Chapter 16: Pricing Concepts and Strategies
Chapter 16: Pricing Concepts and Strategies Pricing Objectives and the Marketing Mix… • Price: exchange value of a good or service o Pricing Objectives can be classified into four major groups:
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Profitability Objectives Marginal Analysis: method of analyzing the relationship among costs, sales price, and increased sales volume • Profit Maximization: point at which the additional revenue gained by increasing the price of a product equals the increase in total costs Target-Return Objectives: short-run or long-run pricing objectives of achieving a specified return on either sales or investment Volume Objectives Market-Share Objective: volume-related pricing objective in which the goal is to achieve control of a portion of the market for a firm's good or service Profit Impact of Market Strategies (PIMS) Project: research that discovered a strong positive relationship between a firm's market share and product quality and its return on investment Meeting Competition Objectives Value Pricing: pricing strategy emphasizing benefits derived from a product in comparison to the price and quality levels of competing offerings Prestige Objectives Not-For-Profit Objectives Pricing strategy helps these organizations goals such as: i. Profit Maximization i. Cost Recovery where groups only try to recover the actual cost of operating the unit
i. Market Incentives to encourage increased usage of the good or service i. Market Suppression where price discourages consumption (tobacco) Methods for Determining Prices… • Customary Prices: traditional prices that customers expect to pay for certain goods and services • Price Determination in Economic Theory: o Demand: schedule of the amounts of a firm's product that consumers will purchase at different prices during a specified time period o Supply: schedule of the amounts of a good or service that firms will offer for sale at different prices during a specified time period o Businesses operate and set prices in four types of market structures: 1. Pure Competition: market structure characterized by homogeneous products in which there are so many buyers and sellers that none has a significant influence on price 1. Monopolistic Competition: market structure involving a heterogeneous product and product differentiation among competing suppliers, allowing the marketer some degree of control over prices 1. Oligopoly: market structure in which relatively few sellers compete and where high start-up costs form barriers to keep out new competitors 1. Monopoly: market structure in which a single seller dominates trade in a good or service for which buyers can find no close substitutes
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Cost and Revenue Curves: • Variable Costs: costs that change with the level of production (such as labour and raw materials costs) • Fixed Costs: costs that remain stable at any production level within a certain range (such as lease payments or insurance costs) • Average Total Costs: costs calculated by dividing the sum of the variable and fixed costs by the number of units produced
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Marginal Cost: change in total cost that results from producing an additional unit of output o Elasticity: measure of responsiveness of purchasers and suppliers to a change in price • ∆Y/∆P • Price Determination in Practice: o Cost-Plus Pricing: practice of adding a percentage of specified dollar amount-or markup-to the base cost of a product to cover unassigned costs and to provide a profit o Full-Cost Pricing: pricing method that uses all relevant variable costs in setting a product's price and allocates those fixed costs not directly attributed to the production of the priced item o Incremental-Cost Pricing: pricing method that attempts to use only costs directly attributable to a specific output in setting prices o Break-Even Analysis: pricing technique used to determine the number of products that must be sold at a specified price to generate enough revenue to cover total cost o Yield Management: pricing strategy that allows marketers to vary prices based on such factors as demand, even though the cost of providing those goods or services remains the same; designed to maximize revenues in situations such as airfares, lodging, auto rentals, and theatre tickets, where costs are fixed Pricing Strategies… • Skimming Pricing Strategy: pricing strategy involving the use of an initial high price relative to competitive offerings. Price is dropped in incremental steps as supply begins to exceed demand, or when competition catches up o Step Out: pricing practice in which one firm raises prices and then waits to see if others follow suit • Penetration Pricing Strategy: pricing strategy involving the use of a relatively low entry price compared with competitive offerings, based on the theory that this initial low price will help secure market acceptance • Everyday Low Pricing (EDLP): pricing strategy of continuously offering low prices rather than relying on such short-term price cuts as cents-off coupons, rebates, and special sales • Competitive Pricing Strategy: pricing strategy designed to de-emphasize price as a comparative variable by pricing a good or service at the general level of comparable offerings o Opening Price Point: setting an opening price point below that of the competition, usually on a high-quality private label item Price Quotations… • List Price: established price normally quoted to potential buyers o Reductions from List Price: • Market Price: price a consumer or marketing intermediary actually pays for a product after subtracting any discounts, allowances, or rebates from the list price • Cash Discounts: price reduction offered to a consumer, business user, or marketing intermediary in return for prompt payment of a bill • Trade Discounts: payment to a channel member or buyer for performing marketing functions; also known as a functional discount • Quantity Discounts: price reduction granted for a large-volume purchase Cumulative Quantity Discounts: price discount determined by amounts of purchases over stated time periods
Noncumulative Quantity Discount: price reduction granted on a one-time-only basis • Allowance: specified deduction from list price, including a trade-in or promotional allowance Trade-In: credit allowance given for a used item when a customer purchases a new item Promotional Allowances: promotional incentive in which the manufacturer agrees to pay the reseller a certain amount to cover the costs of special promotional displays or extensive advertising Minimum Advertised Price (MAP): fees paid to retailers who agree not to advertise products below set prices • Rebate: refund of a portion of the purchase price, usually granted by the product's manufacturer o Geographic Considerations: • FOB Pricing Free On Board (FOB) Plant (FOB Origin): price quotation that does not include shipping charges • Buyer pays all shipping charges • Uniform-Delivered Price: pricing system for handling transportation costs under which all buyers are quoted the same price, including transportation expenses. Sometimes known as postage-stamp pricing • Zone Pricing: pricing system for handling transportation costs under which the market is divided into geographic regions and a different price is set in each region • Basing-Point Pricing: system used in some industries during the early 20th century in which the buyer paid the factory price plus freight charges from the basing-point city nearest the buyer Pricing Policies… • Pricing Policy: general guideline that reflects marketing objectives and influences specific pricing decisions o Firms implement variations of four basic types of pricing policies: 1. Psychological Pricing: pricing policy based on the belief that certain prices or price ranges make a good or service more appealing than others to buyers Odd Pricing: pricing policy based on the belief that a price ending with an odd number just under a round number is more appealing, for instance, $9.97 rather than $10.00 Unit Pricing: pricing policy in which prices are stated in terms of a recognized unit of measurement or a standard numerical count 1. Price Flexibility: pricing policy permitting variable prices for goods and services 1. Product-Line Pricing: practice of setting a limited number of prices for a selection of merchandise and marketing different product lines at each of these price levels 1. Promotional Pricing: pricing policy in which a lower than normal price is used as a temporary ingredient in a firm's marketing strategy Loss Leader: product offered to consumers at less than cost to attract them to stores in the hope that they will buy other merchandise at regular prices • Leader Pricing: variant of loss-leader pricing in which marketers offer prices slightly above cost to avoid violating
minimum-markup regulations and earn a minimal return on promotional sales Special Topics in Pricing… • Competitive Bidding: inviting potential suppliers to quote prices on proposed purchases or contracts • Transfer Price: cost assessed when a product is moved from one profit centre in a firm to another o Profit Centre: any part of an organization to which revenue and controllable costs can be assigned • Online Pricing o Shopbot (Bot): software program that allows online shoppers to compare the price of a particular product offered by several online retailers • Cannibalization: loss of sales of an existing product due to competition from a new product in the same line • Bundle Pricing: offering two or more complementary products and selling them for a single price Pricing and the Law… • Competition Act: the most comprehensive legislation in Canada, designed to help both consumers and businesses by promoting a healthy competitive environment o Purposes: • Promote the efficiency and adaptability of the Canadian economy • Expand opportunities for Canadian participation in world markets while at the same time recognizing the role of foreign competition in Canada • Ensure that small and medium-sized enterprises have an equitable opportunity to participate in the Canadian economy • Provide consumers with competitive prices and product choices o Focuses on price-related practices such as: • Price Discrimination: occurs when some customers pay more than others for the same product • Price Fixing: a form of collusion in which sellers get together and collude to set prices higher than they would otherwise be in a free market • Bid Rigging: occurs when sellers get together and collude to set prices with respect to one or more requests for competitive proposals • Predatory Pricing: occurs when companies set prices below their cost for a sufficiently long period of time to discourage or eliminate competition and then raise their prices or otherwise interfere with competition • False or Misleading Price Representations: one form of misleading advertising
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Profitability Objectives Marginal Analysis: method of analyzing the relationship among costs, sales price, and increased sales volume • Profit Maximization: point at which the additional revenue gained by increasing the price of a product equals the increase in total costs Target-Return Objectives: short-run or long-run pricing objectives of achieving a specified return on either sales or investment Volume Objectives Market-Share Objective: volume-related pricing objective in which the goal is to achieve control of a portion of the market for a firm's good or service Profit Impact of Market Strategies (PIMS) Project: research that discovered a strong positive relationship between a firm's market share and product quality and its return on investment Meeting Competition Objectives Value Pricing: pricing strategy emphasizing benefits derived from a product in comparison to the price and quality levels of competing offerings Prestige Objectives Not-For-Profit Objectives Pricing strategy helps these organizations goals such as: i. Profit Maximization i. Cost Recovery where groups only try to recover the actual cost of operating the unit
i. Market Incentives to encourage increased usage of the good or service i. Market Suppression where price discourages consumption (tobacco) Methods for Determining Prices… • Customary Prices: traditional prices that customers expect to pay for certain goods and services • Price Determination in Economic Theory: o Demand: schedule of the amounts of a firm's product that consumers will purchase at different prices during a specified time period o Supply: schedule of the amounts of a good or service that firms will offer for sale at different prices during a specified time period o Businesses operate and set prices in four types of market structures: 1. Pure Competition: market structure characterized by homogeneous products in which there are so many buyers and sellers that none has a significant influence on price 1. Monopolistic Competition: market structure involving a heterogeneous product and product differentiation among competing suppliers, allowing the marketer some degree of control over prices 1. Oligopoly: market structure in which relatively few sellers compete and where high start-up costs form barriers to keep out new competitors 1. Monopoly: market structure in which a single seller dominates trade in a good or service for which buyers can find no close substitutes
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Cost and Revenue Curves: • Variable Costs: costs that change with the level of production (such as labour and raw materials costs) • Fixed Costs: costs that remain stable at any production level within a certain range (such as lease payments or insurance costs) • Average Total Costs: costs calculated by dividing the sum of the variable and fixed costs by the number of units produced
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Marginal Cost: change in total cost that results from producing an additional unit of output o Elasticity: measure of responsiveness of purchasers and suppliers to a change in price • ∆Y/∆P • Price Determination in Practice: o Cost-Plus Pricing: practice of adding a percentage of specified dollar amount-or markup-to the base cost of a product to cover unassigned costs and to provide a profit o Full-Cost Pricing: pricing method that uses all relevant variable costs in setting a product's price and allocates those fixed costs not directly attributed to the production of the priced item o Incremental-Cost Pricing: pricing method that attempts to use only costs directly attributable to a specific output in setting prices o Break-Even Analysis: pricing technique used to determine the number of products that must be sold at a specified price to generate enough revenue to cover total cost o Yield Management: pricing strategy that allows marketers to vary prices based on such factors as demand, even though the cost of providing those goods or services remains the same; designed to maximize revenues in situations such as airfares, lodging, auto rentals, and theatre tickets, where costs are fixed Pricing Strategies… • Skimming Pricing Strategy: pricing strategy involving the use of an initial high price relative to competitive offerings. Price is dropped in incremental steps as supply begins to exceed demand, or when competition catches up o Step Out: pricing practice in which one firm raises prices and then waits to see if others follow suit • Penetration Pricing Strategy: pricing strategy involving the use of a relatively low entry price compared with competitive offerings, based on the theory that this initial low price will help secure market acceptance • Everyday Low Pricing (EDLP): pricing strategy of continuously offering low prices rather than relying on such short-term price cuts as cents-off coupons, rebates, and special sales • Competitive Pricing Strategy: pricing strategy designed to de-emphasize price as a comparative variable by pricing a good or service at the general level of comparable offerings o Opening Price Point: setting an opening price point below that of the competition, usually on a high-quality private label item Price Quotations… • List Price: established price normally quoted to potential buyers o Reductions from List Price: • Market Price: price a consumer or marketing intermediary actually pays for a product after subtracting any discounts, allowances, or rebates from the list price • Cash Discounts: price reduction offered to a consumer, business user, or marketing intermediary in return for prompt payment of a bill • Trade Discounts: payment to a channel member or buyer for performing marketing functions; also known as a functional discount • Quantity Discounts: price reduction granted for a large-volume purchase Cumulative Quantity Discounts: price discount determined by amounts of purchases over stated time periods
Noncumulative Quantity Discount: price reduction granted on a one-time-only basis • Allowance: specified deduction from list price, including a trade-in or promotional allowance Trade-In: credit allowance given for a used item when a customer purchases a new item Promotional Allowances: promotional incentive in which the manufacturer agrees to pay the reseller a certain amount to cover the costs of special promotional displays or extensive advertising Minimum Advertised Price (MAP): fees paid to retailers who agree not to advertise products below set prices • Rebate: refund of a portion of the purchase price, usually granted by the product's manufacturer o Geographic Considerations: • FOB Pricing Free On Board (FOB) Plant (FOB Origin): price quotation that does not include shipping charges • Buyer pays all shipping charges • Uniform-Delivered Price: pricing system for handling transportation costs under which all buyers are quoted the same price, including transportation expenses. Sometimes known as postage-stamp pricing • Zone Pricing: pricing system for handling transportation costs under which the market is divided into geographic regions and a different price is set in each region • Basing-Point Pricing: system used in some industries during the early 20th century in which the buyer paid the factory price plus freight charges from the basing-point city nearest the buyer Pricing Policies… • Pricing Policy: general guideline that reflects marketing objectives and influences specific pricing decisions o Firms implement variations of four basic types of pricing policies: 1. Psychological Pricing: pricing policy based on the belief that certain prices or price ranges make a good or service more appealing than others to buyers Odd Pricing: pricing policy based on the belief that a price ending with an odd number just under a round number is more appealing, for instance, $9.97 rather than $10.00 Unit Pricing: pricing policy in which prices are stated in terms of a recognized unit of measurement or a standard numerical count 1. Price Flexibility: pricing policy permitting variable prices for goods and services 1. Product-Line Pricing: practice of setting a limited number of prices for a selection of merchandise and marketing different product lines at each of these price levels 1. Promotional Pricing: pricing policy in which a lower than normal price is used as a temporary ingredient in a firm's marketing strategy Loss Leader: product offered to consumers at less than cost to attract them to stores in the hope that they will buy other merchandise at regular prices • Leader Pricing: variant of loss-leader pricing in which marketers offer prices slightly above cost to avoid violating
minimum-markup regulations and earn a minimal return on promotional sales Special Topics in Pricing… • Competitive Bidding: inviting potential suppliers to quote prices on proposed purchases or contracts • Transfer Price: cost assessed when a product is moved from one profit centre in a firm to another o Profit Centre: any part of an organization to which revenue and controllable costs can be assigned • Online Pricing o Shopbot (Bot): software program that allows online shoppers to compare the price of a particular product offered by several online retailers • Cannibalization: loss of sales of an existing product due to competition from a new product in the same line • Bundle Pricing: offering two or more complementary products and selling them for a single price Pricing and the Law… • Competition Act: the most comprehensive legislation in Canada, designed to help both consumers and businesses by promoting a healthy competitive environment o Purposes: • Promote the efficiency and adaptability of the Canadian economy • Expand opportunities for Canadian participation in world markets while at the same time recognizing the role of foreign competition in Canada • Ensure that small and medium-sized enterprises have an equitable opportunity to participate in the Canadian economy • Provide consumers with competitive prices and product choices o Focuses on price-related practices such as: • Price Discrimination: occurs when some customers pay more than others for the same product • Price Fixing: a form of collusion in which sellers get together and collude to set prices higher than they would otherwise be in a free market • Bid Rigging: occurs when sellers get together and collude to set prices with respect to one or more requests for competitive proposals • Predatory Pricing: occurs when companies set prices below their cost for a sufficiently long period of time to discourage or eliminate competition and then raise their prices or otherwise interfere with competition • False or Misleading Price Representations: one form of misleading advertising
