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Setting the Right Price

Steps for Setting Price

1) Establish pricing goals
2) estimate demand costs and profits
3) choose price strategy to help find base price
4) fine tune base price with pricing tactics

Pricing Objectives

Profit Oriented, Sales oriented, status quo

Demand Estimation Points

-points where customers question quality, find it a bargain, think its getting too expensive, and wont purchase

Pricing Strategies

Price Skimming, Penetration Pricing, Status Quo Pricing

Price Skimming

-market plus approach because it denotes a high price relative to the market price
-new products perceived as having unique advantages
-lower prices over time
-used when market is willing to buy above ave price, legally protected, cannot expand rapidly, demand greater than supply

Penetration Pricing

-charging a relatively low price for a product as a way to reach the mass market
-captures large market share, but lower profit/unit
-most effective in price sensitive market or when experience cuts costs significantly

Status Quo Pricing

-meeting the competition or very close to it
-advantage of simplicity
-disadvantage of ignoring demand, cost or both

Unfair Trade Practices

-act puts a floor under wholesale and retail prices
-selling below certain cost illegal
-markups are taken at each level

Price Fixing

-agreement b/w two or more firms on the price
-illegal under Sherman Act and Federal Trade Commission Act

Price Discrimination

-selling to two or more different buyers within rel short time commodities of like grade and quality at different prices where the result would be to substantially lessen competition
-illegal under Robison-Patman Act of 1936

Defenses for Price Discrimination

-Cost: firm can charge different prices if manufacturing or quantity discounts
-Market Conditions: justified if meeting fluid product/market conditions
-Competition: to stay even with competition

Predatory Pricing

-practice of charging a very low price for a product with intent of driving competitors out
-firm raises prices once competition is out
-illegal under Sherman and Federal trade commission acts

Base Price

-general price level at which the company expects to sell the good or service

Fine-Tuning Price Tactics

-Discounts, Allowances, Rebates, Value-Based Pricing
-Geographic Pricing
-Professional Services Pricing
-Price Lining
-Leader Pricing
-Bait Pricing
-Odd-Even Pricing
-Price Bundling
-Two-Part Pricing

Quantity Discounts

-lower price for buying multiply goods; cumulative adds all purchases not from same shopping trip; non-cumulative applies to single order

Cash Discounts

-price reduction offered in return for prompt payment of a bill; allows seller carrying charges and billing expenses and avoids debt

Functional Discounts

compensation to intermediaries for performing services or functions for manufacturer

Seasonal Discounts

price reduction for buying merchandise out of season, shifts storage function to purchaser

Promotional Allowances

payment to dealer for promoting manufacturer's products


cash refund given for the purchase of a product during a specific period

Zero-percent Financing

-enables purchasers to borrow money to pay for things with no interest charge

Value-Based Pricing

starts by determining the value of their product and their competitors' products to the customer and then determines a price

FOB Origin Pricing

requires buyer to absorb freight costs from shipping point

Uniform Delivered Pricing

seller pays the actual freight charges and bills every purchaser an identical, flat freight charge

Zone Pricing

modification of uniform delivered pricing where firm divides market into segments or zones and charges flat freight rate to all customers in a given zone

Freight Absorption Pricing

seller pays all or part of actual freight charges and does not pass onto buyer

Basing-point Pricing

seller designates a location as a basing point and charges all buyers the freight cost from that point regardless of the city from which the goods are shipped

Single-Price Tactic

-offers all goods and services at the same price
-removes price comparisons from buyer's decision-making process

Flexible Pricing

-different customers pay different prices for essentially the same merchandise in equal q
-allows closing of sale with price-conscious buyers and allows price to meet competition
-non-consistent profit margins


customer must negotiate price of trade-in and product being purchased

Professional Services Pricing

-used by people with lengthy experience, training, etc
-have ethical responsibility to not overcharge
-sometimes highly inelastic (heart surgery)

Price Lining

-practice of offering a price line with several items at specific price points

Leader Pricing

-an attempt by the marketing manager to attract customers by selling a product near or below cost in hopes that the shoppers will buy other items once they are in the store

Bait Pricing

-tries to get consumer into a store through false or misleading price advertising and then uses high-pressure selling to persuade the consumer to buy more expensive merchandise

Odd-Even Pricing

-pricing at odd-numbered prices to connote a bargain and pricing at even numbered pricing to imply quality

Price Bundling

-marketing two or more products in a single package for a special price
-can stimulate demand for bundled items if perceived as good value

Two-part pricing

establishing two separate charges to consume a single good or service

Consumer Penalties

-extra fees paid by consumers for violating terms of purchase agreement
-because company will suffer irrevocable revenue loss or will incur significant additional transaction costs should customers be unable to complete purchase obligations

Joint Costs

-costs that are shared in the manufacturing and marketing of several products in a product line

Pricing Tactics during Inflation

Cost-oriented, demand-oriented

Delayed-Quotation Pricing

-cost oriented tactic
-price is not set on the product until the item is either finished or delivered

Escalator Pricing

-cost oriented tactic
-final selling price reflects cost increases incurred between the time an order is placed and time the delivery is made

Price Shading

-demand oriented tactic
-use of discounts by sales people to increase demand for one or more products in a line

Pricing options in Recession

-build market share
-value-based pricing, bundling/unbundling
-lower prices by renegotiating contracts, offering help, keeping the pressure on, or paring down suppliers

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