Marketing Chapter 10

1) cost-plus pricing/markup on cost 2) markup on sale price 3) average-cost price 4) target return price

4 methods used to set the price

1- competitor's price 2- competitor-based pricing strategies.

A _____1______ is one of the most visible elements of its marketing strategy, and you can often infer the pricing objective by carefully analyzing historical and current pricing patterns. Based on such analysis, a firm may develop__________2______ This approach might lead the marketing manager to decide to price at some market average price, or perhaps above or below it in the context of penetration or skimming objectives.

price war

A _______ occurs when a company purposefully makes pricing decisions to undercut one or more competitors and gain sales and net market share.

variable pricing

A one-price strategy makes planning and forecasting infinitely easier than the alternative approach, _______ which is found in many other countries and cultures but is relatively rare in the U.S. With _______, customers are allowed—even encouraged—to haggle about prices. Ultimately, the price is whatever the buyer and seller agree to—a marked price is nothing more than a starting point for negotiation._________is traditional in the U.S. with a few consumer goods—cars, boats, houses, and the like. But it is the pervasive way of doing business with all sorts of products across large parts of the globe.

predatory pricing

A strategy to intentionally sell below cost to push a competitor out of a market, then raise prices to new highs, is called ________. _______ is illegal but prosecuting it can be very tricky because intent must be proved. Other plausible explanations exist for drastic price reductions including inventory overstocks, so proving that predatory pricing has occurred is difficult.

one-price strategy

An ethnocentric aspect of the U.S. marketplace is the nearly total reliance by marketers on a ________ with end-user consumers. That is, except for temporary price reductions for promotional or clearance purposes, the price marked on a good is what it typically sells for.

reference pricing

As in price bundling, it can be useful for customers to have some type of comparative price when considering a product purchase. Such a comparison is referred to as _________ and, in the case of price bundling, the reference price is the total price of the components of the bundle if purchased separately versus the bundled price. The savings would be expected to stimulate purchase of the bundle so long as the perceived value realized is sufficient.

prestige pricing

As mentioned earlier, one rationale for establishing a price skimming objective is _________ —lending prestige to a product or brand by virtue of a price relatively higher than the competition.

FOB Pricing

_________________ stand for free on board, meaning that title transfer and freight paid on the goods being shipped are based on the __________ location. For example,_______-origin or ______-factory pricing indicates that the purchaser pays freight charges and takes title the moment the goods are placed on the truck or other transportation vehicle. The greater the distance between shipper and customer, the higher the freight charges to the customer. In contrast, ______- destination indicates that until the goods arrive at the purchaser's location, title doesn't change hands and freight charges are the responsibility of the seller.

bait and switch

a seller may advertise an item at an unbelievably low price to lure customers into a store, and once the customer arrives refuse to sell the advertised item and instead push a similar item with a much higher price and higher margin. When this occurs and it can be demonstrated that a seller had no true intent to actually make the lower-priced item available for sale, the practice is called _______ and is illegal.

$100,000 / 250 =$400

for the average cost pricing: To make this calculation requires predicting how much of the offering will be demanded. Assuming total costs of $100,000 and forecasted total number of units of 250, the average cost of a single unit is:

Value

is a ratio of the bundle of benefits a customer receives from an offering compared to the costs incurred by the customer in acquiring that bundle of benefits.

1-Product line pricing (or price lining ) 2- price points

As you have learned, firms rarely market single products. Most products are part of an overall product line of related offerings; and this is true whether the product is in the B2C or B2B marketplace, or in the realm of goods or service. ____1_____ affords the marketing manager an opportunity to develop a rational pricing strategy across a complete line of related items. As a customer is evaluating the choices available within a firm's product line, the ___2____ established for the various items in the line need to make sense and reflect the differences in benefits offered as the customer moves up and down the product line.

auction pricing

Auctions have been around for centuries. In an auction, in which individuals competitively bid against each other and the purchase goes to the high bidder, the market truly sets the price (although some minimum bid amount is often established by the seller). As a strategy, _______ has gained in prominence as Internet commerce has come of age. The most famous example of auction pricing is eBay.

(fixed cost + Target return)/Units (250,000+50,000) / 1,500 = 250

target return pricing: Let's assume that total fixed costs are $250,000 and the target return is set at $50,000 for a total of $300,000. Next, a demand forecast must be made. If demand is forecast at 1,500 units:

1- minimum markup laws 2- loss leader products

Closely associated with fair trade laws are __1____ , which require a certain percentage markup be applied to products.In one extreme case in the early 1970s, the State of Oklahoma took legal action against Target Corporation to force the discounter to obey Oklahoma's minimum markup law that prohibited advertising a wide variety of merchandise for less than a 6 percent profit. This effectively shut down Target's ability to advertise ____2_____, items (typically paper towels, toilet paper, toothpaste, and the like) sacrificed at prices below cost to attract shoppers to the store.

price-fixing

Companies that collude to set prices at a mutually beneficial high level are engaged in _______ .

seasonal discounts

Firms often purchase seasonal products many months before the season begins. For example, a retailer might purchase a winter apparel line at a trade show a year before its season, accept delivery in August, begin displaying it in September, yet cold weather may not hit until November or December. To accommodate such lengthy sales processes, firms offer __________ , which reward the purchaser for shifting part of the inventory storage function away from the manufacturer. _______ are often expressed as greatly extended invoice due dates. In the winter clothes line example, terms of 2%/120, Net 145 would not be unusual.

value pricing strategy

Firms that have an objective of utilizing pricing to communicate positioning use a ___________.- overtly attempts to consider the role of price as it reflects the bundle of benefits sought by the customer.

pricing

For the marketing manager, ______ is much more than an economic break-even point or a cost-plus accounting calculation. Price is a critical component that plays into a customer's assessment of the value afforded by a firm and its offerings.

zone pricing

In a __________ approach, shippers set up geographic pricing zones based on the distance from the shipping location. The parcel post system of the U.S. Postal Service is set up this way. Rates are calculated for the various combinations of sending and receiving zones.

deceptive pricing

Knowingly stating prices in a manner that gives a false impression to customers is ________ . _________ practices are monitored and enforced by the FTC. ________ may take several forms. Sometimes, firms will set artificially high reference prices for merchandise just before a promotion so that an advertised sale price will look much more attractive to customers.

uniform delivered pricing

Many direct-to-consumer marketers such as Amazon and Lands' End practice _________ , in which the same delivery fee is charged to customers regardless of geographic location within the contiguous states. Pricing rates are quoted for other locations, and expedited delivery is generally available for a higher fee.

psychological pricing

Now, the rationale for odd pricing is very different and it is often regarded as a key element of _________ , or creating a perception about price merely from the image the numbers provide the customer. Studies indicate that at certain important price breaks—$9.99 versus $10.00, $99.95 versus $100.00, and so on— customers mentally process the price as significantly lower because of the reduced digit count in the price point.

target return pricing

To better take into account the differential impact of fixed and variable costs, marketing managers can use ________ . First, a few definitions are in order. Fixed costs are incurred over time, regardless of volume. Variable costs fluctuate with volume. And total costs are simply a sum of the fixed and variable costs. To use target return pricing, one must first calculate total fixed costs. Second, a target return must be established.

1- product line pricing 2- captive pricing 3- price building 4- reference pricing 5- prestige pricing 6- odd/even pricing 7- one-price and varable pricing 8- EDLP and High/low pricing 9- Auction pricing

What are all the Tactical Pricing Approaches?

Captive pricing

What is the most profitable part of Hewlett-Packard's office products business: printers or ink cartridges? It's the cartridges. And although other sources for replacement cartridges exist for HP machines, the company does a great job of convincing users that only genuine HP cartridges can be depended on for high-quality performance. -This is an example of:

penetration pricing

When a firm's objective is to gain as much market share as possible, a likely pricing strategy is _______ , sometimes also referred to as pricing for maximum marketing share.

horizontal price-fixing

When competitors are involved in the collusion, _______ occurs. The Sherman Act forbids ________, which could result in overall higher prices for consumers since various competitors are all pricing the same to maximize their profits.

price bundling

When customers are given the opportunity to purchase a package deal at a reduced price compared to what the individual components of the package would cost separately, the firm is using a ________ strategy.

vertical price-fixing

When independent members of a channel (for example, manufacturers, distributors, and retailers) collude to establish a minimum retail price, referred to as retail price maintenance, ________ occurs. ________ is illegal under the Consumer Goods Pricing Act, and for good reason. __________ assures everybody in the channel is satisfied with their "cut" of the profits, but the profit boost is achieved by increased prices to consumers.

Price discrimination

________ occurs when a seller offers different prices to different customers without a substantive basis, such that competition is reduced. Robinson-Patman Act explicitly prohibits giving, inducing, or receiving discriminatory prices except under certain specific conditions such as situations where proof exists that the costs of selling to one customer are higher than to another (such as making distributions to remote locations) or when temporary, defensive price reductions are necessary to meet competition in a specific local area.

Fair trade laws

________ were popular in the past because they allowed manufacturers to establish artificially high prices by limiting the ability of wholesalers and retailers to offer reduced or discounted prices. ______ varied greatly from state to state, depending largely on how strong the independent retailer and wholesaler lobby was in a particular locale. These laws protected mom-and-pop operators from the price discounting by chain stores.

Pricing objectives

_________ are the desired or expected result associated with a pricing strategy. _________ must be consistent with other marketing-related objectives (positioning, branding, etc.) as well as with the firm's overall objectives (including financial objectives) for doing business.

Captive pricing

_________, sometimes called complementary pricing , entails gaining a commitment from a customer to a basic product or system that requires continual purchase of peripherals to operate. ______ is just as common in the service sector, where it is sometimes called two-part pricing.

prestige pricing

__________ plays on psychological principles that attach quality attributions to higher-priced goods—a typical response to some higher-priced products is that they must be better than their competitors; otherwise the price would be lower.

just noticeable difference (JND)

___________- a price, which is the amount of price increase that can be taken without affecting customer demand.

stability pricing

A potentially more productive strategy related to competitor-based pricing is _______, in which a firm attempts to find a neutral set point for price that is neither low enough to raise the ire of competition nor high enough to put the value proposition at risk with customers.

price skimming

A strategy of __________ addresses the objective of entering a market at a relatively high price point. In proposing _____, the marketing manager usually is convinced that a strong price-quality relationship exists for the product. This might be done to lend prestige to a brand, or skimming is sometimes used in a new-product introduction by a firm with a first-mover advantage to skim early sales while the product has a high level of panache and exclusivity in the marketplace. (Major developers of gaming consoles, including Nintendo, Microsoft, and Sony, always introduce a new platform with the objective of price skimming. Plasma televisions all started with very high price points and have gradually inched pricing downward as more and more customers began to purchase.)

reverse auctions

Besides standard auction approaches (buyers bid for a seller's offering), online ________ are now very common in which sellers bid prices to capture a buyer's business. Priceline.com is a prominent example of a _________ firm that serves as a clearinghouse for extra capacity from airlines, hotels, and cruise lines.

price elasticity of demand

Often, _________ —the measure of customers' price sensitivity estimated by dividing relative changes in quantity sold by relative changes in price—becomes central to whether a product can even be viably introduced within the context of a firm's financial objectives.

Target ROI

Pricing Objectives and Related Strategies: Objective:profit maximization Strategy: ?

cash discounts

Sellers offer ______ to elicit quicker payment of invoices. The rational purchaser weighs the discount offered for early payment versus the value of keeping the money until it is due. Ideally the _______ results in financial advantage for both parties. Cash discounts are stated in a typical format such as 2%/10, Net/40, which translates to the buyer receiving 2 percent off the total bill if payment is received within 10 days of the invoice date, but after that point there is no discount and the whole invoice is due within 40 days of the invoice date.

high/low pricing

The antithesis to EDLP is a _________ strategy, in which firms rely on periodic heavy promotional pricing, primarily communicated through advertising and sales promotion, to build traffic and sales volume. The promotional investment is offset by somewhat higher everyday prices. Why would a firm elect _______ instead of EDLP? Usually, the firm has little choice because of what competitors are doing. It takes a long time for any product or service provider to convince the market that it has EDLP.

All costs / Total number of units = Average cost of a single unit

The basic formula for average-cost pricing is:

e= % change in quantity demand / % change in price

The basic price elasticity ( e ) equation is portrayed as: (equation)

1- it is the only approach considered when making the ultimate pricing decisions or 2- it leads to exaggerated extremes in pricing such that on the high end a firm's products do not project customer value or on the low end price wars ensue.

The logic of competitor-based pricing is quite rational unless

1- Discounts 2- Allowances

___1___ are direct, immediate reductions in price provided to purchasers. ____2____ remit monies to purchasers after the fact.

Competitor-based pricing

Pricing Objectives and Related Strategies: Objective:Benchmark the competition Strategy: ?

price skimming

Pricing Objectives and Related Strategies: Objective:Market entry at the highest possible initial price Strategy: ?

Penetration pricing

Pricing Objectives and Related Strategies: Objective:Market share maximization Strategy: ?

value pricing

Pricing Objectives and Related Strategies: Objective:communicate positioning through price Strategy: ?

target return on investment (ROI)

Pricing objectives very frequently are designed for profit maximization, which necessitates a _______ pricing strategy. Here, a bottom-line profit is established first and then pricing is set to achieve the target.

markup on sales price

The markup percentage is $5.00 / $12.00 = 41.7 percent. That is, the $5.00 markup is 41.7 percent of the sales price. In most applications, when a marketing manager simply refers to "markup," he or she is referring to this calculation— ________ , which uses the sales price as a basis of calculating the markup percentage. This is because most important items on financial reports (gross sales, revenue, etc.) are sales, not cost, figures.

everyday low pricing (EDLP)

The rise of Walmart as one of the world's largest corporations has brought the concept of _______ to the forefront of global consumer consciousness. ________ is not an option just for retailers; it's an important strategic choice for nearly any firm. The fundamental philosophy behind _________is to reduce investment in promotion and transfer part of the savings to lower price.

promotional allowances

Within a given channel, sellers often want purchasers to help execute their promotional strategies. A consumer products marketer like P&G, for example, depends heavily on wholesalers, distributors, and retailers to promote its brands. When a retailer runs an ad for a P&G brand such as Crest toothpaste, it is nearly always in response to ________ provided by the manufacturer. Ordinarily, upon proof of performance of the promotion, the retailer will receive a check back from the manufacturer to compensate for part of the promotional costs. The allowance might be calculated as a percentage of the invoice for Crest purchased from P&G or it might be a fixed dollar figure per dozen or per case.

Market share

____ is the percentage of total category sales accounted for by a firm.

Pricing decisions

_____ cannot be made in a vacuum but rather must consider the whole of the firm's offering, especially the concurrent decisions the firm is making about branding and products, service approaches, supply chain, and marketing communication. For the marketing manager, pricing is much more than an economic break-even point or a cost-plus accounting calculation. Price is a critical component that plays into a customer's assessment of the value afforded by a firm and its offerings

1-Odd pricing 2- even pricing

_____1___ simply means that the price is not expressed in whole dollars, while ______2___ is a whole-dollar amount ($1.99 versus $2.00, for example). Odd pricing originally came about before the advent of sales taxes and widespread credit card use to bolster cash register security and reduce theft. That is, if a customer brings a $5.00 item to a clerk and presents a $5.00 bill for payment, it was believed that the temptation would be greater for the clerk to simply pocket the bill and not record the sale.

Marketing managers

_______ are in the best position to take into account the competitor, customer, and brand image impact of pricing approaches.

Cost-plus pricing

_______ is really just a general heuristic that builds a price by adding a standardized markup on top of costs for an offering, hence the term markup on cost .

Trade discounts

________ , also sometime called functional discounts, provide an incentive to a channel member for performing some function in the channel that benefits the seller. Examples include stocking a seller's product or performing a service related to that product, such as installation or repair, within the channel. _________ are normally expressed as a percentage off the invoice price.

Quantity discounts

________ are taken off an invoice price based on different levels of product purchased. ________ may be offered on an order-by-order basis, in which case they are noncumulative, or they may be offered on a cumulative basis over time as an incentive to promote customer loyalty. From a legal standpoint, it is essential that_______ are offered to all customers on an equally proportionate basis so that small buyers as well as large buyers follow the same rules for qualification.

Price wars

________ are the quickest way to destroy margins and bottom-line profit.

flexibility

although firms competing on cost leadership will likely also engage in one of Porter's other competitive strategies (differentiation or focus/niche), their core cost advantages translate directly to an edge over their competitors based on much more ________ in their pricing strategies as well as their ability to translate some of the cost savings to the bottom line.