chapter 14 Flashcards
Step 4: Select an Approximate Price Level
- Demand-oriented
- Cost-oriented
- Profit-oriented
- Competition-oriented
Demand-Oriented Pricing Approaches
weigh factors underlying expected customer tastes & preferences more heavily than such factors as cost, profit, & competition when selecting a price level
Demand-Oriented Pricing Approaches
skimming
penetration
prestige
odd-even
target
bundle
yield management
Skimming Pricing
setting the highest initial price that customers really desiring the product are willing to pay when introducing a new or innovative product
-As the demand of customers is satisfied, the firm lowers the price to attract another, more price-sensitive segment
Skimming Pricing Is An Effective Strategy When:
- Enough prospective customers are willing to buy the product immediately at the high initial price to make these sales profitable
- The high initial price will not attract competitors
- Lowering price has only a minor effect on increasing the sales volume & reducing the unit costs
- Customers interpret the high price as signifying high quality
Penetration Pricing
setting a low initial price on a new product to appeal immediately to the mass market
- Opposite of skimming pricing
Penetration Pricing Conditions
- Maintain the initial price for a time to gain profit lost from its low introductory level
- Lower the price further, counting on the new volume to generate the necessary profit
Prestige Pricing
setting a high price so that quality- or status-conscious consumers will be attracted to the product and buy it
- Ex: Rolls-Royce cars, Chanel perfume, Cartier jewelry
Price Lining
setting the price of a line of products at a number of different specific pricing points
- Ex: A department store manager may price a line of women’s casual slacks at $59, $79, and $99
Odd-Even Pricing
setting prices a few dollars or cents under an even number
- Ex: Apple iPhone 13 Pro Max is $1,199.0, Lowe’s DeWalt Radial Saw is $599.99, Gillette Fusion Shaving System is $11.99
- Consumers see the DeWalt Radial Saw priced at “something over $500” rather than “about $600” bc consumers often use a left-digit bias
Left-Digit Bias
consumers have a tendency to read from left to right
- Demand increases if the price drops from $600 to $599.99
Target Pricing
consists of (1) estimating the price that ultimate consumers would be willing to pay for a product, (2) working backward through markups taken by retailers and wholesalers to determine what price to charge wholesalers, and then (3) deliberately adjusting the composition and features of the product to achieve the target price to consumers
- Ex: IKEA uses target pricing for its home furnishings. IKEA’s marketing team decides what price they want to sell a specific product for, & then company designers work w/ material suppliers & manufacturers to deliver the product at that price
Bundle Pricing
marketing two or more products in a single package price
Ex: Spectrum’s TV, phone, & Internet bundles
- Provides a lower total cost to buyers & lower marketing costs to sellers
Yield Management Pricing
charging different prices to maximize revenue for a set amount of capacity at any given time
Ex: Airlines, hotels, cruise ships, & car rentals vary prices by time, day, week, or season
- Matches demand & supply to customize the price for a service
Cost-Oriented Pricing Approaches
price setter stresses the cost side of the pricing problem, not demand. Price is set by looking at the production & marketing costs & then adding enough to cover direct expenses, overhead, & profit.
Cost-Oriented Pricing Approaches
standard markup pricing
cost-plus pricing experience curve pricing
Standard Markup Pricing
adding a fixed percentage to the cost of all items in a specific product class
Ex: Theaters have high markups on snacks & beverages
- Markups must cover all of the expenses of the store, pay for overhead costs, & contribute something to profits
Cost-Plus Pricing
summing the total unit cost of providing a product/serv and adding a specific amount to the cost to arrive at a price
- Most commonly used method to set prices for business products
-Two forms
Two Forms of Cost-Plus Pricing
- Cost-Plus Percentage-of-Cost Pricing
- Cost-Plus Fixed-Fee Pricing
Cost-Plus Percentage-of-Cost Pricing
a fixed percentage is added to the total unit cost
- Often used to price one- or few-of-a-kind items
Ex: An architectural firm charges a percentage of the construction costs of the 492 million Rock & Roll Hall of Fame & Museum in Cleveland, Ohio
Cost-Plus Fixed-Fee Pricing
a supplier is reimbursed for all costs, regardless of what they turn out to be, but is allowed only a fixed fee as profit that is independent of the final cost of the project
Ex: If NASA agreed to pay a contractor a $6.5 billion fee for providing a lunar spacecraft, & the contractor increases the fee to $7 billion, its fee wouldn’t change & would remain at $6.5 billion
Experience Curve Pricing
a method of pricing based on the learning effect, which holds that the unit cost of many products and services declines by 10% to 30% each time a firm’s experience at producing and selling them doubles
Ex: Sony, Samsung, LG use this to price HDTV sets. Consumers benefit bc prices decline as cumulative sales volume grows. HDTV prices have fallen by over 40%
Profit-Oriented Pricing Approaches
price setter may choose to balance both revenues & costs to set price using these. These might involve setting a target of a specific dollar volume of profit or expressing this target profit as a percentage of sales or investment
Profit-Oriented Pricing Approaches
Target Profit Pricing
Target Return-on-Sales Pricing
Target Return-on-Investment (ROI) Pricing
Target Profit Pricing
setting an annual target of a specific dollar volume of profit
Target Return-on-Sales Pricing
setting a price to achieve a profit that is a specified percentage of the sales volume
-Supermarket chains use this
Target Return-on-Investment (ROI) Pricing
setting a price to achieve an annual target return on investment (ROI)
- P = TFC + TVC + (Investment X ROI) / Std # Units
Competition-Oriented Pricing Approaches
a price setter can stress what “the market” is doing rather than emphasize demand, cost or profit factors
Competition-Oriented Pricing Approaches
Customary Pricing
Above-, At-, or Below-Market Pricing
Loss-Leader Pricing
Customary Pricing
setting a price that is dictated by tradition, a standardized channel of distribution, or other competitive factors
Ex: Tradition prevails in the pricing of Swatch watches, the $50 customary price for the basic model has changed little in 10 yrs
Ex: Hershey changes the amt of chocolate in its candy bars depending on the price of raw chocolate
Above-, At-, or Below-Market Pricing
setting a market price for a product or product class based on a subjective feel for the competitors’ price or market price as the benchmark
Ex: Above-Market Pricing: Rolex, emphasizes that it males one of the most expensive watched you can buy
Ex: At-Market Pricing: Revlon Cosmetics are prices at market & provide a reference price for competitor
Ex: Below-Market Pricing: Skippy peanut butter sets prices below those of Jif
Price Premium
used to assess whether a comp’s products/brands are above, at, or below market
Loss-Leader Pricing
deliberately selling a product below its customary price, not to increase sales, but to attract customers’ attention to it in hopes that they will buy other products with large markups as well
Ex: Milk
Price Leader/Follower
a big player that’s dominant in the industry & you compare to their prices
Ex: Kellogs raising prices & rivals are likely to follow
Competitive Bid
The company doing the bidding decides what they want to pay & receiving party has all the power
Step 5: Set the List or Quoted Price
Step 5: Set the List or Quoted Price
Three Factors a Manger Must Consider When Setting The List/Quoted Price
- Choose a Price Policy
- Consider Company, Customer, & Competitive Effects on Pricing
- Balance Incremental Costs & Revenues
Two Price Policy Options
- Fixed-Price Policy
- Dynamic Pricing Policy
Fixed-Price Policy (also called One-Price Policy)
setting one price for all buyers of a product/serv
Ex: Dollar Tree sells all its products for $1.25
Ex: CarMax “no haggle, one price” for cars
Dynamic Pricing Policy (also called a flexible-price policy)
setting different prices for products/servs in real time in response to supply and demand conditions
Ex: Dell Technologies continually adjusts prices in response to changes in its own costs, competitive pressures, and demand from customers, from one segment of the personal computer market to another
- Gives sellers considerable discretion in setting the final price in light of demand, cost, & competitive factors
- Yield Management is a form of dynamic pricing bc prices vary by an individual buyer’s purchase situation, company cost considerations, & competitive conditions
Company Effects
for a firm with more than one product, a decision on the price of a single product must consider the price of other items in its product line or related product lines in its product mix
- Within a product line or mix there are usually some products that are substitutes for one another & some that complement each other
Ex: Baked Tostitos, Tostitos, & Doritos brands are partial substitutes for one another & its bean/cheese dips/salsas complement the products in the tortilla chip line
› Manger’s challenge when marketing multiple products is product-line pricing
Product-Line Pricing
setting prices for all items in a product line to cover the total cost and produce a profit for the complete line, not necessarily for each item
Ex: PS5 was probably at or below its cost, but prices of its video games (complementary products) were set high enough to cover any loss & deliver a handsome profit for the product line
Product-Line Pricing Involves Determining
- the lowest-priced product and price
- the highest-priced product and price
- price differentials for all other products in the line
Customer Effects
marketers play close attention to factors that satisfy the perceptions or expectations of ultimate consumers, such as customary prices for a variety of consumer products. Manufacturers must choose prices that result in profit for resellers in the channel to gain their cooperation & support
Competitive Effects
manager must anticipate potential price responses from competitors. Regardless of whether a firm is a price leader/follower, it wants to avoid cutthroat price wars in which no firm in the industry makes a profit
Price War
successive price cutting by competitors to increase or maintain their unit sales or market share
Consider Price Cutting Only When One or More Conditions Exist:
- The comp has a cost or technological advantage over its competitors
- Primary demand for a product class will grow if prices are lowered
- The price cut is confined to specific products/customers (as with airline tickets) & is not across the board
Balance Incremental Costs & Revenues
involves a continuing, concise trade-off of incremental costs incurred against incremental revenues received. Expected incremental revenues from pricing & other marketing actions must more than offset incremental costs
› Adv: commonsense usefulness
› Disadv: difficulty obtaining the necessary data to make the decisions involved
Step 6: Make Special Adjustments to the List or Quoted Price
Step 6: Make Special Adjustments to the List or Quoted Price
Three Special Adjustments To The List or Quoted Price
- Discounts
- Allowances
- Geographical Adjustments
Discounts
reductions from the list price that a seller gives a buyer as a reward for some activity of the buyers that is favorable to the seller
Four Kinds of Discounts
- Quantity
- Seasonal
- Trade (functional)
- Cash
Quantity Discounts
reductions in unit costs for a larger order
- Encourages customers to buy larger quantities
-There’s 2 Kinds of quantity discounts
- Ex: AlphaGraphics sets a price of 10 cents a copy for 1-25 copies, 9cents a copy for 26-100, 8 cents a copy for 101 or more (lowered prices for large order)
2 Kinds of Quantity Discounts
noncumulative
cumulative
Noncumulative Quantity Discounts
based on the size of an individual purchase order. They encourage large individual orders, not a series of orders
Ex: FedEx uses this to encourage companies to ship a large number of packages at one time
Cumulative Quantity Discounts
apply to the accumulation of purchases of a product over a given time period, typically a year
-Encourage repeat buying by a single customer
Seasonal Discounts
encourage buyers to stock inventory earlier than their normal demand would require
Ex: Honda, manufactures lawn mowers/snow throwers offers seasonal discounts to encourage wholesalers/retailers to stock up on lawn mowers in Jan/Feb & on snow throwers in July/Aug- five or six months before the seasonal demand by ultimate consumers
Trade (Functional) Discounts
rewards wholesalers/retailers for marketing functions they will perform in the future
- Reductions Off The List/Base Price are Offered on the Basis Of: (1) where they are in the channel & (2) the marketing activities they are expected to perform
Ex: Hardware, food, & pharmaceutical items use this
Cash Discounts
encourages retailers to pay their bills quickly
Allowances
reductions from list or quoted prices to buyer for performing some activity
-2 types of allowances
Two Types of Allowances
- trade-in allowances
- promotional allowances
Trade-in Allowances
price reduction given when a used product is accepted as part of the payment on a new product
Ex: Apple & Samsung offer a reduction in the list price of their new phones by offering you a trade-in allowance on your current phone
Promotional Allowances
cash payments or an extra amount of “free goods” awarded sellers in the marketing channel for undertaking certain advertising or selling activities to promote a product
Ex: Red Baron gave a free case of their frozen cheese pizzas to a retailer for every dozen cases purchased
Everyday Low Pricing (EDLP)
the practice of replacing promotional allowances with lower manufacturer list prices
- Reduced the average price to consumers while minimizing promotional allowances that cost manufacturers billions of dollars each year
Ex: P&G reduce promotional allowances for retailers by using EDLP
Geographical Adjustments
reflect the cost of transportation of the products from seller to buyer
-2 methods
Two Methods For Quoting Prices Related to Transportation Costs
FOB Origin Pricing
Uniform Delivered Pricing
FOB Origin Pricing
the “free on board” (FOB) price the seller quotes that includes only the cost of loading the product onto the vehicle and specifies the name of the location where the loading is to occur (seller’s factory or warehouse)
Uniform Delivered Pricing
the price the seller quotes that includes all transportation costs
Four Kinds of Uniform Delivered Pricing Methods
(1) single-zone pricing, (2) multiple-zone pricing
(3) FOB with freight-allowed pricing
(4) basing-point pricing.
Single-Zone Pricing
all buyers pay the same delivered price for the products, regardless of their distance from the seller
Ex: All customers pay the same delivered price
Multiple-Zone Pricing
a firm divides its selling territory into geographical areas or zones
FOB with Freight-Allowed Pricing
the price is quoted by the seller as “FOB plant-freight allowed”. The buyer is allowed to deduct freight expenses from the list price of the goods, so the seller agrees to pay, or absorb , the transportation costs
Basing-point Pricing
selecting one or more geographical locations (basing point) from which the list price for products plus freight expenses are charged to the buyer
-Used in the steel, cement, & lumber industries
Ex: Comp might designated St.Louis as the basing point & charge all buyers a list price of $100 plus freight from St.Louis to their location
Five Pricing Practices That Have Received The Most Scrutiny
- Price Fixing
- Price Discrimination
- Deceptive Pricing
- Geographical Pricing
- Predatory Pricing
Price Fixing
a conspiracy among firms to set prices for a product
Is illegal per se (in & of itself) under the Sherman Act
-2 types
Horizontal Price Fixing
two or more competitors explicitly or implicitly set prices
Vertical Price Fixing
controlling agreements b/w independent buyers & sellers (a manufacturer & a retailer) whereby sellers are required to not sell products below a minimum retail price
Price Discrimination
charging different prices to different buyers for products of like grade and quality
- The Clayton Act amended by the Robinson-Patman Act prohibits this
- Not all price differences are illegal; only those that substantially lessen competition/create a monopoly
Deceptive Pricing
price deals that mislead consumers
- Outlawed by the Federal Trade Commission Act
Geographical Pricing
Basing-point pricing is viewed as illegal under the Robinson-Patman Act & the FTC Act is there’s a clear-cut evidence of a conspiracy to set prices
- Geographical pricing practices have been immune from legal/regulatory restrictions, except in those instances in which a conspiracy to lessen competition exists under the Sherman Act or price discrimination exists under the Robinson-Patman Act
Predatory Pricing
charging a very low price for a product with the intent of driving competitors out of business. Once competitors have been driven out, the firm raises its prices
- Illegal under the Sherman Act & FTC Act
