Mgmt 105 - Ch 10: Pricing

Value proposition

A marketplace offering that fairly and accurately sums up the value that the customer will realize if they purchase a product.

• Includes all benefits the firm promises to deliver, not just the benefits of the product itself

Opportunity cost

The value of something we give up to obtain something else.

Price planning: Step 1

Set pricing objectives.

• Profit, sales, market share, competitive effect, customer satisfaction, image enhancement

• Must support broader objectives of the firm

Price planning: Step 2

Estimate demand.

• Shifts in demand, price elasticity of demand

Price planning: Step 3

Determine costs.

• Variable costs, fixed costs, break-even analysis, markups, and margins

Price planning: Step 4

Examine the pricing environment.

• Economy, competition, federal regulation, consumer trends, the international environment

Price planning: Step 5

Choose a pricing strategy.

• Based on: cost, demand, the competition, customers’ needs

• New-product pricing

Price planning: Step 6

Develop pricing tactics.

• For individual and multiple products

• Distribution-based tactics

• Discounting for channel members

Pricing objective: sales or market share

Develop bundle pricing offers in order to increase this.

Pricing objective: Profit

Set prices to allow for an eight percent profit margin on all goods sold.

Pricing objective: Image enhancement

Alter pricing policies to reflect the increased emphasis on the product’s quality image.

Pricing objective: Competitive effect

Alter pricing strategy during first quarter of the year to increase sales during competitor’s introduction of a new product.

Pricing objective: Customer satisfaction

Alter price levels to match customer expectations.

Market share

The percentage of a market (defined in term of either sales units or revenue) accounted for by a specific firm, product line, or brand.

Competitive-effect (or market-based) pricing

Pricing a product based on the competition’s pricing.

Prestige products

Products that have a high price and that appeal to status-conscious consumers.

Demand

Refers to the quantity of a good or service that consumers and business customers are willing and able to buy at a given price in a given time period.

Demand curve

Shows the quantity of a product that customers will buy in a market during a period of time at various prices if all other factors remain the same.

Axes of a demand curve

• Vertical: different prices (P)

• Horizontal: quantity (Q)

Price elasticity of demand

The percentage change in unit sales that results from a percentage change in price.

= (% change in quantity demanded) / (% change in price)

Elastic demand

Demand in which changes in price have large effects on the amount demanded.

Inelastic demand

Demand in which changes in price have little or no effect on the amount demanded.

Cross-elasticity of demand

When changes in the price of one product affect the demand for another item.

Variable costs

The costs of production (raw and processed materials, parts, and labor) that are tied to and vary by the number of units produced.

Fixed costs

Costs of production that do not change with the number of units produced.

Average fixed cost

The fixed cost per unit produced.

Total costs

The total of the fixed costs and the variable costs for a set number of units produced.

Break-even analysis

A method for determining the number of units that a firm must produce and sell at a given price to cover all its costs.

Break-even point

The point at which the total revenue and total costs are equal and above which the company makes a profit; below that point, the firm will suffer a loss.

• = (total fixed costs) / (contribution per unit to fixed costs)

The point at which the total _____ and total _____ lines intersect is the _____.

revenue; costs; break-even point

Contribution per unit

The difference between the price the firm charges for a product and the variable cost.

Markup

An amount added to the cost of a product to create the price at which a channel member will sell the product.

Gross margin

The markup amount added to the cost of a product to cover the fixed costs of the retailer or wholesaler and leave an amount for a profit.

Wholesaler/retailer margin

The margin added to the cost of a product by a wholesaler/retailer.

Credit Card Responsibility and Disclosure Act

Limits credit card rates and other fees.

Affordable Care Act

Provides access to health care for all Americans.

Consumer trend influences

AI tools, delightful distractions, green decision-making, political polarization, money saving, wellness pragmatists.

Pricing strategies based on cost

• Pros: simple to calculate and relatively risk free

• Cons: Neglect variables like changing prices of inputs, the nature of the target market, demand, competition, the product life cycle, and the product’s image.

• Estimating costs accurately may also prove difficult

Cost-plus pricing

A method of setting prices in which the seller totals all the costs for the product and then adds an amount to arrive at the selling price.

• Commonly used for its simplicity

Keystone pricing

A retail pricing strategy in which the retailer doubles the cost of the item (100 percent markup) to determine the price.

Demand-based pricing

A price-setting method based on estimates of demand at different prices.

Congestion pricing

Pricing strategy of charging a high fee for operating cars during peak traffic times to reduce congestion.

Target costing

A process in which firms identify the quality and functionality needed to satisfy customers and what price they are willing to pay before the product is designed.

• The product is manufactured only if the firm can control costs to meet the required price.

Yield management pricing

A practice of charging different prices to different customers to manage capacity while maximizing revenues.

• Often practiced by service firms since they recognize that different customers have different sensitivities to price.

Price leadership

A pricing strategy in which one firm first sets its price and other firms in the industry follow with the same or similar prices.

Value pricing / Everyday low pricing (EDLP)

A pricing strategy in which a firm sets prices that provide ultimate value to customers.

• Promises good-quality and durable products are reasonable prices every day.

High/low pricing, or promo pricing

A retail pricing strategy in which the retailer prices merchandise at list price but runs frequent, often weekly, promotions that heavily discount some products.

Skimming price

A very high, premium price that a firm charges for its new, highly desirable product.

Penetration pricing

A pricing strategy in which a firm introduces a new product at a very low price to encourage more customers to purchase.

Trial pricing

Pricing a new product low for a limited period of time to lower the risk for a customer.

Price segmentation

The practice of charging different prices to different market segments for the same product.

Peak load pricing

A pricing plan that sets prices higher during periods with higher demand.

Surge pricing

A pricing plan that raises prices of a product as demand goes up and lowers it as demand slides.

Bottom-of-the-pyramid pricing

Innovative pricing strategy in which brands that wish to get a foothold in the bottom-of-the-pyramid countries appeal to consumers with the lowest incomes.

Two-part pricing

Pricing that requires two separate types of payments to purchase the product.

Payment pricing

A pricing tactic that breaks up the total price into smaller amounts payable over time.

Subscription pricing

Pricing tactic where customers pay on a periodic basis, normally monthly or yearly, for access to a product.

Decoy pricing

A pricing strategy where a seller offers at least three similar products.

• Two have comparable but more expensive prices

• One of these two is less attractive to buyers, causing more buyers to buy the higher-priced, more attractive item

Price bundling

Selling two or more goods or services as a single package for one price.

Captive pricing

A pricing tactic for two items that must be used together.

• One item is priced very low

• The other is a high-margin item essential to the operation of the first item, this is where the firm makes its profit

FOB factory (or origin) pricing

A pricing tactic in which the cost of transporting the product from the factory to the customer’s location is the responsibility of the customer.

CIF (cost, insurance, freight)

Means the seller quotes a price for the goods (including insurance), all transportation, and miscellaneous charges to the point of debarkation from its vessel.

CFR (cost and freight)

The quoted price covers the goods and the cost of transportation to the named point of debarkation, but the buyer must pay the cost of insurance.

CIP (carriage and insurance paid to)

Include the same provisions as CIF and CFR but are used for shipment by modes other than water.

Uniform delivered pricing

A pricing tactic in which a firm adds a standard shipping charge to the price for all customers regardless of location.

Freight absorption pricing

A pricing tactic in which the seller absorbs the total cost of transportation.

Trade discounts

Discounts off list price of products to members of the channel of distribution who perform various marketing functions.

Quantity discounts

A pricing tactic of charging reduced prices for purchases of larger quantities of a product.

Cash discounts

A discount offered to a customer to entice them to pay their bill quickly.

Dynamic pricing

A pricing strategy in which the price can easily be adjusted to meet changes in the marketplace.

Online auctions

E-commerce that allows shoppers to purchase products through online bidding.

Freemium pricing

A business strategy in which a product in its most basic version is provided free of charge but the company charges money (the premium) for upgraded versions of the product with more features.

Internet price discrimination

An Internet pricing strategy that charges different prices to different buyers for the same product based on order size or geographic location.

Buy now, pay later (BNPL)

Services that allow consumers to get a product now and pay for it over a period of time.

Save now, buy later (SNBL)

A payment process whereby payments are automatically drafted from a customer’s bank account, and when the agreed-upon amount is saved, the customer can order the item.

Collaborative savings and consumption

A savings plan where members are placed into small groups and make monthly payments.

• One member is selected randomly ever 30 days to withdraw the entire monthly contributions.

P2P or social lending

Allows individuals to borrow money from other individuals giving the lender higher rates and the borrower lower rates than banks.

Rent to own

A buyer rents an item and at a set end of the rental period, the buyer owns the merchandise.

Cashless society

An economic state where financial transactions are executed through the transfer of digital information rather than with banknotes.

Psychological issues in pricing

Buyers’ expectations, internal reference prices, price-quality inferences

Psychological pricing strategies

Odd-even pricing, price lining, prestige pricing.

Legal and ethical issues in B2C and C2C pricing

Bait and switch, loss-leader pricing, misleading merchandise, price gouging.

Legal and ethical issues in B2B pricing

Price discrimination, price-fixing, predatory pricing.

Internal reference price

A set price or a price range in consumers’ minds that they refer to in evaluating a product’s price.

Odd-even pricing

The psychological pricing strategy that dollar and cent amounts are usually in odd numbers.

• Research shows that prices ending 99 rather than 00 can increase sales by 21-34 percent.

• Professional services are usually in even dollar amounts

Price lining

The practice of setting a limited number of different specific prices, called price points, for items in a product line.

Prestige/premium pricing

A pricing strategy used by luxury goods marketers in which they keep the price artificially high to maintain a favorable image of the product.

Bait and switch

An illegal marketing practice in which 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

The pricing policy of setting prices very low or even below cost to attract customers into a store.

Unfair sales acts

State laws that prohibit suppliers from selling products below cost to protect small businesses from larger competitors.

Price gouging

An illegal act in which a seller seeks to take advantage of an emergency of extreme need to charge exorbitant prices for items.

Price fixing

The collaboration of two or more firms in setting prices, usually to keep prices high.

Predatory pricing

An illegal pricing strategy in which a company sets a very low price for the purpose of driving competitors out of business.