Chapter 11 - Pricing Products and Services

Price

The money or other considerations (including other products and services) exchanged for the ownership or use of a product or service; it determines a firm’s market share and profitability and is the only marketing mix element that produces revenue.[cite: 2, 3]

Barter

The practice of exchanging products and services for other products and services rather than for money.[cite: 3]

Price Equation

Final price = List price – (Incentives + Allowances) + Extra fees.[cite: 2, 3]

Value

The ratio of perceived benefits to price (Value = Perceived Benefits ÷ Price).[cite: 2, 3]

Value Pricing

The practice of simultaneously increasing product and service benefits while maintaining or decreasing price.[cite: 2, 3]

Profit Equation

Profit = Total Revenue – Total Cost.[cite: 3]

Demand-Oriented Pricing

Approaches that weigh expected customer tastes and preferences more heavily than cost, profit, and competition when selecting a price level.[cite: 3]

Skimming Pricing

Setting the highest initial price that customers who really desire the product are willing to pay when introducing a new or innovative product.[cite: 2, 3]

Penetration Pricing

Setting a low initial price on a new product to appeal immediately to the mass market.[cite: 2, 3]

Prestige Pricing

Setting a high price so that quality- or status-conscious consumers will be attracted to the product and buy it.[cite: 2, 3]

Odd-Even Pricing

Setting prices a few dollars or cents under an even number to psychologically influence demand.[cite: 2, 3]

Target Pricing

Estimating the price ultimate consumers are willing to pay, working backward through markups, and adjusting product features to achieve the target price.[cite: 3]

Bundle Pricing

The marketing of two or more products in a single package price.[cite: 2, 3]

Yield Management Pricing (Dynamic Pricing)

The charging of different prices to maximize revenue for a set amount of capacity at any given time.[cite: 2, 3]

Cost-Oriented Pricing

Setting price by looking at production and marketing costs and then adding enough to cover direct expenses, overhead, and profit.[cite: 2, 3]

Standard Markup Pricing

Adding a fixed percentage to the cost of all items in a specific product class.[cite: 2, 3]

Cost-Plus Pricing

Summing the total unit cost of providing a product or service and adding a specific amount to the cost to arrive at a price.[cite: 2, 3]

Target Profit Pricing

Setting an annual target of a specific dollar volume of profit.[cite: 2, 3]

Target Return-on-Sales Pricing

Setting a price to achieve a profit that is a specified percentage of the sales volume.[cite: 2, 3]

Target Return-on-Investment Pricing (ROI)

Setting a price to achieve an annual target return-on-investment.[cite: 2, 3]

Customary Pricing

Setting a price that is dictated by tradition, a standardized channel of distribution, or other competitive factors.[cite: 2, 3]

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.[cite: 2, 3]

Loss-Leader Pricing

Deliberately selling a product below its customary price to attract customers’ attention in hopes that they will buy other products with large markups.[cite: 2, 3]

Demand Curve

A graph relating the quantity sold and price, showing the maximum number of units that will be sold at a given time period and price.[cite: 2, 3]

Price Elasticity of Demand

The percentage change in quantity demanded relative to a percentage change in price, measuring the sensitivity of demand to changes in price.[cite: 2, 3]

Elastic Demand

Exists when a 1 percent decrease in price produces more than a 1 percent increase in quantity demanded (demand changes significantly with a small price change).[cite: 2, 3]

Inelastic Demand

Exists when a 1 percent decrease in price produces less than a 1 percent increase in quantity demanded (demand hardly changes with a small price change).[cite: 2, 3]

Total Revenue (TR)

The total money received from the sale of a product, calculated as unit price times the quantity sold.[cite: 3]

Total Cost (TC)

The total expense incurred by a firm in producing and marketing a product, calculated as the sum of fixed cost and variable cost.[cite: 2, 3]

Fixed Cost (FC)

The sum of the firm's expenses that are stable and do not change with the quantity of a product that is produced and sold (e.g., rent, executive salaries).[cite: 2, 3]

Variable Cost (VC)

The sum of the firm's expenses that vary directly with the quantity of a product that is produced and sold (e.g., direct labor and materials).[cite: 2, 3]

Unit Variable Cost (UVC)

Variable cost expressed on a per-unit basis.[cite: 2, 3]

Break-Even Analysis

A technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output.[cite: 3]

Break-Even Point (BEP)

The quantity at which total revenue and total cost are equal, meaning profit is exactly $0.[cite: 2, 3]

Pricing Objectives

Goals specifying the role of price in an organization’s marketing and strategic plans, such as profit, sales, market share, unit volume, survival, or social responsibility.[cite: 3]

Pricing Constraints

Factors that limit the range of prices a firm may set, including consumer demand, product newness, costs, competitors' prices, and legal/ethical considerations.[cite: 3]

Price Fixing

A conspiracy among firms to set prices for a product, which is illegal under the Sherman Act.[cite: 2, 3]

Price Discrimination

The practice of charging different prices to different buyers for products of like grade and quality.[cite: 2, 3]

Deceptive Pricing

Price deals that mislead consumers, such as bait and switch tactics or fake discounts.[cite: 2, 3]

Predatory Pricing

The practice of charging a very low price for a product with the intent of driving competitors out of business, and then raising prices later.[cite: 2, 3]

One-Price Policy (Fixed-Price)

Setting one fixed price for all buyers of a product or service.[cite: 3]

Dynamic Pricing Policy (Flexible-Pricing)

Setting different prices for products and services in real time in response to supply and demand conditions.[cite: 3]

Quantity Discounts

Reductions in unit costs for a larger order to encourage customers to buy larger quantities of a product.