Ch. 10 - Price

Price

Money, goods, services, favors, votes, or anything that has value to the seller and is given by the buyer in the exchange.

Cost

Costs are absorbed only by the buyer, but have no value to the seller.

Pricing Factors

1. supply and demand

2. cost to produce product

3. pricing environment

4. revenue goals

Elasticity

The change in item sales (%) that results from a change in price (%).

Elastic Demand

Like a rubber band, changes in price changes demand; demand stretches based on price.

Inelastic Demand

Unlike a rubber band, changes in price has little effect on demand.

Substitutes

Two goods where an increase in the price of one leads to an increase in the demand for the other.

Compliments

Two goods where an increase in the price of one leads to a decrease in the demand for the other.

Fixed Costs

Costs that do not vary with the quantity of output produced.

Variable Costs

Costs that vary with the quantity of output produced.

Markup

The amount added to the cost of merchandise to establish the selling price.

Gross Margin

The amount of money the retailer makes as a percentage of the price.

List Price

The prices suggested by the manufacturer (MSRP) and used to suggest value to the consumer or for "price maintenance" strategies (uses anchoring). See MSRP.

MSRP

Manufacturer's suggested retail price. See List Price.

Pricing Strategy

A long-term approach to how a firm sets prices.

Pricing Tactics

Short-term methods used to obtain maximum price from the consumer.

Cost-based Pricing Strategy

Setting prices based on the costs of producing, distributing, and selling the product plus a fair rate of return for effort and risk. Also called "cost-plus" pricing.

Commodity

A raw material such as copper, coffee, pork bellies, where there is no difference between one firm's product (say, copper) and another firm's copper. Therefore, price is the only distinguishable factor the consumer uses to make purchase decisions.

Demand-based Pricing Strategy

Firm bases price on estimated volume it can sell. Often different prices in different markets.

Yield Management Pricing Strategy

Prices to maximize perishable resource (e.g. airlines, movie theaters).

Target Costing Pricing Strategy

Pricing that starts with an ideal selling price, then targets costs of product components that ensures the price is met.

EDLP Strategy

Every day low pricing (e.g., Walmart).

Price Leadership Strategy

Often used in oligopolistic industries when a dominant firm announces its new price, and competitors get in line or drop out, in order to minimize competition (e.g., airlines).

Skim Pricing Strategy

Charging a high price for a new product during the introductory stage and lowering the price later. Opposite of penetration pricing.

Penetration Pricing Strategy

Opposite of skim pricing. Using a relatively low entry price to gain market share.

Trial Pricing Strategy

Offers low price for short-term (with clear increase stated, i.e., "limited time") to capture market then maintain margins.

Two-part Pricing Tactic

Price is paid in two parts. For example, initiation fee plus monthly dues at a country club, or night club cover charge + drinks/food.

Payment Pricing Tactic

Split costs across multiple payments over time (e.g., QVC, Apple, Amazon).

Price Bundling Tactic

Discount for buying multiple types of items (e.g., value meal, Comcast cable/tv packages).

Captive Pricing Tactic

Low price for a fixed item plus a higher for required consumables (e.g., handle + razor, printer + toner).

Price Discrimination

Companies (legally) offers different pricing to different groups based on value the groups get from the product. This is, in fact, the origin of modern segmentation.

Price Segmentation

Charging different prices to different groups (e.g., 10% discount for seniors).

Peak or Surge Pricing

Price varies by demand (e.g., Uber).

Dynamic Pricing Tactic

Online, often real-time, pricing based on individual's known interests and needs.

Online Auctions

Price set by the buyers.

Freemium Pricing

Some minimal functionality of the product (e.g., an app) is free and upgrades are charged. Internet makes upgrading (and paying) easy.

Anchoring

The tendency, in making judgments, to rely on the first piece of information encountered or information that comes most quickly to mind.

Epistemic Shopping

Activities oriented towards acquiring knowledge about products, including what is a "good" price.

Price-quality Inferences

When consumers use price as a cue to infer product quality. Price too high is a "bad deal." Price too low means "bad quality."

Odd-even Pricing

Setting prices a few dollars or cents under an even number. Prominent in the US, less so in Europe. Suggests a "deal."

Price Lining

Having a tier of products that are presented, for example, as "good," "better," and "best."

Prestige Pricing

Setting a high price to suggest scarcity and high status.

Bait-and-switch

An illegal marketing practice where an advertised price special is used as "bait" to get customers into the store with the intention of "switching" them to a higher-priced item.

Loss Leader Pricing

Setting prices very low or even below cost on a few goods to attract customers into a store. See predatory pricing.

Price Fixing

An illegal agreement among firms to charge one price for the same good.

Predatory Pricing

Firm sets very low price for purpose of driving rival out of business. See loss leader pricing.

Price Gouging

Overcharging for essential goods during an emergency. All three underlined must be true for it to be gouging.

Deceptive Pricing

An illegal practice that involves intentionally misleading customers with price promotions that lead to paying hidden costs.