Chapter 21 Pricing Decisions

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Pricing objectives
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goals that describe what a firm wants to achieve through pricing -requirement the objectives should be explicitly stated
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Stages for Establishing Prices
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1. Development of pricing objectives 2. assessment of target markets evaluation of price 3. evaluation of competitors price 4. selection of a basis for pricing 5. determination of a specific price
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Pricing objections
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1. survival 2. profit 3. return on investment 4. market share 5. cash flow 6. status quo 7. product quality
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Survival
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-adjust price levels so that the firm can increase sales volume to match organizational expenses -When a company adjusts price levels so that it can increase sales volume to levels that match the organization’s expenses -Running a big sale in order to generate enough cash flow to pay creditors is typical
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Profit
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identify price and cost levels that enable the firm to yield targeted ROI example: Westin Inc. has an objective of achieving a 25 percent return from its overall sales
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Market share
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adjust price levels so the firm can maintain or increase sales relative to competitors sales
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Cash flow
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set price levels to encourage rapid sales -sets prices to recover cash as quickly as possible -when a quick return on investment is desired
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status quo
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Identify price levels that help stabilize demand – Maintaining a certain market share, meeting competitors’ prices, maintaining a favorable image, and achieving price stability are all associated -de-emphasizes price and can lead to a climate of nonprice competition in an industry -of pricing objective would an organization use if it were in a favorable position and desired nothing more -can reduce a firm’s risk by helping to stabilize demand for its products
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product quality
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set prices to recover research and development expenditures and establish a high-quality image -If an organization sets prices to recover research and development expenses and establish a premium quality image for its product -The pricing of Clinique makeup considerably higher than brands such as Cover Girl, Revlon, and Maybelline is used to communicate
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Return on investment
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achieved by trial and error because not all cost and revenue data are available when prices are set.
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Maintaining or increasing market share
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can be achieved even if industry sales are flat or decreasing
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Market share objective
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-can be used effectively whether total industry sales are rising or falling -to maintain or increase its product’s sales in relation to total industry sales
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good indicators of profitability
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both market share and product quality
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Value
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When consumers are making do with less expensive products and shopping more selectively, manufacturers and retailers must focus on this of their product -is a function of the product’s quality attributes.
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Marketers improve their ability to establish prices appropriately when
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they know prices charged for competing brands
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Some grocery stores collect data on competitive prices
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by using full-time comparison shoppers
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Marketers at organizations engaged in nonprice competition
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need competitive price information to make sure that their products are priced at approximately the same level as the prices of competing brands.
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Competitors’ prices, along with the marketing variables they emphasize, are determining factors in
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how important price will be to customers
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Category killers
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Companies that focus on particular product categories and rely on everyday low pricing to acquire a large market share through aggressive and competitive pricing strategies example: petsmart
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three primary bases for developing prices are
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1. demand 2. competition 3. cost
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Cost based pricing
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adding a dollar amount or percentage to the cost of the product
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Cost plus
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adding a specified dollar amount or percentage to the sellers cost -For custom-made equipment or commercial construction projects -example : Steinway produces concert grand pianos, often using the custom materials and designs desired by a specific customer. The average price of these pianos runs about $50,000 depending on the exact piano -federal government often uses when it grants defense contracts
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markup pricing
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adding to the cost of the product predetermined percentage of that cost – a cost-based pricing method commonly used in retail -The use of similar markups reduces price competition -measured by either percent of selling price or percentage of cost -determining markup as a percentage of cost, divide the markup amount by cost
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demand based pricing
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pricing based on the level of demand for the product
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competition based pricing
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pricing influenced primarily by competitors prices -used when costs and revenues are secondary to competitors’ prices -become more important when products in an industry are relatively homogeneous and price is a key purchase consideration
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differential pricing
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charging different prices to different buyers for the same quality and quantity of products The fact that senior citizens are charged a lower price at movie theaters than younger adults is an example
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negotiated pricing
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establishing a final price through bargaining between seller and customer
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secondary market pricing
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setting one price for the primary target market and a different price for another marker -example : Executives in Japan decided to price Lexus luxury cars in the United States at $55,000 while pricing them at $66,000 in their own country
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periodic discount
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temporary reduction of prices on a patterned or systematic basis -disadvantage: is that consumers can predict when prices will be lowered and delay purchases until that time.
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random discounting
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temporary reduction of prices on an unsystematic basis – If a business decides to reduce its prices once in a while on an unsystematic basis
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price skimming
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changing the highest possible price that buyer who most desire the product will pay When businesses charge the highest possible price that customers who really want the new product will pay, -does NOT discourage competitors from entering the market. -the initial demand is highly inelastic
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penetration pricing
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setting prices below those of competing brands to penetrate a market and gain a significant marker share quickly the initial demand is highly inelastic wants to quickly gain a large market share with its new line of reduced-fat snack crackers -used in setting the price of a new product if considerable competition is expected -example The management at Allied Electronics is having difficulty in raising the introductory price on system components to cover the increased costs of producing the sensing devices for home security systems
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product line pricing
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establishing and adjusting prices on multiple products within a product line
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captive pricing
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pricing the basic product in a product line low while pricing related items higher -printer 100 printer ink 30
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premium pricing
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pricing the highest quality or most versatile products higher than other models in the product line A product that has more features than those of its competition, or that is perceived to be of higher quality
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bait pricing
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pricing an item in a product line low with the intention of selling a higher priced item in the line -When a company prices one item in a line low with the intention of selling a higher-priced item in the same line -example: When Gabriella logs on to Dell’s website, she sees a notebook model priced well below $1,000. As she continues through the site to view the other options, she realizes the first one she saw was the cheapest model available, but she of course wants more features.
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price lining
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setting a limited number of prices for selected groups or lines of merchandise The pricing strategy that assumes that demand is relatively inelastic over certain price ranges
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physiological pricing
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pricing that attempts to influence a customers perception of price to make a products price more attractive customary pricing. b) prestige pricing. c) reference pricing. d) odd-even pricing
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reference pricing
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pricing a product at a moderate level and displaying it next to a more expensive model or brand example: A Macy’s manager designs the casual clothing department such that one of Macy’s private label pairs of jeans, priced at $24.99, is positioned next to a national brand of jeans, such as Levis, priced at $39.99.
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bundle pricing
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packaging together two or more complementary products and selling them at a single price – considered a value to customers because they prefer buying a combination of bundled products in a single transaction, which saves time, effort, and perhaps money. -example: When Mia and Shane are planning their honeymoon, their travel agent tells them that if they buy a special package, their trip to Paris will include meals, tickets to the theater, and a rental car in addition to airfare and a hotel. This is an example of the use of
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multiple unit pricing
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packaging together two or more identical products and selling them at a single price -Products such as light bulbs, canned soft drinks, and ice cream sandwiches are usually priced
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The decision of Macy’s to use even prices such as $60 for a Ralph Lauren Polo shirt is an application of odd-even pricing, and even prices are often used to
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give a product an upscale or exclusive image.
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everyday low prices (EDLP)
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pricing products low on a consistent basis
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odd-even pricing
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ending the price with certain numbers to influence buyers perceptions of the price of product -a psychological pricing strategy.
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customary pricing
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pricing n the basis of tradition Goods that are priced primarily based on the way they have always been priced are examples
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prestige pricing
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setting prices to an artificially high level to convey prestige or a quality image
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professional pricing
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fees set by people with great skill or experience in a particular field where demand for a product is price inelastic and the seller has an ethical responsibility not to overcharge the client
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Tensile pricing
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sale that advertised prices “up to 65 percent off” the original price
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New-product pricing
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Price skimming and penetration pricing are both strategies
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pricing strategies used by companies establishing prices of multiple products within a product line
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premium pricing, price lining, captive pricing, bait pricing
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Price leaders
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products priced near or even below cost it is sold at less than cost in the hope that sales of other products will increase -example To attract customers into a store, Safeway advertises its milk at less than cost, hoping that customers will purchase other groceries as well. -often results in a retailer losing money on the product
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Special event discounting
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setting a price at a specific level and comparing it with a higher price
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Promotional pricing
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Price leaders, comparison discounting, and special-event pricing are applications -Showing a product’s price along with its previous price, the price of a competing brand, or the price at another retail outlet
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Pricing strategies and methods
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help direct and structure the selection of a final price

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