Chapter 19: Pricing Concepts

Market Structures

Pricing is heavily influenced by the market structure

• Pure Monopoly

  • illegal

• Oligopoly

  • small number of firms that dominate the market

• Monopolistic Competition

• Pure Competition

Market Entry Pricing

Price Skimming:

• high price for a new product initially and then gradually lowers the price over time.

• this approach targets consumers who are less price-sensitive and willing to pay more for early access to a product.

Penetration Pricing:

• company sets a low initial price for a product to attract customers and gain market share quickly

• for repeat purchase items

• low prices help penetrate the market

• the hope is higher sales and better profits

• good for frequently purchased non durable products

Price Modification: Discounts and Allowances

• the goal is to maximize profitability while still listening to their customers

• Discounting is a good way to

  • sell excess inventory

  • introduce new products

  • improve wider margin

Types of Discounts:

• Quantity Discount

  • happens when people buy a certain amount to get a discount on an other one

  • e.g buy two, get one half off

• Cash Discount

  • Typically used for business ventures

• Seasonal Discount

  • discounts during off seasons

• Promotional Discount

  • pushing the seller’s product, offering more prominent display

• Rebate

  • type of discount that is paid after the purchase has been made

  • incentive to boost sales and customer loyalty

Geographic Pricing and Other Pricing Tactics

Geographic Pricing

• FOB

  • the buyer pays the shipping cost from the seller’s original location to the buyer’s destination

  • when the freight cost is high

• Uniformed Delivered Pricing

  • all customers pay the same shipping cost no matter how far the seller is

• Zone Pricing

  • charging different prices for products or services in different regions

Other Commonly Used Pricing Tactics

• Loss leader pricing

  • sells a product at a loss to attract customers

• Psychological

  • set prices for products and services based on how consumers perceive numbers and value rather than the cost

• Two Part Pricing

  • customer pays an entry fee to access a product or service and pays an additional unit per charge based on their usage

• Price Bundling

  • involves selling multiple items together at a discounted price instead of selling them individually

• Versioning

  • offers different versions of a product at different pricing

Legal Issues In Pricing

You want competition.

Different Types of Pricing:

• Price Fixing

  • competitors collaborate to fix a price and avoid price-base competition

  • considered illegal in most countries

• Price Discrimination

  • charging different prices to different buyers in a short span of time

  • not illegal if it could be justified

• Predatory Pricing

  • undercutting competitors prices to drive them out of business