Pricing Strategies Flashcards

Flashcards covering key vocabulary related to pricing strategies.

Price Bands/Banding

A statistical technique for identifying which customers are paying significantly more or significantly less than the band of “peer” prices for a given type of transaction.

Organizational Structure

Designing an ____ for the pricing function involves establishing formal reporting relationships for the managers responsible for managing the pricing process.

Expert Resource Role

The ________ can be effective with a centralized pricing function supporting multiple divisions where each unit operates in distinct markets.

Functional Coordinator

is asked to take control of the pricing processes

Commercial Partner

role when it is given authority over both pricing decisions and processes

Figurehead

occurs when the pricing organization owns the right to make key decisions, but does not have the power to enforce those decisions in the market place.

Pricing Structure

• Center of Scale

• Center of Expertise

• Dedicated support unit

Center of Scale

• which pricing decisions are made and managed at the corporate level.

• Pricing owned and managed at corporate level

Center of Expertise

• characterized by the business units maintaining control of the pricing decisions and pricing processes.

• Pricing decisions and strategy supported by corporate pricing

Dedicated Support Unit

• business unit has a dedicated pricing group that is only loosely aligned with corporate pricing (if that function even exists)

• Independent pricing organizations exist in each business units

Input rights

enable an individual to provide information before the decision is made

Make Rights

belong to only one person or committee

Ratification Rights

provide a mechanism for senior managers to overturn pricing decisions when they conflict with broader organizational priorities

Notification Rights

allocated to individuals that will use or be affected by the pricing decisions in other decision-making processes.

Customers Analytics

is the use of data to understand the composition, needs and satisfaction of the customer.

Process Management Analytics

to measure unsatisfactory pricing outcomes (such as profit leaks) and trace them back to the pricing process, where they can be “sealed.”

Organization

______ must create a small pricing committees within each business unit that were tasked with managing pricing policies and execution.

_______ must form a corporate-supported pricing council composed of representatives from the pricing committees at the business units.

Price Waterfall

A powerful tool for identifying hidden costs and shows how much revenue companies really keep from each of their transactions.

Demonstration Project

A means of promoting innovations and capturing and disseminating best practice through the development and analysis of a live project.

Cost-based pricing (Cost-plus pricing)

The selling price of a product is determined by adding a specific fixed percentage (markup) to the product’s unit cost.

Value pricing

A strategy of setting prices primarily based on a consumer’s perceived value of a product or service.

Penetration pricing

A marketing strategy used by businesses to attract customers to a new product or service by offering lower pricing during its initial offering.

Competition based pricing

Prices points are heavily influenced by competitors. This approach focuses outwardly on the marketer rather than your costs.

Psychological pricing

Capitalizes on human cognitive biases and behaviors to influence consumer perceptions of product value and pricing.

Price Anchoring

Customers depend heavily on the initial piece of information.

Charm Pricing

The use of prices ending in the number nine because of the ”left-digit bias.

Odd-Even Pricing

Leverages on the belief that, psychologically, buyers are more sensitive to certain ending digits.

Decoy Pricing

Individuals tend to have a specific change in preference when presented with a third option

Price Skimming

The firm charges the highest initial price that customers will pay. Over time, the price is lowered to attract more price sensitive customers.

Premium pricing

The practice of keeping the price of the product or service higher compared to competition to encourage favorable perceptions among buyers.

Bundling

A business sales strategy that involves offering two or more related products and services as a package at a discounted price.

Versioning

A company offers multiple versions of a product at different price points. Designed to capture different market segments based on customers’ willing to pay, needs, and preference

High-Low pricing

Allows businesses to charge more for initially introduced products and then later, sell them at a much lower price during promotional campaigns, before raising prices again.

Peak-load Pricing

Charging a high price during demand peaks and a lower price during off-peak time periods.

Geographical Pricing

The practice of adjusting an item’s sale price based on the location of the buyer.

Internet Pricing

The process of setting, adjusting, and communicating products prices on digital platforms such as websites, online marketplace, and social media.

Absolute vs. Relative Numbers

◦ Absolute: $15 off of a $199 item and $15 off of a $49 item is the same in absolute terms

◦ Relative: $15 of $199 is 8% while $15 of $49 is 31%

Framing

A $499 trip is the same as a $599 trip with a $100 discount at booking

◦ However, the $599 trip seems like a better deal because of the higher starting price.

Price discount and mood

Temporary price discounts make customers think they are smart shoppers

◦ They experience feelings of happiness, pride, optimism, confidence, etc.

Price ending in 99

Prices like $4.99 or $49.99 tend to be more attractive than $5 or $50

People read left to right ; thus, the 4 is processed first and leaves an impression

Mental Accounting

People categorize & budget purchases

People pay less attention to future

e.g., Vacation money is “different than” food money

Compromise Effect

The inner/middle choice between two extremes is attractive

People assume that if a company charges more, it must be providing more.

Referent Pricing

People compare price to some referent, either an externally available price or an internally stored price

Cost

The amount of money that a company spends on the creation or production of goods or services. It does not include the markup for profit.

Fixed Costs (Overhead)

Costs that don't vary with sales or production levels

Variable Costs

Costs that do vary directly with the level of production

Total Costs

Some of the fixed and variable cost for a given level of production.

Relevant cost

A managerial accounting term that describes avoidable costs that are incurred only when making specific business decisions.

Incremental cost

The total cost incurred due to an additional unit of product being produced.

Avoidable costs

Are those that either have not yet been incurred or can be reversed.

Costs associated with changes in pricing and sales.

Sunk cost

In economics and finance, a cost that has already been incurred and that cannot be recovered.

Peak pricing

A form of congestion pricing where customers pay an additional fee during periods of high demand.

Activity-Based Costing (ABC)

The ABC system of cost accounting is based on activities, which are considered any event, unit of work, or task with a specific goal.

Percent Contribution Margin

The share of price that adds to profit or reduces losses.

Transfer pricing

An accounting practice that represents the price that one division in a company charge another division for goods and services provided.

Price Wars

Occur when 2 or more rival companies lower prices of comparable goods/services to gain customers and increase market share.

Positive-sum games

Are those in which the very process of competition creates benefits.

Negative-sum games

Are those in which the process of competition imposes costs on players.

Needs-Based Positioning

Based on serving the needs of only a particular customer segment or niche, which enables the firm to tailor its operations to meet the unique needs of that segment more cost-effectively.

Access-Based Positioning

Based on the company’s ability to gain access to customers in unique ways. Access can be a function of geography or customer scale.

Variety-Based Positioning

Competing in industries by choosing selected activities as part of strategically designed value chains, including coalitions with strategic partners that coordinate or share value chains to give a company a shared cost or differentiation advantage.

Economies of scale

Refer to cost reductions that are derived from specialization or spreading the costs of fixed assets over more units as the volume of production increases.

Economies of scope

Are derived from the breadth of a firm’s activities, perhaps deriving from spreading the costs of fixed assets over a wider variety of units.

Economies of learning

Are derived from experience as measured by accumulated output.

Diplomacy

A way to constructively engage and negotiate with multiple business, mitigate geopolitical and commercial risk, and influence actors within the global arena.

Generalship

Refers to the strategic leadership and decision-making skills that drive a business toward sustained profit and financial health.

Tit for Tat Pricing

Is an extreme form of price followership in which a firm matches its competitor’s price actions at every stage of the game.

Laws and regulations

These are governmental rules that are enforced with penalties, such as fines and imprisonment.

Social responsibilities

Are the obligations of a business to implement policies that are most beneficial to society.

Ethics

Are the standards and principles concerning fairness and whether something is considered right or wrong.

Sarbanes-Oxley Act

A significant and sweeping piece of securities reform legislation—became law in 2002.

Price Fixing

• may be horizontal (by competitors selling to common customers) or vertical (by firms in the same chain of distribution).

• Competitors cannot agree upon prices.

• The law that governs in this area is Section 1 of the Sherman Act, a 1890 statute that prohibits “[e]very contract, combination . . . Or conspiracy in restraint of trade”

Horizontal Price Fixing

Manufacturers of competing products that both sell to distributors (horizontal competitors) may not agree to set or maintain the price or terms of sale of common products.

This is the clearest single example of conduct that will land you in jail.

Vertical price fixing

(“resale price maintenance”) Involves an agreement between a manufacturer and its distributors to sell at a stated price.

Resale Price Encouragement

Provide rebates directly to its dealer’s customers or even reimburse dealers who paid it to their customers, if the dealer remains free to set its own price

Provide promotional allowances to reduce wholesale prices, if the dealer remains free to determine whether to reduce its resale price

Offer dealer assistance programs that require the dealer to pass a manufacturer’s price reduction down to the dealer’s customers, if the dealer continues to set its own prices.

Non-Price Vertical Restraints

Manufacturers also may use various _____ on dealers to control the marketing of their products and combat against discounting and dealer free-riding.

Customer and Territorial Restrictions

Product Restrictions

Tying

Occurs when a supplier makes the sale of one product (the tying product) conditional upon the purchase of another (the tied product) from the supplier.

Predatory or below-cost pricing

When a company sets it prices very low, often below cost, to drive competitors out of business.

Price Signaling

information conveyed to consumers and producers, via the prices offered or requested for, and the amount requested or offered of a product or service, which provides a signal to increase or decrease quantity supplied or quantity demanded

Price Discrimination

– requires that a single seller sell two products to two purchasers at different prices.

– Services are not commodities. The items must be of “like grade and quality” based upon characteristics of the product itself rather than brandnames and labels, packaging, or warranties.

– Physical differences in products place them outside this test.

Cost Justification

A way for a seller defend themselves against accusations of unfair pricing by showing that they have lower costs when serving customers who pay less.

Meeting Competition

A legal defense used in antitrust cases where the defendant argues that they lowered their prices in good faith to match a competitor’s equally low offer.

Changing Conditions

Ensures that businesses can adapt to market fluctuations without violating antitrust laws, as long as the price differences are justifiable and not intended to undermine competition.

Dumping

When a country or company exports a product a price that is lower in the foreign importing market than the price in exporter’s domestic market.

Collusive pricing

Occurs when entities or individuals work together to influence a market or pricing to their advantage.

Price Fixing

○ is a type of societally questionable pricing practice that concerns the price-setting process

○ A second type of questionable pricing practice concerns not so much any particular price-setting process as much as the negative societal consequences of the prices that end up actually occurring

Excessively Low Price

It is not just high prices that could have negative societal consequences; low prices could also be harmful to society.

Inadequate Price Communication

This refers to situations where businesses fail to clearly, accurately, or transparently convey pricing information to consumers.

Manipulation of Price Format

refers to deceptive practices where sellers present prices in misleading ways to influence consumer perception and purchasing decisions.

Misleading Merchandising

Includes tactics that create false impressions about a product’s quality, quantity, origin, or benefits, leading consumers to make purchasing decisions based on inaccurate or incomplete information.

Using Fictitious Low Prices as “Bait”

A seller advertises a product at an exceptionally low price to attract customers. However, when customers attempt to purchase the advertised item, they discover its unavailable or of inferior quality.