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UNT Marketing 3650 Topic 10 Thompson

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Utility
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The want satisfying ability of a Product
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Price
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A statement or measure of utility and the amount of money or other consideration given in exchange for the utility delivered by the product.
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Value
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Ratio of perceived utility to price & other costs.
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Other costs include
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Time, travel expenses, emotional costs.
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Value Ratio
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Value = Benefits Received / Cost Incurred
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Price competition
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Means marketers elect to compete on a price basis. They influence consumer demand by changing prices, and has less reliance on other components of the marketing mix
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Competitive ramifications of Price competition
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Price wars, lead to lower industry profits. Government monitoring & intervention to avoid price collusion/fixing.
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Non price competition
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Means firms emphasize other elements of the marketing mix. They Avoid price wars, emphasize differential attributes in products, and build brand image/equity.
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Competitive ramifications of Non price competition
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Prices can be raised and theres a risk that consumers may not perceive differential status as significant
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The pricing decision areas are:
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Pricing Objectives Pricing Strategies Pricing Technique(s) Price Discounts Price Allowances CVP Analysis Geographic Price Adjustments Price Managemen
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Pricing objectives
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What we want price to do as part of the marketing mix
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Pricing Strategies
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The fundamental approaches to setting & managing price. How we intend to price to reach identified objectives
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Pricing Technique(s)
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Various techniques are used to set the list or base price of the product. This price is the beginning point. Adjusted via discounts, allowances, markdowns, etc.
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Price Discounts
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Discounts subtract from base price. Used strategically & tactically to manage demand & cash flow
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Price Allowances
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Similar to discounts. Generally a form of “help” to distributors to offset marketing costs
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CVP Analysis
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Examines the relationships between price, costs, sales volume & profitability. Break even analysis the major tool.
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Geographic Price Adjustments
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Build in considerations for the effects of shipping & handling on demand.
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Price Management
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Prices, after being initially set, must be managed in response to changing market & competitive conditions.
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Effective price range.
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Maximum pricing we can charge for a product is always dictated by consumer and price for, setting price below costs
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Why concern cost?
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Costs act as a “price floor” meaning it cannot price below costs in long run. The relevant costs are variable & fixed costs.
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How are prices set in relation to cost?
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Prices often are set specifically to cover costs or provide some level of profit above & beyond estimated costs.
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What are the firm’s options when costs increase?
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Raise price Reduce quality Reduce size Reduce costs in other business areas
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Weight-out
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Reducing the size of a product
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De-sheeting
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is reducing the number of sheets of toilet paper or tissues in each package while holding retail prices constant.
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Weber’s Law
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Predicts how much a stimulus must change before the change is noticed.
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Common Applications of Weber’s Law
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includes the FTC regulation of the size of warning labels, de-sheeting, price changes, and changes in product taste, quality, and size.
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Fixed Costs
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Ongoing costs that are unrelated to production volume. Constant over wide range of output and sales
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Fixed Costs Examples
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Rent Administrative salaries Real-estate taxes Plant & equipment Advertising Sales support expenses
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Variable Costs
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Costs that change with increases or decrease in output.
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Variable Costs Examples
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Hourly labor Parts & materials Utilities Sales commissions
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Total Cost
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Equals Total Variable cost plus Total Fixed costs. TC = TVC + TFC
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Average Fixed Costs
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Total Fixed Costs divided by units of output. As output increases, fixed costs are spread over larger numbers of units.
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Average Fixed Costs Equation
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AFC = TFC / Q
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Average Variable Costs
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Average Variable Costs divided by units of output. Slightly U-shaped curve and has a initial declines due to experience curve effects & scale economies. Eventually increase due to diseconomies of scale
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Average Variable Costs Equation
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AVC = TVC / Q
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Average Total Costs Equation
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ATC=AFC+AVC
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Customer Demand
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Demand will vary with price charged. Must be able to predict the nature of the demand curve faced
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The Law of Demand
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All else being equal, as the price of a product increases, quantity demanded falls; c.p.
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Demand Curve
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Shows how the demand for service/goods varies. Not all prices on a demand curve will be profitable
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Demand curves forms
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Downward sloping (traditional “law of demand”) Upward sloping (prestige pricing) Elasticity of demand
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Inverse Demand
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Demand initially increases as price increases, At some point (P1), further increases in price result in decreased demand. Common for prestige goods & situations in which quality is inferred from price .
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Elastic Demand
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Consumers are “price sensitive.”
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When Price & total revenue are inversely related?
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Total revenue will increase as price decreases; TR decreases as price increases
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Demand Elasticity Equation
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e = Q2 – Q1 / .5(Q2 + Q1) / P2 – P1 / .5(P2 + P1) e = price elasticity P1 is the initial price P2 is the changed price Q1 and Q2 are the respective quantities demand at each price
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Percent Change in relation to Elastic Demand
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Percent (absolute value) change in demand is greater than the percent (absolute value) change in price.
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What is “e” in relation to Elastic Demand
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“e” is the % change in demand for every 1% change in price. For each 1% change in price, demand changes by -1.8%.
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Factors Contributing to Elastic Demand
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Goods/service s are very similar No urgency in purchase Low involvement Low brand loyalty
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Inelastic Demand
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Consumers are price insensitive. Price & total revenue are positively related meaning, total revenue will increase as price increases
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Percent Change in relation to Inlastic Demand
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Percent (absolute value) change in demand is less than the percent (absolute value) change in price
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What is “e” in relation to Inlastic Demand
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“e” is the % change in demand for every 1% change in price. Demand changes by -.61% for each 1% change in price.
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Factors That Contribute to Inelastic Demand
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Products are highly differentiated Brand loyalty exists Brand connotes prestige image Emergency nature of purchase
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Why aren’t all prices profitable?
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Loss occurs at high prices due to inadequate demand — cannot cover fixed costs, even though margins per unit are high. Loss occurs at lower prices because it cannot cover either variable or fixed costs. Margins per unit are very low or even negative.
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Techniques for Estimating Demand Curves
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Judgment Surveys Historical Ratios Experimentaion
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Historical Ratios
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Past data showing how price changes with demand. It projects demand at given price using linear regression
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Limitations of Ratios
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Requires extensive historical data (company & Indusrty), assumes no changes in other marketing mix variables, and assume no changes in key environmental variables
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Buy Response Data
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Product shown or described at a specific price and customers are asked if they would buy at that price. Process is repeated with different groups of customers at series of prices
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Using Buy-Response Data
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Identify prices at which at which consumers become highly price sensitive and estimate demand curve
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Experimentation
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Controlled & simulated test markets in which price is manipulated. Can be time consuming, expensive, and difficult
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Controlled Test Markets
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Retail prices manipulated; all other factors held constant
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Ways to manipulate test markets
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Vary prices across test cities, across stores in same city, and in same store over time
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The Price Plan
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The goal is to produce a pricing plan that contains a price schedule (i.e. actual price lists, adjustments for discounts & allowances, adjustments for shipping & handling), and contingencies for managing price given changes in market conditions
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The Pricing Process
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Set Pricing Objectives -The Pricing Environment Set Pricing Strategies Set the Base Price -Relevant Costs Examine Cost-Volume Profit Relationships -Demand Relationships Identify Pricing Adjustments
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Basic Pricing Strategies
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Demand Generation Pricing Premium Pricing Product Line Pricing Competitive Pricing
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Demand Generation Pricing
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When pricing objectives center around generating sales volume, demand generation strategies that focus on low prices are appropriate. Demand is price elastic. Strategies include: Penetration pricing, periodic, random and deep discounting, odd pricing, and value pricing
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Premium Pricing
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Price is set high to target inelastic markets or market segments. Also used as a cue or signal meant to produce a specific image or convey some meaning about the product. Strategies include: Skimming pricing, quality pricing, prestige pricing.
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Product Line Pricing Definition
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Pricing strategies that specifically focus on the product line, rather than single products. Objective is to maximize profits for the entire line. Strategies include: Captive, leader, and bait pricing, price lining, and price bundling
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Competitive Pricing
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Used by firms with specific competition-based pricing objectivesStrategies include: Meet the competition, undercut competitors, price leadership, predatory pricing, reference pricing
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Penetrating price
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The Experience Curve
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In relation to AVC with co. Ulithi e product volume.
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Second Market Discounting
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Higher price in core target markets; second (lower) price in secondary market. Danger exists that ‘secondary’ and ‘primary’ markets may communicate about prices.
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Systematic Discounting
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Price initially high. Discount after set time Discount periods are predictable
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Systematic Discounting Pro
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Pro may entice price sensitive customers ho would have purchased elsewhere, they will have to wait for the sale.
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Systematic Discounting Con
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Con: Regular customers can predict & postpone purchases until sale.
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NonSystematic Discounting
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Also known as random is designed so regular customers cannot predict timing & postpone purchases. Lower price at random times May encourage
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Odd pricing
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Prices set at even dollar values (i.e. $49). Impression. Exists that seller sets price will the care and as low as possible.
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Skimming price
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High price to attract customers desiring quality, uniqueness, status. Often most appropriate during early stages of PLC. Price systematically reduced over time as.
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Skimming is effective when
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The effects of competition can be minimized
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Price-Quality Pricing
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Belief that higher prices mean higher quality. Firms may set price high to induce perceptions of quality
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Price-Quality Pricing is used to infer quality when …
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Difficult to judge product on tangible attributes Buyers think there are large differences in quality between brands Buyers have little experience with the product (e.g.. new product)
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Prestige Pricing
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Prestige pricing is closely related to price/quality. Inverse demand may exist & higher prices stimulate added demand
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Product Line Pricing
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Captive Pricing Leader Pricing Bait Pricing Price lining Price Bundling
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Captive Pricing
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Low price for the basic product; high markup on related supplies. Works when few alternative sources of supply exist
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Leader Pricing
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Advertise and sell key items at less than usual profit margins. For middlemen, the goal is to increase traffic in store. For manufacturers, obj. Is to gain greater consumer interest in its overall product line.
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Bait Pricing
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Advertise low price version of product to create draw, trade customer up to higher priced version in store. Bait & Switch
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Price Bundling
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Basic product, options, customer service offered at one total “package” price. Individual items total to more if sold separately.
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Reference Pricing
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Reference price listed on pricing tags, catalogs. Used to induce perception of bargain, shows manufacturers’ suggested prices with own price, and can easily be accused of deceptive pricing Moderately priced product displayed next to high priced version. Reference can be a competitor or other items in same seller’s line, moderate priced version looks more attractive.
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Penetration Pricing
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Low price strategy can prevent competitive entry. Possible to obtain very low unit cost structure via scale economies, experience. Price very low to buy market share in anticipation of obtaining economies. Signals potential entrants that low margins exist. If entry is delayed, may have developed significant cost, price advantage
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Meet the competition
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Price set at the “going rate.” Avoids price cutting & wars. Shifts competition to other areas like product differentiation & promotion
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Oligopolistic industries
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Dominated by few large firms, assume role as leader due to market share, capacity. Leader has market knowledge, control over distribution system, determines price level, other firms follow. Firms in weaker competitive positions have little incentive to deviate
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Undercutting the Competition
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Desire to be lowest priced alternative, price is focal point of strategy through Discount retailers & Global businesses. Feasible when scale economies exist
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Predatory Pricing
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Firms wishing to establish a monopoly or market presence. Set prices very low — below cost, drive smaller, less efficient competitors out, buy market share and market awareness, raise prices after competitors eliminated or presence established