A.

Demand-Oriented Pricing Approaches

 Demand-oriented approaches weigh factors underlying expected

customer tastes and preferences more heavily than…

[Figure 14-1] A key to a marketer’s setting a final price for a product is to find an 1. Skimming Pricing.
approximate price level to use as a reasonable starting point.
a. Skimming pricing involves setting the highest initial price that
customers who really desire the product are willing to pay when
introducing a new or innovative product.

– These customers are not very price sensitive.

– Customers weigh the new product’s price and quality against

the same characteristics of substitutes.

b. Skimming pricing is an effective strategy when:

– Enough prospective customers are willing to buy the

I. STEP 4: SELECT AN APPROXIMATE PRICE
product at the high initial price to make these sales
LEVEL [LO 14-1] profitable.
Step 4: Select an approximate price level – The high initial price will not attract competitors.

2. Penetration Pricing.

a. Penetration pricing involves setting a low initial price on a

new product to appeal immediately to the mass market—the
opposite of skimming pricing.

b. The conditions favoring penetration pricing are that:

– Many segments of the market are price sensitive.
– A low initial price discourages competitors from
entering the market.
– Unit production and marketing costs fall
dramatically as production volumes increase.

14-1
 3. Prestige Pricing. 5. Odd-even pricing.
 Involves setting prices a few dollars or cents under an even
a. Consumers may use price as a measure of the quality or number ($899.99 vs. $900.00).
prestige of an item so that as price is lowered beyond some
point, demand for the item actually falls. 6. Target pricing.

b. Prestige pricing involves setting a high price so that quality- or a. Consists of estimating the price that ultimate consumers
status-conscious consumers will be attracted to the product and would be willing to pay for a product working backward
buy it. through markups taken by retailers and wholesalers to
determine what price to charge wholesalers, and then…
c. In Figure 14-3:
b. Deliberately adjusting the composition and features of the
product to achieve the target price to consumers.

The demand curve: 7. Bundle Pricing.

–Slopes downward and to the
right between points A and B. a. Is the marketing of two or more products in a single package
price.
–Turns back to the left between
points B and C because demand b. Is based on the idea that consumers value the package more
is actually reduced between than the individual items.
points B and C.
8. Yield Management Pricing.
 Is the charging of different prices to maximize revenue for a
set amount of capacity at any given time.
Energizer’s Lesson in Price Perception—Value
Case: Energizer Batteries
B. Cost-Oriented Pricing Approaches
• Priced Advanced Formula battery at same price as standard battery.
• But lost market share as consumers linked low price with low quality.  With cost-oriented approaches, price is set by looking at the
• Then, priced e2 high-performance battery higher than Duracell, and production and marketing costs (the supply side of the pricing
higher than its own Advanced Formula battery. problem) and…
• Price increase recovered lost sales and market share.
• Lesson: Value is in eyes of the beholder.  Then adding enough to cover direct expenses, overhead, and profit.

1. Standard markup pricing.

4. Price Lining.
 Price lining involves setting the price of a line of products at
a. Standard markup pricing involves adding a fixed percentage to
a number of different specific pricing points.
the cost of all items in a specific product class.

b. This percentage markup varies depending on the type of retail

store and on the product involved.
14-2
 2. Cost-plus pricing. 2. Target Return-on-Sales Pricing.

a. Cost-plus pricing involves summing the total unit cost of  Target return-on-sales pricing involves setting a price to
providing a product or service and adding a specific amount achieve a profit that is a specified percentage of the sales
to the cost to arrive at a price. volume.

b. Cost-plus pricing assumes two forms: 3. Target Return-on-Investment Pricing.

 Cost-plus percentage-of-cost pricing.
– Involves adding a fixed percentage of the total  Target return-on-investment pricing involves setting a price to
unit cost. achieve an annual target return-on-investment (ROI).
 Cost-plus fixed-fee pricing.
– A supplier is reimbursed for all costs, regardless
of what they are. D. Competition-Oriented Pricing Approaches
– Allowed only a fixed fee as profit that is
Rather than emphasize demand, cost, or profit factors, a price setter can
independent of the final cost of the project.
stress what competitors or “the market” is doing.
3. Experience curve pricing.
1. Customary pricing.
a. Is a method of pricing based on the learning effect, which:
 Involves setting a price that is dictated by tradition, a
– Holds that the unit cost of many products and services
standardized channel of distribution, or other competitive
declines by 10 percent to 30 percent…
factors.
– Each time a firm’s experience at producing and
selling them doubles, resulting in possible rapid price
2. Above-, at-, or below-market pricing.
reductions.
a. Involves setting a market price for a product or product class
b. This reduction is regular or predictable enough that the
based on a subjective feel for the competitors’ price or market
average cost per unit can be mathematically estimated.
price as the benchmark.

b. Above-market pricing sets a premium price for a product.

C. Profit-Oriented Pricing Approaches
c. At-market pricing:
A marketer may choose to balance both revenues and costs to set price by
– Establishes the going market price in the minds of their
either:
competitors.
– Provides a reference price for competitors that use
 Setting a target of a specific dollar volume of profit.
above- and below-market pricing.
 Expressing this target profit as a percentage of sales or investment.
d. Below-market pricing.
1. Target Profit Pricing.
– Sets a market price below the prices of nationally
branded competitive products to promote a value image
 Target profit pricing involves setting an annual target of a
among buyers.
specific dollar volume of profit.

14-3
 – Is used by manufacturers and retailers that offer private  The price decision for a single product must consider the
brands of products. price of other items in its product line or lines in its product
mix.
Q: Are XXX Above, At, or Below the market?
b. Product-line pricing.
 Involves setting of prices for all items in a product line to cover
the total cost and produce a profit for the complete line, not
necessarily for each item.

2. Customer Effects.
 In setting price, retailers weigh factors heavily that satisfy the
3. Loss-leader pricing. perceptions or expectations of consumers, such as customary
prices for a variety of products.
 Involves deliberately selling a product below its customary price,
not to increase sales but to attract customers’ attention in hopes 3. Competitive Effects.
that they will buy other products with large markups as well.
a. A marketer’s pricing decision is immediately apparent to
most competitors, who may retaliate with price changes of
II. STEP 5: SET THE LIST OR QUOTED PRICE [LO 14-2] their own.

A. Choose a Price Policy (2 選 1) b. A price war involves successive price cutting by competitors
to increase or maintain their unit sales or market share.
1. Fixed-Price Policy.
Consider price cutting:
 A fixed-price policy involves setting one price for all buyers of 1. if company has competitive advantage.
a product or service. Also called a one-price policy. There is no 2. if primary demand will grow.
variation in price. 3. if price cut is for specific product.

2. Dynamic Pricing Policy. C. Balance Incremental Costs and Revenues

 A dynamic pricing policy involves different prices for products  When price is changed or new advertising or selling programs
and services in real time in response to supply and demand are planned, their effect on the quantity sold must be
conditions. Also called a flexible-pricing policy. considered.
(= impact on sales)

B. Consider Company, Customer, and Competitive Effects on  Marginal analysis or incremental analysis:
Pricing a. Involves a continuing, concise trade-off of incremental
costs against incremental revenues.
1. Company Effects. b. Connotes the notion of marginal revenue, marginal cost,
and price elasticity of demand.
a. For a firm with multiple products:
Suppose The Caplow Company is considering buying a series of magazine ads to reach
its upscale target market. The cost of the ads is $1,000, the average price of a framed
picture is $50, and the unit variable cost (materials plus labor) is $30.

This is a direct application of marginal analysis that an astute manager uses to

14-4 estimate the incremental revenue or incremental number of units that must be
obtained to at least cover the incremental cost. In this example, the number of extra
picture frames that must be sold is obtained as follows:
 – Apply to the accumulation of purchases of a product
over a given time period, typically a year.

II. STEP 6: MAKE SPECIAL ADJUSTMENTS

TO THE LIST OR QUOTED PRICE [LO 14-3] 2. Seasonal Discounts.
[Figure 14-7] Marketers make three special adjustments to the list or quoted price.
 Are used to encourage buyers to stock inventory earlier than
their normal demand would require.

3. Trade (Functional) Discounts.

 A manufacturer gives trade, or functional, discounts to

reward wholesalers and retailers for marketing functions they
will perform in the future.

Fig14-8 The structure of trade discounts affects the manufacturer’s selling price and
the margins made by resellers in the marketing channel.

 Wholesalers adjust list or quoted prices they set for retailers.

 Retailers do the same for consumers.

A. Discounts

 Are reductions from the list price that a seller gives a buyer as a
reward for some activity of the buyer that is favorable to the seller.

 Four kinds of are important in marketing strategy. 4. Cash Discounts.

1. Quantity Discounts.  Manufacturers offer retailers cash discounts to encourage

them to pay their bills quickly.
a. Are reductions in unit costs for a larger order to encourage
customers to buy larger quantities of a product. B. Allowances

b. Quantity discounts are of two general kinds: Allowances, like discounts, are reductions from list or quoted prices to buyers
 Noncumulative quantity discounts. for performing some activity.
– Are based on the size of an individual purchase
1. Trade-in Allowances.
order.
 Cumulative quantity discounts.  Are a price reduction given when a used product is part of the
payment on a new product.
14-5
 – All buyers pay the same delivered price for the
products…

a. Promotional allowances:
– Are cash payments or an extra amount of “free goods”
awarded sellers in the marketing channel for retailers
frequently pass on a portion of these savings to the  In multiple-zone pricing.
consumer. – A firm divides its selling territory into geographic
areas or zones.
b. Everyday low pricing (EDLP).
– Is the practice of replacing promotional allowances with – The delivered price to all buyers within any one zone
lower manufacturer list prices. is the same.
 FOB with freight-allowed pricing or freight absorption
pricing:
C. Geographical Adjustments
– The price is quoted by the seller as “FOB plant—
Geographical adjustments are made by manufacturers or even wholesalers to freight allowed.”
list or quoted prices to reflect the cost of transportation of the products from  Basing-point pricing:
seller to buyer.
– Involves selecting one or more geographical locations
1. FOB Origin Pricing. (basing point) from which the list prices for products
plus freight expenses are charged to the buyer.
a. FOB means:
 “Free on board” a vehicle (barge, railroad car, or truck) at – Is used in industries where:
some ___location.  Freight expenses are a significant part of the total
cost to the buyer.
b. FOB origin pricing:  Products are largely undifferentiated.
 Includes only the cost of loading the product onto the
vehicle.
D. Legal and Regulatory Aspects of Pricing [LO 14-4]

2. Uniform Delivered Pricing. [Figure 14-9] Five legal and regulatory restrictions influence the final price.

a. Is the price the seller quotes that includes all transportation

costs.

b. There are four kinds of delivered pricing methods:

 Single-zone pricing.

14-6
1. Price Fixing. - Involves price deals that mislead consumers.
a. The five most common deceptive pricing practices are:
 Price fixing is a conspiracy among firms to set prices for a
product and is illegal per se (per se means “in and of itself”)  Bait and switch.
under the Sherman Act.
– Exists when a firm offers a very low price on a
 Horizontal price fixing – Competitors set prices. product (the bait) to attract customers to a store.
 Vertical price fixing – Sellers cannot sell below a minimum
price. – Once in the store, the customer is persuaded to
 Rule of reason – Must consider circumstances before judging purchase a higher priced item.
legality.
 However, MSRP is not illegal per se.
 Bargains conditional on other purchases.
2. Price Discrimination.
– Exists when a buyer is offered “1-Cent Sales,” “Buy
 Price discrimination is the practice of charging different 1, Get 1 Free,” and “Get 2 for the Price of 1.”
prices to different buyers for products of like grade and quality.
– Substituting lower quality items on either the first or
 However, not all price differences are illegal, only those that second purchase is deceptive.
lessen competition.
 Comparable value comparisons.
 Robinson-Patman Act allows for price differentials: – Advertising such as “Retail Value $100.00, Our
1. Cost justification defense. Price $85.00” is deceptive if a verified and
2. Changing market conditions. substantial number of stores in the market area do
3. Meet-the-competition defense. not price the item at $100.
3. Deceptive Pricing.  Comparisons with suggested prices.

14-7
 – A claim that a price is below a manufacturer’s
suggested or list price may be deceptive if…

– Few or no sales occur at that price in a retailer’s

market area.

 Former price comparisons.

– When a seller represents a price as reduced, the item

must have been offered in good faith at a higher
price for a substantial previous period.

– Setting a high price for the purpose of establishing a

reference for a price reduction is considered
deceptive.
4. Geographical Pricing.

 FOB origin and FOB freight-allowed pricing practices are

legal, providing no conspiracy to set prices exists.

5. Predatory Pricing.

a. Predatory pricing is the practice of charging a very low price

for a product with the intent of driving competitors out of
business.

b. Once competitors have been driven out, the firm raises its
prices.

14-8