Chapter 11 Flashcards
What are the 5 C’s of Pricing?
Competition
Costs
Company Objectives
Customers
Channel Members
What are the 5 possible company objectives in pricing? What do each mean?
PROFIT ORIENTED
Maximize profits with formula or have a minimum margin policy
SALES ORIENTED
Low price to generate sales and take sales from competitors
COMPETITOR ORIENTED
Set price lower, higher, or equal to competitors depending on objective (predatory pricing, show quality, show similar value)
CUSTOMER ORIENTED
Target market segment who highly value a particular product benefit and set prices relatively high
What is a Value-Based Pricing Method? Explain the two value-based sub-methods.
VALUE-BASED METHOD
Approach to setting prices that focuses on the overall value of the product offering as perceived by the customer.
IMPROVEMENT VALUE METHOD
Manager decides on improvement value, or how much more customers are willing to pay for a product relative to others
COST OF OWNERSHIP METHOD
Based on the total cost of owning the product of its useful life. Consumers may be willing to pay more for a product that costs less over its entire lifetime
Everyday Low Pricing (EDLP)
Companies with EDLP stress the continuity of their retail prices between retail and deep discount.
Adds value by reducing consumers search costs
High/Low Pricing
Relies on promotion of sales, during which prices drop and purchases are encouraged
What are the two pricing strategies for new products?
PRICE SKIMMING
Price starts high for early adopters who are anxious to adopt the product and be one of the first to have it. Price drops a bit more afterwards to SKIM the next part of the market, and so on until all demand for the product is satisfied. Competitors cannot be able to easily enter the market, unless it will force the price to drop and destroy the strategy. (Profits through margin)
MARKET PENETRATION PRICING
Price set initially low to build sales, market share, and profits quickly by encouraging customers to purchase immediately. Many firms expect experience curve effect, meaning with volume costs drop and prices do too, furthering the effect. Firm must be able to keep up with demand. (Profits through volume).
Pricing Strategies vs. Pricing Tactics
PRICING STRATEGIES
Long-term approach setting prices across all firm’s products based on 5 C’s of pricing
PRICING TACTICS
Short-term methods that focus on select components of the five C’s. Generally represents a response to a competitive threat or broadly accepted method of calculating short-term price that is short-term in nature.
What are the three pricing tactics firms use when selling directly to consumers, rather than other businesses? Explain each one.
PRICE LINING
Establishing a price floor and a price ceiling for an entire line of similar products and then setting price points in between to represent distinct differences in quality.
PRICE BUNDLING
Pricing of more than one product for a single, lower price.
LEADER PRICING
Building store traffic by aggressively pricing and advertising a regularly purchased item, often priced at or just above the store’s cost. While customer is in store buying such items they will likely buy other things.
Size Discount
The larger the quantity, the lower the cost per gram. Encourages customers to buy more and use more
Describe each of the five B2B pricing tactics.
SEASONAL DISCOUNTS
An additional reduction offered as an incentive to retailers to order merchandise in advance of the normal buying season.
CASH DISCOUNTS
An additional reduction that reduces the invoice cost if the buyer pays the invoice prior to the end of the discount period.
ALLOWANCES
Advertising or listing allowances (additional price reductions) offered in return for specific behaviours. Advertising allowances are offered to retailers if they agree to feature the manufacturer’s product in their advertising and promotional efforts. Listing allowances are offered to get new products into stores or to gain more or better shelf space.
QUANTITY DISCOUNTS
Providing a reduced price according to the amount purchased.
UNIFORM DELIVERED VERSUS GEOGRAPHIC PRICING
With uniform delivered pricing, the shipper charges one rate, no matter where the buyer is located. With geographic pricing, different prices are charged depending on the geographical delivery area.
Loss Leader Pricing
Leader Pricing (low price to attract customers to the store), but pricing below cost
Bait and Switch
Attracting customers with a low price without intent to really sell it for that by either:
-Talking the consumer into getting a higher-priced item once they’re in-store (trash talking cheap product or aggressively upselling better one)
-Professing insufficient quantity of good on sale when in store
Horizontal Price Fixing vs. Vertical Price fixing
VERTICAL PRICE FIXING
Parties at different levels of the same marketing channel (ex. manufacturers and retailers) collude to control the prices passed on to consumers. Manufacturers often enforce MSRP to reduce competition
HORIZONTAL PRICE FIXING
Competitors that produce and sell competing products collude to control prices, taking price out of the decision process or consumers and reducing competition (illegal)
