Marketing Chapter 11

unfair sales acts

(unfair trade practices acts) state laws that prohibit suppliers from selling products below cost to protect small businesses from larger competitors

steps of price planning

1. develop pricing objectives; 2. estimate demand; 3. determine costs; 4. evaluate the pricing environment; 5. choose a pricing strategy; 6. develop pricing tactics

external influences on pricing

1. the economy [recessions, inflation]; 2. the competition; 3. consumer trends [bargain hunting]

upward shift in demand

: at any given price, demand is greater than before the shift occurs

freenomics

A business model that encourages giving products away for free because of the increase in profits that can be achieved by getting more people to participate in a market (externalities). Ex. Google/Gmail is free because it attracts more "eyeballs," which boosts the rates advertisers are willing to pay to talk to those people, paying Google

profit objectives

a certain level of profit a firm hopes to realize; focus is on a target level of profit growth or a desired net profit margin; important to firms that believe profit is what motivates shareholders and bankers to invest in a company

pricing for multiple products

a firm may sell several products that consumers typically buy at one time (ex. Taco Bell - buy a taco, also a soft drink + burrito)

break-even analysis

a method for determining the number of units that a firm must produce and sell at a given price to cover all its costs

marginal analysis

a method that uses cost and demand to identify the price that will maximize profits

yield management pricing

a practice of charging different prices to different customers in order to manage capacity while maximizing revenues. (Ex. Airlines, hotels, cruise lines, etc.). Service firms! Goal is to accurately predict proportion of customers who fall into each category and allocate percentages of the airline's or hotel's capacity accordingly so that no product goes unsold

reserve price

a price below which the item will not be sold

reasonable price

a price that makes the product affordable and appears to be fair - often the most important consideration in a purchase

pricing strategies based on demand

a price-setting method based on estimates of demand at different prices. Firms must determine how much product they can sell in each market and at what price. May use a field experiment where product is offered at different prices in different markets and reactions are gauged

penetration pricing

a pricing strategy in which a firm introduces a new product at a very low price to encourage more customers to purchase it. May act as barrier-to-entry for competitors if the prices the market will bear are so low that the company will not be able to recover development and manufacturing costs

value pricing/everyday low pricing [EDLP]

a pricing strategy in which a firm sets prices that provide ultimate value to customers. In the customers' eyes, the price is justified by what they receive. Ex. Wal-Mart demands tens of billions of dollars in cost efficiencies from retail supply chain and passes these savings on to customers. Begins with customers, considers competition, then determines best pricing strategy

price leadership strategy

a pricing strategy in which one firm first sets its price and other firms in the industry follow with the same or very similar prices (usually in oligopoly). Maximizes price competition. Popular because firms agree on prices legally without coordinating rates with each other; in most cases this would be illegal a.k.a. collusion

dynamic pricing

a pricing strategy in which the price can easily be adjusted to meet changes in the marketplace. A bricks-and-mortar retail store has difficulty changing prices, because they have to reticket/update computer information on everything. A B2B company similarly has to send out new catalogues, etc. -- these companies don't change prices often. Online, you can change more quickly because the price to do so is practically zero

captive pricing

a pricing tactic for 2 items that must be used together; one item is priced very low, and the firm makes its profit on another, high-margin item essential to the operation of the first item. Ex. Shaving products - razor is cheap, blades are expensive

uniform delivered pricing

a pricing tactic in which a firm adds a standard shipping charge to the price for all customers regardless of location

basing-point pricing

a pricing tactic in which customers pay shipping charges from set basing-point locations, whether the goods are actually shipped from these points or not

FOB delivered pricing

a pricing tactic in which the cost of loading and transporting the product to the customer is included in the selling price and is paid by the manufacturer

FOB origin pricing

a pricing tactic in which the cost of transporting the product from the factory to the customer's location is the responsibility of the customer

freight absorption pricing

a pricing tactic in which the seller absorbs the total cost of transportation. Usually done for high-ticket items, where the cost of shipping is a negligible part of the sales price and profit margin

quantity discounts

a pricing tactic of charging reduced prices for purchases of larger quantities of a product

target costing

a process in which firms identify the quality and functionality needed to satisfy customers and what price they are willing to pay before the product is designed; the product is manufactured only if the firm can control costs to meet the required price

internal references prices

a set price or a price range in consumers' minds that they refer to in evaluating a product's price -- based on past experience

skimming price

a very high, premium price that a firm charges for its new, highly desirable product. Intention of reducing price in the future in response to market pressures. More likely to succeed if product provides some important benefits to target market that make customers feel they must have it no matter what the cost. Should be little chance that competitors can get into the market quickly

open auction

all the buyers know the highest price bid at any point in time

bait-and-switch

an illegal marketing practice in which an advertised price special is used as bait to get customers into the store with the intention of switching them to a higher-priced item. (ex. Budget model appliance like a washing machine that has been stripped of all but the most basic features, but it's almost impossible to buy this advertised item. The salespeople try to get customers to buy a different, more expensive, item by telling the consumers that the advertised item is poor quality, lacking features, etc.). Hard to detect because it's too similar to "trading up."

cumulative quantity discounts

based on a total quantity bought within a specified time period, often a year, and encourage a buyer to stick with a single seller instead of moving from one supplier to another. Rebates (firm sends buyer a rebate check at the end of the discount period or gives buyer credit against future orders)

noncumulative quantity discounts

based only on the quantity purchased with each individual order and encourage larger single orders but do little to tie the buyer and the seller together

horizontal price fixing

competitors making the same product jointly determine what price they each will charge. There must be an exchange of pricing information between sellers to be illegal, otherwise it could just be competitive [Sherman Antitrust Act]

pricing strategies based on consumers' needs

concerned with keeping customers for the long term

psychological issues in setting prices

consumers aren't rational

buyers' pricing expectations

consumers base perceptions of price on what they consider to be "fair." When a price of a product is above or sometimes even below what consumers expect, they are less willing to purchase the product. If above, they may think it's a rip-off. If below, they may think quality is below par. Marketers need to understand the pricing expectations of their customers

price-quality inferences

consumers use price as a cue or indicator of quality (we believe something to be true without any direct evidence); if consumers are unable to judge the quality of a product through examination or prior experience, they usually assume that the higher-priced product is the higher-quality product

image enhancement objectives

consumers use price to make inferences about the quality of a product

variable costs

costs of production (raw and processed materials, parts, and labor) that are tied to and vary depending on the number of units produced. Usually go down with higher levels of production - company is offered deals to buy more parts to create their product

fixed costs

costs of production that do not change with the number of units produced

elastic demand

demand in which changes in price have large effects on the amount demanded. Greater than 1 in the equation

inelastic demand

demand in which changes in price have little or no effect on the amount demanded. Less than 1 in the equation

trade or functional discounts

discounts off list price of products to members of the channel of distribution who perform various marketing functions

online auctions

e-commerce that allows shoppers to purchase products through online bidding

distribution-based pricing

establishes how firms handle the cost of shipping products to customers near, far, and wide. Decision to charge all customers the same price or to vary according to shipping cost

monopolistic competition

ex. Restaurant industry; a lot of sellers each offering a slightly different product; firms can differentiate products and focus on nonprice competition; each firm prices its product on basis of cost without much concern for matching exact price of competitors' products

purely competitive

ex. Wheat farmers; little opportunity to raise or lower prices; price of wheat, soybeans, etc. is directly influenced by supply and demand. Less crops, price goes up; more people eat fish instead of red meat, price goes up

downward shift in demand

ex. meat recall

oligopoly

few sellers, many buyers; status quo pricing objectives (pricing of all competitors is similar); allows all players in industry to remain profitable. Ex. Delta Airlines

cash discounts

firms try to entice their customers to pay their bills quickly by offering cash discounts (2% 10 days, net 30 days)

customer satisfaction objectives

focus on keeping customers for the long term; customer satisfaction and long-term service

free enterprise system

founded on the idea that the marketplace will regulate itself; prices will rise or fall according to demand. Firms and individuals will supply goods and services at fair prices if there is an adequate profit incentive. This is not all true, so there is legislation to protect consumers and businesses from predatory rivals

demand curve

graph that illustrates effect of price on quantity demanded of a product; shows quantity of a product that customers will buy in a market during a period of time at various prices if all other factors remain the same

prestige/luxury products

have a high price and appeal to status-conscious consumers

shifts in demand

if a factor other than price changes, so can demand (ex. Seeing a celebrity using the product, demand goes up)

substitute goods/services

if a product has a close substitute, its demand will be elastic; marketers here are less likely to compete on price

law of demand

if price of a product goes up, the number of units that customers are willing to buy goes down; if prices decrease, customers will buy more; "price-quantity relationship." Exception = prestige products, until even those prices get too high and almost no one can afford them

assimilation effect

if prices and other characteristics of two products are fairly close, the consumer will probably feel that the product quality is similar

contrast effect

if the prices of the two products are too far apart; the customer equates the gap with a big difference in quality (ex. Lower priced one isn't as good as the higher priced one, so buy the higher priced one)

predatory pricing

illegal pricing strategy in which a company sets a very low price for the purpose of driving competitors out of business. Later, when they have a monopoly, they turn around and increase prices. [Sherman Act and Robinson-Patman Act]

payment pricing

makes the consumer think the price is "do-able" by breaking up the total price into smaller amounts payable over time (ex. Lease rather than buy a car). Designed to reduce: • Negative reaction to total retail price = sticker shock

profit is maximized when...

marginal cost is exactly equal to marginal revenue; the cost of producing one unit is exactly equal to the revenue to be realized from selling that one unit

odd-even pricing

marketers assume that there is a psychological response to odd prices that differs from the response to even prices (ex. $1.99 vs. $2.00). Prices ending in 99 rather than 00 for some reason lead to increased sales

sales/market share objectives

maximize sales (in dollars or units) or increase market share

cost-plus pricing

method of setting prices in which the seller totals all the costs for the product and then adds an amount to arrive at the selling price; most common cost-based approach to pricing a product. Marketers calculate markup on cost or markup on selling price to calculate cost-plus pricing

break-even price

minimum price necessary to cover all costs

fad products

must price on profit objectives; short market life - profit objective is essential to allow the firm to recover its investment in a short time

CIF [cost, insurance, freight]

ocean shipments; seller quotes price for goods (including insurance), transportation, and miscellaneous charges to the point of debarkation from the vessel

prestige pricing

people buy more as the price goes up; luxury goods; we value a product or service more when the price increases

price-placebo effect

people who think they're getting the real (more expensive) product but who are actually using a product that's the same as the less expensive product experience the better effects of using the "real" one. ($90 wine and $10 wine that's the same in different bottles - people liked the $90 better)

seasonal discounts

price reductions offered only during certain times of the year (snow blowers, lawn mowers, etc.). Marketers try to entice customers to buy off-season and store the product at their locations until the right time of the year or pass along the discount to consumers with off-season sales programs. Also may offer discounts in-season to create competitive advantage during periods of high demand

trial pricing

pricing a new product low for a limited period of time in order to lower the risk for a customer. Increases trial price after the introductory period. Customer acceptance first, make profits later

pricing strategies based on competition

pricing wares near, at, above, or below the competition's prices

new-product pricing

product is new to market, there is no established industry price norm

CFR [cost and freight]

quoted price covers goods and cost of transportation to the named point of debarkation but the buyer must pay the cost of insurance. Also ocean shipments

Robinson-Patman act

regulations against price discrimination in interstate commerce. Prevent firms from selling the same product to different retailers and wholesalers at different prices if such practices lessen competition. Prohibits offering "extras" such as discounts, rebates, premiums, coupons, guarantees, and free delivery to some but not all customers

two-part pricing

requires 2 separate types of payments to purchase the product (ex. Golf club charges yearly or monthly fee + fees for each round of golf)

CIP [carriage and insurance paid to] and CPT [carriage paid to]

same provisions as CIF and CFR but used for shipment by modes other than water

price bundling

selling 2+ goods or services as a single package for one price. Often costs less than the total price of the items if bought individually (but consumers buy more, so the firm still earns revenue)

pricing strategies based on cost

simple, relatively risk-free; price at least covers cost to manufacture/market; drawbacks: don't consider factors like nature of target market, demand, competition, product life cycle, and product image; often a marketer's best choice even with difficulties of calculating accurate cost

price

the assignment of value, or the amount the consumer must exchange to receive the offering

price fixing

the collaboration of two or more firms in setting prices, usually to keep prices high

contribution per unit

the difference between the price the firm charges for a product and the variable costs

average fixed costs

the fixed cost per unit produced

marginal cost

the increase in total cost that results from producing one additional unit of a product

marginal revenue

the increase in total income or revenue that results from selling one additional unit of a product

price elasticity of demand

the percentage change in unit sales that results from a percentage change in price; percentage change in quantity demanded [divided by] Percentage change in price

break-even point

the point at which the total revenue and total costs are equal and beyond which the company makes a profit; below that point, the firm will suffer a loss

price lining

the practice of setting a limited number of different specific prices, called price points, for items in a product line. Good way to maximize profits - in theory a firm would charge each customer the highest price they'd be willing to pay, but offering each consumer a different price is not really possible, so they create a limited number of prices that generally fall at the top of the different prices ranges customers find acceptable

list price

the price the end customer is expected to pay as determined by the manufacturer; also referred to as the suggested retail price

competitive effect objectives

the pricing plan is intended to have a certain effect on the competition's marketing efforts; sometimes a firm may try to preempt or reduce effectiveness of competitor(s)

loss leader pricing

the pricing policy of setting prices very low or even below cost to attract customers into a store (hoping to build store traffic and that consumers will buy other items at regular prices)

vertical price fixing

the retailer that wants to carry the product has to charge the "suggested" retail price; manufacturers or wholesalers attempt to force retailer to charge a certain price for their product. Today, retailers don't need to do this. [Consumer Goods Pricing Act of 1976]

total costs

the total of the fixed costs and the variable costs for a set number of units produced

opportunity cost

the value of something we give up to obtain something else (ex. College education - you give up working/earning money to go to class)

reverse auction

tool used by firms to manage their costs in business-to-business buying. Sellers compete for the right to provide a product at, hopefully, a low price

cross-elasticity of demand

when changes in the price of one product affect the demand for another item. Ex. If price of bananas goes up, people may instead buy strawberries or blueberries. When products are complements - one is essential to the use of another - increase in price of one decreases the demand for the second. Ex. Price of gas goes up, people may drive less - demand for tires and gas decreases