Chapter 7 Questions

Price discrimination

Setting a different price for the same product in different segments to the market. For example, this can be for different ages, such as classes, or for different opening times of a theatrical production (i.e. Matinee discounts).

Market-oriented pricing

Setting a price based upon analysis and research compiled from the target market. This means that marketers will set prices depending on the results from the research. For instance if the competitors are pricing their products at a lower price, then it's up to them to either price their goods at an above price or below, depending on what the company wants to achieve.

Value pricing

This approach is used where external factors, such as recession or increased competition, force companies to provide value products and services to retain sales (e.g., value meals at McDonalds and other fast-food restaurants). Value price means that you get great value for money (i.e., the price that you pay makes you feel that you are getting a lot of product). In many ways it is similar to economy pricing. One must not make the mistake to think that there is added value in terms of the product or service. Reducing price does not generally increase value.

Dynamic pricing

A flexible pricing mechanism made possible by advances in information technology, and employed mostly by Internet based companies. By responding to market fluctuations or large amounts of data gathered from customers - ranging from where they live to what they buy to how much they have spent on past purchases - dynamic pricing allows online companies to adjust the prices of identical goods to correspond to a customer's willingness to pay. The airline industry is often cited as a dynamic pricing success story. In fact, it employs the technique so artfully that most of the passengers on any given airplane have paid different ticket prices for the same flight.

Limit pricing

A limit price is the price set by a monopolist to discourage economic entry into a market, and is illegal in many countries. The limit price is the price that the entrant would face upon entering as long as the incumbent firm did not decrease output. The limit price is often lower than the average cost of production or just low enough to make entering not profitable. The quantity produced by the incumbent firm to act as a deterrent to entry is usually larger than would be optimal for a monopolist, but might still produce higher economic profits than would be earned under perfect competition.The problem with limit pricing as a strategy is that once the entrant has entered the market, the quantity used as a threat to deter entry is no longer the incumbent firm's best response. This means that for limit pricing to be an effective deterrent to entry, the threat must in some way be made credible.

Loss leader

A loss leader is a product sold at a low price (i.e. at cost or below cost) to stimulate other profitable sales. This would help the companies to expand its market share as a whole. Retailers often use this tactic on popular products to lure customers into their stores, making up the loss by selling other items to the shopper.

Predatory pricing

Aggressive pricing (also known as "undercutting") intended to drive out competitors from a market. It is illegal in some countries.

Price leadership

An observation made of business behavior in which one company, usually the dominant competitor among several, leads the way in determining prices, the others soon following. The context is a state of limited competition, in which a market is shared by a small number of producers or sellers.

Optional product pricing

Companies will attempt to increase the amount customers spend once they start to buy by offering "add-ons". Optional 'extras' increase the overall price of the product or service. For example, car dealers will often offer service programs, and airlines will charge for optional extras such as guaranteeing a window seat or reserving a row of seats next to each other. Airlines are prime users of this approach when they charge you extra for additional luggage or extra legroom.

Contribution margin-based pricing

Contribution margin-based pricing maximizes the profit derived from an individual product. This is based on the difference between the product's price and variable costs (the product's contribution margin per unit), and on one's assumptions regarding the relationship between the product's price and the number of units that can be sold at that price. The product's contribution to total firm profit (i.e., to operating income) is maximized when a price is chosen that maximizes the following: (contribution margin per unit) X (number of units sold).

Cost-plus pricing

Cost-plus pricing is the simplest pricing method. The firm calculates the cost of producing the product and adds on a percentage (profit) to that price to render the selling price. This method, although simple, has two flaws; it takes no account of demand and there is no way of determining if potential customers will purchase the product at the calculated price. This appears in two forms. Full cost pricing takes into consideration both variable and fixed costs and adds a percent markup. The other is direct cost pricing which is variable costs plus a percent markup; the latter is only used in periods of high competition as this method usually leads to a loss in the long run.

The pricing strategy made famous by Wal-Mart, where the retailer sets the price at the lowest price they are willing to sell the product at. a)Value pricing b)Product bundle pricing c)Every-day low price d)Product line pricing e)High-Low pricing

Every-day low price

True or False. Most consumers who live at or near the poverty line almost exclusively purchase generic products for use in their homes.

False

True or False: In the early stage of a product life cycle is when the lowest price is charged and most profits are reaped

False

Freemium

Freemium is a business model that works by offering a product or service free of charge (typically digital offerings such as software, content, games, web services, etc.) while charging a premium for advanced features, functionality, or related products and services. It has become a highly popular model, with notable success in phone apps.

Geographical pricing

Geographical pricing sees variations in price in different regions of the same country, or in parts of the world. Some countries tax goods such as alcohol or gasoline in order to increase revenue, and it is noticeable when you do travel overseas that sometimes goods are much cheaper, or more expensive.

The pricing strategy often used at department stores like Kohl's or Dillard's, where goods offered by the retailer are regularly priced higher than the competition, but through promotions, sales, advertisements or discounts, lower prices are offered on key items. a)Value-based pricing b)High-Low Pricing c)Premium-decoy pricing d)Absorption pricing e)Bait and Switch pricing

High-Low Pricing

Creaming or skimming

In market skimming, goods are sold at higher prices so that fewer sales are needed to break even. Selling a product at a high price, sacrificing high sales to gain a high profit is therefore "skimming" the market. Skimming is usually employed to reimburse the cost of investment of the original research into the product. It is commonly used in electronic markets when a product such as the latest iPad, are introduced into the market at a high price. This strategy is often used to target "early adopters" of a product or service. Early adopters generally have a relatively lower price-sensitivity. This can be attributed to their need for the product outweighing their need to economize, a greater understanding of the product's value, or simply having a higher disposable income.This strategy is employed only for a limited duration to recover most of the investment made to build the product. To gain further market share, a seller must use other pricing tactics such as economy or penetration. This method can have some setbacks as it could leave the product at a high price against the competition.

Product bundle pricing

In this approach sellers combine several products in the same package. This also serves to move old stock. Blu-ray and videogames are often sold using the bundle approach once they reach the end of their product life cycle. You might also see product bundle pricing with the sale of items at auction, where an attractive item may be included as a package with a box of less interesting things so that you must bid for the entire lot. It's a good way of moving slow selling products, and in a way is another form of promotional pricing.

Odd pricing

In this type of pricing, the seller tends to fix a price whose last digits are odd numbers. This is done so as to give the buyers/consumers no gap for bargaining; the prices seem to be less and yet, in an actual sense, are too high.

A product sold at a low price (i.e. at cost or below cost) to attract customers and stimulate sales of other profitable products is called a)Limit Pricing Premium Pricing b)Loss Leader Pricing c)Penetration Pricing d)Cost plus pricing

Loss Leader Pricing

Premium decoy pricing

Method of pricing where a retailer artificially sets one product price high, in order to boost sales of a lower priced product.

High-low pricing

Method of pricing where the goods or services offered by the retailer are regularly priced higher than competitors, but through promotions, advertisements, and or coupons, lower prices are offered on key items. The lower promotional prices are designed to bring customers to the retailer where the customer is offered the promotional product as well as the regular higher priced products. This is the pricing strategy of most department stores (Dillard's, Macy's, Kohl's, etc.).

Pay what you want

Pay what you want is a pricing system where buyers pay any desired amount for a given commodity, sometimes including zero. In some cases, a minimum (floor) price may be set, and/or a suggested price may be indicated as guidance for the buyer. The buyer can also select an amount higher than the standard price for the commodity.Giving buyers the freedom to pay what they want may seem to not make much sense for a seller, but in some situations it can be very successful. While most uses of pay what you want have been at the margins of the economy, or for special promotions, there are emerging efforts to expand its utility to broader and more regular use.

Premium pricing

Premium pricing is the practice of keeping the price of a product or service artificially high in order to encourage favorable perceptions among buyers, based solely on the price. The practice is intended to exploit the tendency for buyers to assume that expensive items enjoy an exceptional reputation, are more reliable or desirable, or represent exceptional quality and distinction. This approach is used where a substantial competitive advantage exists and the marketer is safe in the knowledge that they can charge a relatively higher price.

The economics technique that is used to help determine the "optimal" product price is called: a)Price flexibility modeling b)Price elasticity c)Power pricing d)Line pricing e)Price modeling

Price elasticity

The best business to own and operate is one in which buyers will pay just about any price for your goods, and sales volume doesn't really change much no matter what you charge. This is called: a)Price sensitive b)Price insensitive c)Power pricing d)Price modeling e)High-Low pricing

Price insensitive

Pricing a product at $3.99 instead of $4.00 is an example of a)Psychological pricing b)Dynamic pricing c)Penetration pricing d)Predatory pricing e)Premium pricing

Psychological pricing

Value-based pricing

Pricing a product based on the perceived value and not on any other factor. Pricing based on the demand for a specific product would have a likely change in the market place.

Psychological pricing

Pricing designed to have a positive psychological impact. For example, selling a product at $3.95 or $3.99, rather than $4.00.

Promotional pricing

Pricing to promote a product is a very common approach. There are many examples of promotional pricing including approaches such as Buy One Get One Free, money off vouchers and discounts. Promotional pricing is often the subject of controversy. Many countries have laws that govern the amount of time that a product should be sold at its original higher price before it can be discounted. Sales are extravaganzas of promotional pricing!

A pricing strategy where retailers combine several products into the same package is called:a)Freemium pricing b)Every-day low price c)Value pricing d)Product bundle pricing e)Optional product pricing

Product bundle pricing

Target pricing

Target pricing is a method whereby the selling price of a product is calculated to produce a particular rate of return on investment for a specific volume of production. The target pricing method is used most often by public utilities, like electric and gas companies, and companies whose capital investment is high, like automobile manufacturers.Target pricing is not useful for companies whose capital investment is low because, according to this formula, the selling price will be understated. Also the target pricing method is not keyed to the demand for the product, and if the entire volume is not sold, a company might sustain an overall budgetary loss on the product.

Penetration pricing

The price charged for products and services is set artificially low in order to gain market share. Once this is achieved, the price is increased.

Marginal-cost pricing

This is the practice of setting the price of a product to equal the extra cost of producing an extra unit of output. Under this policy, a producer charges, for each product unit sold, only the addition to total cost resulting from materials and direct labor. Businesses often set prices close to marginal cost during periods of poor sales. If, for example, an item has a marginal cost of $1.00 and a normal selling price is $2.00, the firm selling the item might wish to lower the price to $1.10 if demand has waned. The business would choose this approach because the incremental profit of 10 cents from the transaction is better than no sale at all.

Product line pricing

This is useful when there is a range of products or services where the pricing reflects the benefits of parts of the range. Car washes are an example of this - a basic wash could be $2, a wash and wax $4, and the whole package for $6. Product line pricing seldom reflects the cost of making the product since it delivers a range of prices that a consumer perceives as being incrementally fair - over the range.

Absorption pricing

This method of pricing is one in which all costs are recovered. The price of the product includes the variable cost of each item plus a proportionate amount of the fixed costs and is a form of cost-plus pricing.

True or False:Price communicates value to the consumer. The price you ask makes a statement about the value you are offering to the consumer.

True

Captive product pricing

Where products have complements (such as blood sugar testing strips that are required with diabetes blood sugar monitors), companies will charge a premium price since the consumer has no choice. For example a razor manufacturer will charge a low price for the razor handle and recoup its margin (and more) from the sale of the blades that fit the razor. Another example is where printer manufacturers will sell you an inkjet printer at a low price. In this instance the inkjet company knows that once you run out of the consumable ink you need to buy more, and this tends to be relatively expensive. Again the cartridges are not interchangeable and you have no choice.