Chapter 14

loss-leader pricing

Deliberately selling a product below its customary price, not to increase sales, but to attract customers attention to it in hopes that they will buy other products with large markups as well.

product-line pricing

The setting of prices for all items in a product line to cover the total cost and produce a profit for the complete line, not necessarily for each item.

yield management pricing

The charging of different prices to maximize revenue for a set amount of capacity at any given time.

What profit-based pricing approach should a manager use if he or she wants to reflect the percentage of the firm's resources used in obtaining the profit?

target return-on-investment pricing

price lining

Setting the price of a line of products at a number of different specific pricing points.

above, at or below market pricing

Setting a market price for a product or product class based on a subjective feel for the competitors price or market price as the benchmark.

target return on sales pricing

Setting a price to achieve a profit that is specified percentage of the sales volume.

price fixing

A conspiracy among firms to set prices for a product.

target return on investment pricing

Setting a price to achieve an annual target return on investment (ROI).

Why would a seller choose a dynamic pricing policy over a fixed-price policy?

A dynamic pricing policy sets different prices for products and services in real time in response to supply and demand conditions. Sellers have considerable discretion in setting the final price in light of demand, cost, and competitive factors. Moreover, sellers can continually adjust prices due to the implementation of sophisticated information technology that gives them the ability to customize a price on the basis of customer purchasing patterns, product preferences, and price sensitivity. A fixed-price policy sets one price for all buyers of a product or service. Consumers can choose to buy or not buy, but there is no variation in the price from the seller.

experience curve pricing

A method of pricing based on the learning effect, which holds that the unit cost of many products and services declines by 10 percent to 30 percent each time a firm's experience at producing and selling them doubles.

standard markup pricing

Adding a fixed percentage to the cost of all items in a specific product class.

promotional allowances

Cash payments or an extra amount of "free goods" awarded sellers in the marketing channel for undertaking certain advertising or selling activities to promote a product.

target pricing

Consists of (1) estimating the price that ultimate consumers would be willing to pay for a product, (2) working backward through markups taken by retailers and wholesalers to determine what price to charge wholesalers, and then (3) deliberately adjusting the composition and features of the product to achieve the target price to consumers.

quantity discounts

Reductions in unit costs for a larger order.

basing point pricing

Selecting one or more geographical locations (basing point) from which the list price for products plus freight expenses are changed to the buyer.

prestige pricing

Setting a high price so that quality or status conscious consumers will be attracted to products and buy it.

penetration pricing

Setting a low initial price on a new product to appeal immediately to the mass market.

target profit pricing

Setting an annual target of a specific dollar volume of profit.

dynamic pricing policy

Setting different prices for products and services in real time in response to supply and demand conditions. Also called a flexible-price policy.

What is odd-even pricing?

Odd-even pricing involves setting prices a few dollars or cents under an even number. Psychologically, a $499.99 price feels lower than $500.00, even though the difference is just 1 cent.

price discrimination

The practice of changing different prices to different buyers for products of like grade and quality.

predatory pricing

The practice of charging a very low price for a product with the intent of driving competitors out of business.

everyday low pricing

The practice of replacing promotional allowances with lower manufacturer list prices

uniform delivered pricing

The price the seller quotes that includes all transportation costs.

If a firm wished to encourage repeat purchases by a buyer throughout a year, would a cumulative or a noncumulative quantity discount be a better strategy?

Cumulative quantity discounts apply to the accumulation of purchases of a product over a given time period (typically a year) and encourage repeat buying by a single customer to a far greater degree than do noncumulative quantity discounts.

bundle pricing

The marketing of two or more products in a single package price.

What is the purpose of loss-leader pricing when used by a retail firm?

Loss-leader pricing involves deliberately selling a product below its customary price not to increase sales but to attract customers in hopes they will buy other products as well, such as discretionary items with large markups.

customary pricing

Setting a price that is dictated by tradition, a standardized channel of distribution, or other competitive factors.

fixed-price policy

Setting one price for all buyers of a product or service. Also called a one price policy.

odd-even pricing

Setting prices a few dollars or cents under an even number.

skimming pricing

Setting the highest initial price that customers really desiring the product are willing to pay when introducing a new or innovative product.

In pricing a new product, what circumstances might support skimming or penetration pricing?

Skimming pricing is an effective strategy when: (1) the firm may want to recoup the initial R&D and promotion costs in developing and promoting the product; (2) enough prospective customers are willing to buy the product immediately at the high initial price to make these sales profitable because they are not very price sensitive; (3) the high initial price will not attract competitors; (4) lowering the price has only a minor effect on increasing the sales volume and reducing the unit costs; and (5) customers interpret the high price as signifying high quality. These conditions are most likely to exist when the new product is protected by patents or copyrights or its uniqueness is understood and valued by consumers. Penetration pricing is an effective strategy when: (1) used after a skimming strategy to appeal to a broader segment of the population and increase market share; (2) many segments of the market are price sensitive; (3) a low initial price discourages competitors from entering the market; (4) unit production and marketing costs fall dramatically as production volumes increase; (5) a firm wants to maintain the initial price for a time to gain profit lost from its low introductory level; and (6) a firm wants to lower the price further, counting on the new volume to generate the necessary profit. 14-2 What is odd-even pricing? Answer: Odd-even pricing involves setting prices a few dollars or cents under an even number. Psychologically, a $499.99 price feels lower than $500.00, even though the difference is just 1 cent. 14-3 What is standard markup pricing? Answer: Standard markup pricing entails adding a fixed percentage to the cost of all items in a specific product class. The price varies based on the type of product and the retail store within which it is sold. 14-4 What profit-based pricing approach should a manager use if he or she wants to reflect the percentage of the firm's resources used in obtaining the profit? Answer: target return-on-investment pricing 14-5 What is the purpose of loss-leader pricing when used by a retail firm? Answer: Loss-leader pricing involves deliberately selling a product below its customary price not to increase sales but to attract customers in hopes they will buy other products as well, such as discretionary items with large markups. 14-6 Why would a seller choose a dynamic pricing policy over a fixed-price policy? Answer: A dynamic pricing policy sets different prices for products and services in real time in response to supply and demand conditions. Sellers have considerable discretion in setting the final price in light of demand, cost, and competitive factors. Moreover, sellers can continually adjust prices due to the implementation of sophisticated information technology that gives them the ability to customize a price on the basis of customer purchasing patterns, product preferences, and price sensitivity. A fixed-price policy sets one price for all buyers of a product or service. Consumers can choose to buy or not buy, but there is no variation in the price from the seller. 14-7 If a firm wished to encourage repeat purchases by a buyer throughout a year, would a cumulative or a noncumulative quantity discount be a better strategy? Answer: Cumulative quantity discounts apply to the accumulation of purchases of a product over a given time period (typically a year) and encourage repeat buying by a single customer to a far greater degree than do noncumulative quantity discounts. 14-8 Which pricing practices are covered by the Sherman Act? Answer: The Sherman Act prohibits (1) horizontal price fixing, which is when two or more competitors explicitly or implicitly set prices and (2) predatory pricing, which is the practice of charging a very low price for a product with the intent of driving competitors out of business. Once competitors have been driven out, the firm raises its prices.

What is standard markup pricing?

Standard markup pricing entails adding a fixed percentage to the cost of all items in a specific product class. The price varies based on the type of product and the retail store within which it is sold.

price war

Successive price cutting by competitors to increase or maintain their unit sales or market share.

cost-plus pricing

Summing the total unit cost of providing a product or service and adding a specific amount to the cost to arrive at a price.

FOB origin pricing

The 'free on board" price the seller quotes that includes only the cost of loading the product onto the vehicle and specifies the name of the location where the loading is to occur.

Which pricing practices are covered by the Sherman Act?

The Sherman Act prohibits (1) horizontal price fixing, which is when two or more competitors explicitly or implicitly set prices and (2) predatory pricing, which is the practice of charging a very low price for a product with the intent of driving competitors out of business. Once competitors have been driven out, the firm raises its prices