Chapter 14

Five Cs of Pricing

company objectives, customers, costs, competition, & channel members

Company objectives

profit, sales, competitor, customer-oriented

Profit Orientation

target profit pricing, maximizing profits, & target return pricing

Target profit pricing

pricing strategy implemented by firms when they have a particular profit goal as their overriding concern; uses price to stimulate a certain level of sales at a certain profit per unit

Maximizing profits

firm can accurately specify a mathematical model that captures all the factors required to explain and predict sales and profits, it should be able to identify the price at which its profits are maximized

Target return pricing

pricing strategy implemented by firms less concerned with the absolute level of profits and more interested in the rate at which their profits are generated relative to their investments

Sales Orientation

company objective based on the belief that increasing sales will help the firm more than will increasing profits

Competitor orientation

company objective based on the premise that the firm should measure itself primarily against its competition

Customer orientation

based on the premise that the firm should measure itself primarily according to whether it meets its customers’ need; add value to its products and services

Demand curve

shows how many units of a product or service consumers will demand during a specific period at different prices

Price elasticity of demand

measures how changes in a price affect the quantity of the product demanded

Factors influencing price elasticity of demand

cross-price elasticity, income effect, & substitution effect

Income effect

refers to the change in the quantity demanded by consumers due to the changes in their income

Substitution effect

consumers’ ability to substitute other products for the focal brand

Cross-price elasticity

percentage change in the quantity of Product A demanded compared with the percentage change in price in Product B

Complementary products

products whose demand curves are positively related

Substitute products

changes in demand are negatively related; increase in demand for Product A results in a decrease in demand for Product B

Price war

competition that occurs when two or more firms compete primarily by lowering their prices; sometimes occur as a reaction to prices in an oligopolistic market

Predatory pricing

firm’s practice of setting a very low price for one or more of its products with the intent to drive its competition of business

Four types of competitive environments

monopoly, oligopolistic competition, monopolistic competition, & pure competition

Manufacturers

might be focused on building brand awareness; higher prices

Retailers

focused on increasing sales; lower prices

Everyday low pricing

strategy companies use to emphasize the continuity of their retail prices at a level somewhere between the regular, nonsale price and the deep-discount sale prices their competitors may offer

High/low pricing

relies on the promotion of sales, during which prices are temporarily reduced to encourage purchases

Reference prices

price against which buyers compare the actual selling price of the product and that facilitates their evaluation process

Market penetration pricing

build sales, market share, and profits quickly & deter competition from entering the market

Price skimming

helps firms build market share for their new products quickly, but consumers must be price elastic for this strategy to work

Horizontal price fixing

competing firms should refrain from discussing prices or terms and conditions of sale with competitors

Vertical price fixing

manufacturers often encourage retailers to sell their merchandise at a specific price