Chapter 14

Marketing: Arriving at the Final Price

AFTER READING THIS CHAPTER
YOU SHOULD BE ABLE TO:
  • •Understand how to establish the initial “approximate price level” using demand-oriented, cost-oriented, profit-oriented, and competition-oriented approaches.
•
  • •Identify the major factors considered in deriving a final list or quoted price from the approximate price level.
 
  • •Describe adjustments made to the approximate price level on the basis of geography, discounts, and allowances.
•
  • •Prepare basic financial analyses useful in evaluating alternative prices and arriving at the final sales price.
 
  • Describe the principle laws and regulations affecting pricing practices.
 

 

ARRIVING AT THE FINAL PRICE
DURACELL KNOWS THE VALUE
OF PORTABLE POWER
 

 

FIGURE 14-1  Steps in setting price

STEP 4:  SELECT AN APPROXIMATE PRICE LEVEL

FIGURE 14-2  Four approaches for selecting an approximate price level

STEP 4:  SELECT AN APPROXIMATE PRICE LEVEL
  • •Demand-Oriented Approaches
 
 

 

Skimming Pricing
The highest initial price that customers really desiring the product are willing to pay.
 
 

 

Penetration Pricing
Setting a low initial price on a new product to appeal immediately to the mass market.
 
 

 

Prestige Pricing
Setting a high price so that status-conscious consumers will be attracted to the product and buy it.
 
 

 

Price Lining
Setting the price of a line of products at a number of different specific pricing points.
 
 

 

FIGURE 14-3  Demand curves for two types of demand-oriented approaches

STEP 4:  SELECT AN APPROXIMATE PRICE LEVEL
  • •Demand-Oriented Approaches
    (cont)
 
 

 

Odd-Even Pricing
Setting prices a few dollars or cents under an even number, such at $19.95.
 
 

 

Target Pricing
Manufacturer deliberately adjusting the composition and features of a product to achieve the target price to consumers.
 
 

 

Bundle Pricing
The marketing of two or more products in a single “package” price.
 
 

 

Yield Management Pricing
The charging of different prices to maximize revenue for a set amount of capacity at any given time.
 
 

 

Concept Check
1.  What are the circumstances in pricing a new product that might support skimming or penetration pricing?
A:  Circumstances supporting a skimming strategy include:  (1) Enough prospective customers are willing to buy the product immediately at the initial high price to make these sales profitable, (2) The high initial price will not attract competitors, (3) Lowering price has only a minor effect on increasing the sales volume and reducing the unit cost, and (4) Customers interpret the high price as signifying high quality. 
Conditions supporting a penetration strategy include:  (1) Many segments of the market are price sensitive, (2) A low initial price discourages competitors from entering the market, and (3) Unit production and marketing costs fall dramatically as production volumes increase.
 

2.  What is odd-even pricing?

 

A:  Odd-even pricing involves setting prices with a few dollars or cents under an even number, with the assumption that demand might drop off dramatically if the price were raised to the even number.
 

 

 

STEP 4:  SELECT AN APPROXIMATE PRICE LEVEL

 

 

Standard Markup Pricing
Adding a fixed percentage to the cost of all items in a specific product class.
 
 

 

Cost-Plus Pricing
The practice of summing the total unit cost of providing a product or service and adding a specific amount to the cost to arrive at a price.
 
 

 

Experience Curve Pricing
A method of pricing based on the learning effect, which holds that the unit cost of many products and services declines by 10 percent to 30 percent each time a firm’s experience at producing and selling them doubles.
 
 

 

STEP 4:  SELECT AN APPROXIMATE PRICE LEVEL

 

Target Profit Pricing
Setting an annual target of a specific dollar volume of profit.
 
 

 

Target Return-on-Sales Pricing
Setting a price to achieve a profit that is a specified percentage of the sales volume.
 

 

Target Return-on-Investment Pricing
Setting a price to achieve a return-on-investment (ROI) target.
 
 

 

FIGURE 14-4  Results of computer spreadsheet simulation to select price to achieve a target ROI

STEP 4:  SELECT AN APPROXIMATE PRICE LEVEL

 

 

Customary Pricing
A method of pricing based on tradition, a standardized channel of distribution, or other competitive factors.
 
 

 

Above-, At-, or Below-Market Pricing
Pricing based on market price.
 
 

 

Loss-Leader Pricing
Deliberately selling a product below its customary price to attract attention to it.
 

 

Concept Check
1.  What is standard markup pricing?
 
A:  Standard markup pricing entails adding a fixed percentage to the cost of all items in a specific product class.
 

2.  What profit-based pricing approach should a manager use if he or she wants to reflect the percentage of the firm’s resources used in obtaining the profit?

 
A:  Target-return-on-investment pricing.
 

3.  What is the purpose of loss-leader pricing when used by a retail firm?

 
A:  Loss-leader pricing is used to attract customers in hopes they will buy other products as well.
 
 

 

STEP 5:  SET THE
LIST OR QUOTED PRICE
  • •Company, Customer, and Competitive Effects
  • •Balancing Incremental Costs and Revenues
 
 
 

 

One-Price Policy
Setting one price for all buyers of a product or service.  Also called fixed pricing.
 
 

 

Flexible-Price Policy
Setting different prices for products and services depending on individual buyers and purchase situations.
 
 

 

Product-Line Pricing
The setting of prices for all items in a product line.
 
 

 

Price War
Successive price cutting by competitors to increase or maintain their unit sales or market share.
 
 

 

FIGURE 14-5  The power of marginal analysis in real-world decisions

STEP 6:  MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE

FIGURE 14-6  Three special adjustments to list or quoted price

STEP 6:  MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE

  • •Discounts
  • •Quantity Discounts
  • •Seasonal Discounts
  • •Trade (Functional) Discounts
  • •Cash Discounts
 
 

 

Quantity Discounts
Reductions in unit costs for a larger order.
 
 

 

FIGURE 14-7  The structure of trade discounts

STEP 6:  MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE

  • •Allowances
  • •Geographical Adjustments
 
 

 

Promotional Allowances
Cash payment or extra amount of “free goods” awarded sellers in the channel of distribution for undertaking certain advertising or selling activities to promote a product.
 
 

 

Everyday Low Pricing
(1) The practice or replacing promotional allowances with lower manufacturer list prices.  (2) Retail strategy that emphasizes consistently low prices and eliminates most markdowns.
 
 

 

FOB Origin Pricing
A method of pricing where the title of goods passes to the buyer at the point of loading.
 
 

 

Uniform Delivered Pricing
The price the seller quotes includes all transportation costs.
 
 

 

Basing-Point Pricing
Selecting one or more geographic locations (basing point) from which the list price for products plus freight expenses are charged to buyers.
 
 

 

STEP 6:  MAKE SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE

  • •Legal and Regulatory Aspects of Pricing
 
 

 

Price Fixing
A conspiracy among firms to set prices for a product.
 
 

 

Price Discrimination
The practice of charging different prices to different buyers for goods of like trade and quality. 
 
 

 

Predatory Pricing
Charging a very low price for a product with the intent of driving competitors out of business.
 
 

 

FIGURE 14-8  Pricing practices affected by legal restrictions

FIGURE 14-9  Five most common deceptive pricing practices

Concept Check
1.  Why would a seller choose a flexible-price policy?
 
A:  Flexible-price policies give sellers greater discretion in setting the final price in light of demand, cost, and competitive factors.
 
2.  If a firm wished to encourage repeat purchases by a buyer throughout a year, would a cumulative or noncumulative quantity discount be a better strategy?
 
A:  Cumulative
 
3.  Which pricing practices are covered by the Sherman Act?
 
A:  Price-fixing, geographical pricing, and predatory pricing.
 
 

 

Chapter 14 - Summary

 

  1. Four general approaches for finding an approximate price level for a product or service are demand-oriented, cost-oriented, profit-oriented, and competition-oriented pricing.
  2. Demand-oriented pricing approaches stress consumer demand and revenue implications of pricing and include eight types: skimming, penetration, prestige, price lining, odd-even, target, bundle, and yield management.
  3. Cost-oriented pricing approaches emphasize the cost aspects of pricing and include three types: standard markup, costplus, and experience curve pricing.
  4. Profit-oriented pricing approaches focus on a balance between revenues and costs to set a price and include three types: target profit, target return-on-sales, and target return-on-investment pricing.
  5. Competition-oriented pricing approaches stress what competitors or the marketplace are doing and include three types: customary; above-, at-, or below-market; and loss-leader pricing.
  6. Given an approximate price level for a product, a manager must set a list or quoted price by considering factors such as one-price versus a flexible-price policy; the effects of the proposed price on the company, customer, and competitors; and balancing incremental costs and revenues.
  7. List or quoted price is often modified through discounts, allowances, and geographical adjustments.
  8. Legal and regulatory issues in pricing focus on price fixing, price discrimination, deceptive pricing, geographical pricing, and predatory pricing.

 

 

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