The major emphasis of a pricing strategy is on buying a product outright rather than leasing it. Except in housing, leasing is more common in the marketing of industrial goods than among consumer goods, though in recent years there has been a growing trend toward the leasing of consumer goods. For example, some people lease cars. Usually, by paying a specified sum of money every month, similar to a rental on an apartment, one can lease a new car. Again, as in the case of housing, a lease is binding for a minimum period, such as two years. Thus, the consumer can lease a new car every other year. Because repairs in the first two years of a car’s life may not amount to much, one is saved the bother of such problems. At the same time, overall the lease may cost slightly more than what a customer would pay by buying the car on loan. The net price of a fully equipped 1995 Ford Windstar with a sticker price of $23,650, after negotiations and a $1,000 manufacturer’s rebate, would be $20,494. Payments on a two-year lease from Ford Motor Credit Co. would be $457.43 a month, or total payout of $10,520, assuming that the rebate is used for the first payment and a security deposit.

At the end of the lease, the car would have a residual value the value after depreciation of $14,663. That is what the customer would have to pay if he/she decides to buy it, bringing the total cost to $25,183. On the other hand, monthly payments on a four-year loan at9.9% would be $518.79. The total paid over the term of the loan would be $24,901, and the customer would have a vehicle valued at more than $7,000 at the end. Although there may be different alternatives for setting the lease price, the lessor usually likes to recover the investment within a few years. Thereafter, a very large portion of the lease price (or rent) is profit. A lessor may set the monthly rental on a car so that within a few months, say 30, the entire cost of the car can be recovered. For example, the monthly rental on a Toyota Corolla, based on its 1998 price (assuming no extras), may be about $239 a month (the sticker price is $15,985). With the term set at 36 months, the dealer gets all his or her money back in about 32 months. (It should be noted that a dealer gets a car at the wholesale price, not the sticker price, which is the suggested retail price.) The important thing is to set the monthly lease rate and the minimum period for which the lease is binding in such proportions that the total amount that the lessee pays for the duration of the lease is less than what he or she would pay in monthly installments on a new car. As a matter of fact, the lease rate must be substantially less than that in order for the buyer to opt to lease. Automobile renting is transforming the market perspectives of the industry. One-fourth of all cars and trucks sold in 1998 went out under lease. By the year 2005, it is predicted, half of all cars and trucks will be leased.

The reason for this shift in automobile buying is easy to understand. About 75 percent of car buyers need some sort of financing, and with interest on car loans no longer deductible, leasing’s relatively low monthly payments are enticing. For the auto companies, leasing camouflages price increases, and restores brand loyalty. It offers companies an opportunity to strike up a relationship with the customers. Further, it attracts younger buyers to luxury brands and smoothes industry sales throughout the year. Leasing works out to be a viable strategy for other products as well. For example, furniture renting may be attractive to young adults, people of high mobility (e.g., executives, airline stewards), and senior citizens who may need appropriate furnishings only temporarily when their children’s families come to visit. In addition, apartment owners may rent furniture to provide furnished units to tenants. In industrial markets, the leasing strategy is employed by essentially all capital goods and equipment manufacturers. Traditionally, shoe machinery, postage meters, packaging machinery, textile machinery, and other heavy equipment have been leased. Recent applications of the strategy include the leasing of computers, copiers, cars, and trucks. As a matter of fact, just about any item of capital machinery and equipment can be leased. From the customer’s point of view, the leasing strategy makes sense for a variety of reasons. First, it reduces the capital required to enter a business. Second, it protects the customer against technological obsolescence. Third, the entire lease price, or rental, may be written off as an expense for income tax purposes. This advantage, of course, may or may not be relevant depending on the source of funds the customer would have used for the outright purchase (i.e., his or her own money or borrowed funds). Finally, leasing gives the customer the freedom not to get stuck with a product that may later prove not to be useful. From the viewpoint of the manufacturer, the leasing strategy is advantageous in many ways. First, income is smoothed out over a period of years, which is very helpful in the case of equipment of high unit value in a cyclical business. Second, market growth can be boosted because more customers can afford to lease a product than can afford to buy. Third, revenues are usually higher when a product is leased than when it is sold.

BUNDLING-PRICING STRATEGY Bundling, also called iceberg pricing, refers to the inclusion of an extra margin (for support services) in the price over and above the price of the product as such. This type of pricing strategy has been popular with companies that lease rather than sell their products. Thus, the rental price, when using a bundling strategy, includes an extra charge to cover a variety of support functions and services needed to maintain the product throughout its useful life. Because unit profit increases sharply after a product completes its planned amortization, it is desirable for firms that lease their products to keep the product in good condition, thus enhancing its working life for high resale or re-leasing value. The bundling strategy permits a company to do so because a charge for upkeep, or iceberg, services is included in the price. IBM once followed a bundling strategy, whereby it charged one fee for hardware, service, software, and consultancy. In 1969, however, the Justice Department charged IBM with monopolizing the computer market. Subsequently, the company unbundled its price and started selling computers, software, service, and technical input separately. Under the bundling strategy, not only are costs of hardware and profits covered, anticipated expenses for extra technical sales assistance, design and engineering of the system concept, software and applications to be used on the system, training of personnel, and maintenance are also included. Although the bundling strategy can be criticized for tending to discourage competition, one must consider the complexities involved in delivering and maintaining a faultfree sophisticated system. Without the manufacturer taking the lead in adequately keeping the system in working condition, customers would have to deal with a variety of people to make use of such products as computers. At least in the initial stages of a technologically oriented product, a bundling strategy is highly useful from the customer’s point of view.

For the company, this strategy (a) covers the anticipated expenses of providing services and maintaining the product, (b) provides revenues for supporting after-sales service personnel, (c) provides contingency funds to meet unanticipated happenings, and (d) ensures the proper care and maintenance of the leased products. The bundling strategy also permits an ongoing relationship with the customer. In this way the company gains firsthand knowledge of the customer’s needs that may help to shift the customer to a new generation of the product. Needless to say, the very nature of the bundling strategy makes it most relevant to technologically sophisticated products, particularly those marked by rapid technological obsolescence. On the negative side, the bundling strategy tends to inflate costs and distort prices and profitability. For this reason, during unfavorable economic conditions, it may not be an appropriate strategy to pursue. Grocery wholesalers, for instance, may pass through a straight invoice cost and then charge separately for delivery, packaging, and so on. A growing number of department stores now charge extra for home delivery, gift wrapping, and shopping bags. Thus, people who don’t want a service need not pay for it.

PRICE-LEADERSHIP STRATEGY The price-leadership strategy prevails in oligopolistic situations. One member of an industry, because of its size or command over the market, emerges as the leader of an entire industry. The leading firm then makes pricing moves that are duly acknowledged by other members of the industry. Thus, this strategy places the burden of making critical pricing decisions on the leading firm; others simply follow the leader. The leader is expected to be careful in making pricing decisions. Afaulty decision could cost the firm its leadership because other members of the industry would then stop following in its footsteps. For example, if, in increasing prices, the leader is motivated only by self-interest, its price leadership will not be emulated. Ultimately the leader will be forced to withdraw the increase in price. The price-leadership strategy is a static concept. In an environment where growth opportunities are adequate, companies would rather maintain stability than fight each other by means of price wars. Thus, the leadership concept works out well in this case. In the auto industry, General Motors is the leader, based on market share. The other two domestic members of the industry adjust their prices to come very close to any price increase by General Motors. Usually, the leader is the company with the largest market share. The leadership strategy is designed to stave off price wars and “predatory” competition that tend to force down prices and hurt all parties. Companies that deviate from this form are chastised through discounting or shaving by the leaders. Price deviation is quickly disciplined. Successful price leaders are characterized by the following:

1. Large share of the industry’s production capacity.

2. Large market share.

3. Commitment to a particular product class or grade.

4. New cost-efficient plants.

5. Strong distribution system, perhaps including captive wholesale outlets.

6. Good customer relations, such as technical assistance for industrial buyers, programs directed at end users, and special attention to important customers during shortages.

7. An effective market information system that provides analysis of the realities of supply and demand.

8. Sensitivity to the price and profit needs of the rest of the industry.

9. A sense of timing to know when price changes should be made.

10. Sound management organization for pricing. 1

1. Effective product line financial controls, which are needed to make sound priceleadership decisions. 1

2. Attention to legal issues. In an unfavorable business environment, it may not be feasible to implement a leadership strategy because firms may be placed differently to interact with the environment. Thus, the leader hesitates to make decisions on behalf of an entire industry because other firms may not always find its decisions to their advantage. For this reason, the price leader/follower pattern may be violated. In order to survive during unfavorable conditions, even smaller firms may take the initiative to undercut the price leader. For example, during 1988 when the list prices of steel were similar, companies freely discounted their prices. In the chemical industry, with increasing competition from overseas, the price-leadership strategy does not work. Companies thus plan a variety of temporary allowances to generate business. The following quote highlights the erosion of the leadership strategy in the glass container industry: Traditional patterns of price leadership also are breaking down in the glass container industry, with smaller companies moving to the fore in pricing. Last year, for example, Owens-Illinois, Inc. which is larger than its next five competitors combined increased its list prices by 4½ percent. Fearing that the increase would hurt sales to brewing companies that were just beginning to switch to glass bottles, the smaller companies broke ranks and offered huge discounts. The action not only negated O-I’s increase but served notice that the smaller companies were after O-I’s market share. An automatic response to a leader’s price adjustment assumes that all firms are more or less similarly positioned vis-à-vis different price variables (i.e., cost, competition, and demand) and that different firms have common pricing objectives. Such an assumption, however, is far from being justified. The leadership strategy is an artificial way to enforce similar pricing responses throughout an industry. Strategically, it is a mistake for a company to price in a manner identical to that of its competitors. It should price either above or below the competition to set itself apart.