chapter 14 Flashcards
Step 4: Select an Approximate Price Level
- Demand-oriented
- Cost-oriented
- Profit-oriented
- Competition-oriented
Demand-Oriented Pricing Approaches
weigh factors underlying expected customer tastes & preferences more heavily than such factors as cost, profit, & competition when selecting a price level
Demand-Oriented Pricing Approaches
skimming
penetration
prestige
odd-even
target
bundle
yield management
Skimming Pricing
setting the highest initial price that customers really desiring the product are willing to pay when introducing a new or innovative product
-As the demand of customers is satisfied, the firm lowers the price to attract another, more price-sensitive segment
Skimming Pricing Is An Effective Strategy When:
- Enough prospective customers are willing to buy the product immediately at the high initial price to make these sales profitable
- The high initial price will not attract competitors
- Lowering price has only a minor effect on increasing the sales volume & reducing the unit costs
- Customers interpret the high price as signifying high quality
Penetration Pricing
setting a low initial price on a new product to appeal immediately to the mass market
- Opposite of skimming pricing
Penetration Pricing Conditions
- Maintain the initial price for a time to gain profit lost from its low introductory level
- Lower the price further, counting on the new volume to generate the necessary profit
Prestige Pricing
setting a high price so that quality- or status-conscious consumers will be attracted to the product and buy it
- Ex: Rolls-Royce cars, Chanel perfume, Cartier jewelry
Price Lining
setting the price of a line of products at a number of different specific pricing points
- Ex: A department store manager may price a line of women’s casual slacks at $59, $79, and $99
Odd-Even Pricing
setting prices a few dollars or cents under an even number
- Ex: Apple iPhone 13 Pro Max is $1,199.0, Lowe’s DeWalt Radial Saw is $599.99, Gillette Fusion Shaving System is $11.99
- Consumers see the DeWalt Radial Saw priced at “something over $500” rather than “about $600” bc consumers often use a left-digit bias
Left-Digit Bias
consumers have a tendency to read from left to right
- Demand increases if the price drops from $600 to $599.99
Target Pricing
consists of (1) estimating the price that ultimate consumers would be willing to pay for a product, (2) working backward through markups taken by retailers and wholesalers to determine what price to charge wholesalers, and then (3) deliberately adjusting the composition and features of the product to achieve the target price to consumers
- Ex: IKEA uses target pricing for its home furnishings. IKEA’s marketing team decides what price they want to sell a specific product for, & then company designers work w/ material suppliers & manufacturers to deliver the product at that price
Bundle Pricing
marketing two or more products in a single package price
Ex: Spectrum’s TV, phone, & Internet bundles
- Provides a lower total cost to buyers & lower marketing costs to sellers
Yield Management Pricing
charging different prices to maximize revenue for a set amount of capacity at any given time
Ex: Airlines, hotels, cruise ships, & car rentals vary prices by time, day, week, or season
- Matches demand & supply to customize the price for a service
Cost-Oriented Pricing Approaches
price setter stresses the cost side of the pricing problem, not demand. Price is set by looking at the production & marketing costs & then adding enough to cover direct expenses, overhead, & profit.
Cost-Oriented Pricing Approaches
standard markup pricing
cost-plus pricing experience curve pricing
Standard Markup Pricing
adding a fixed percentage to the cost of all items in a specific product class
Ex: Theaters have high markups on snacks & beverages
- Markups must cover all of the expenses of the store, pay for overhead costs, & contribute something to profits
Cost-Plus Pricing
summing the total unit cost of providing a product/serv and adding a specific amount to the cost to arrive at a price
- Most commonly used method to set prices for business products
-Two forms
Two Forms of Cost-Plus Pricing
- Cost-Plus Percentage-of-Cost Pricing
- Cost-Plus Fixed-Fee Pricing
Cost-Plus Percentage-of-Cost Pricing
a fixed percentage is added to the total unit cost
- Often used to price one- or few-of-a-kind items
Ex: An architectural firm charges a percentage of the construction costs of the 492 million Rock & Roll Hall of Fame & Museum in Cleveland, Ohio
Cost-Plus Fixed-Fee Pricing
a supplier is reimbursed for all costs, regardless of what they turn out to be, but is allowed only a fixed fee as profit that is independent of the final cost of the project
Ex: If NASA agreed to pay a contractor a $6.5 billion fee for providing a lunar spacecraft, & the contractor increases the fee to $7 billion, its fee wouldn’t change & would remain at $6.5 billion
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% to 30% each time a firm’s experience at producing and selling them doubles
Ex: Sony, Samsung, LG use this to price HDTV sets. Consumers benefit bc prices decline as cumulative sales volume grows. HDTV prices have fallen by over 40%
Profit-Oriented Pricing Approaches
price setter may choose to balance both revenues & costs to set price using these. These might involve setting a target of a specific dollar volume of profit or expressing this target profit as a percentage of sales or investment
Profit-Oriented Pricing Approaches
Target Profit Pricing
Target Return-on-Sales Pricing
Target Return-on-Investment (ROI) Pricing
