99.95, consumers view it not as ` 100 and certain types of consumers are attracted more by
odd prices rather than even. This assumption is not supported by substantial research fi ndings,
but still odd prices seem to be far more common than even prices. Also, supposedly even prices
favour exclusive or upscale product image and consumers view the product as a premium quality
brand.

Task Find some examples of firms (products and services) that use psychological

pricing.

14.2.3 Promotional Pricing

Companies can choose a variety of pricing techniques to motivate consumers to buy early. As the
name suggests, these techniques are considered as an important part of sales promotions. Some of
these techniques include loss leader pricing, special event pricing, low-interest fi nancing, longer
payment period, cash rebates, free auto insurance, warranties, increased number of free services,
etc. Generally, these techniques do not lead to significant gains because most competitors can

copy them in a hurry: To illustrate, just three techniques are briefl y discussed.
Loss Leader Pricing: Sometimes large retail outlets use loss leader pricing on well-known brands
to increase store traffic. By attracting increased number of consumers to store the retailers hope

that sales of routinely purchased products will rise and increase sales volume and profi ts. This
compensates for the lower margins on loss leader brands. Firms whose brands are chosen as
loss leader oppose this approach as the image of their brands, gets diluted and consumers resist
paying list price to retailers selling the same brands.
Superfi cial Discounting: It is superficial comparative pricing. It involves setting an artifi cially

high price and offering the product at a highly reduced price.

Example: The communication might say, “Regular price was ` 495, now reduced to
` 299.” This is a deceptive practice and often used by retailers. Occasionally we come across
advertisements that show ` 495 crossed (X) and a fresh price written as ` 250.
Special Event Pricing: This involves coordinating price cuts with advertising for seasonal or
special situations to attract consumers by offering special reduced prices. For example, before the
beginning of a new session for young children at school, we see ads of shoes generally viewed
as part of uniform.

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