Chapter 14: Final Price (textbook and classnotes)

Bargains conditional on other purchases

"1 cent sales," "buy one get one free." and the like are only legal if the first item is sold at its regular price, not if the price is inflated to reduce the effect of the deal.

Two general methods for quoting prices related to transportation costs are

(1) FOB origin pricing and (2) uniform delivered pricing

Penetration pricing conditions

(1) Many segments of the market are price sensitive (2) a low initial price discourages competitors from entering the market (3) unit production and marketing costs fall dramatically as production volume increase

Skimming pricing is an effective strategy when

(1) enough prospective customers are willing to buy the product immediately at the high initial price to make these sales profitable, (2) the high initial price will not attract competitors, (3) lowering price has only a minor effect on increasing the sales volume and reducing the unit costs, and (4) customers interpret the high price as signifying high quality. These four 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

A firm using penetration pricing may:

(1) maintain the initial price for a time to gain profit lost from its low introductory level or (2) lower the price further, counting on the new volume to generate the necessary profit.

Target ROI price =

(Total fixed cost + total variable cost + (Total investment x ROI) / Quantity of units)

Target profit pricing formula

(Total fixed cost + total variable cost + Total (target) profit) / Quantity of units Total (target) profit displayed as pie symbol.

These reductions off the list or base price are offered to resellers in the marketing channel on the basis of

1) where they are in the channel 2) the marketing activities they are expected to perform in the future

Two forms of cost-plus pricing

1. Cost-plus percentage of cost pricing: adding a fixed percentage to the total cost. For example, a construction company might charge "X%" over the final cost of the project. 2. Cost plus fixed fee pricing: Adding a fixed fee to the total cost. For example, suppose Lockheed Martin a fee of $6.5 billion in addition to costs of $4 billion to produce an aircraft. Lockheed Martin's fee would remain $6.5 billion even if its costs unexpectedly increased to $5 billion rather than $4 billion.

Robinson-Patman Act allows for price differentials to different customers under the following conditions

1. When price differences are equal or less than cost differences resulting from different methods of quantities in which the products are sold 2. When price differences result from changing market conditions, attempts to avoid obsolescence, or close-out sales 3. When price differences were made in good faith to meet competitors' price

Value-based pricing is a research-based approach involving these steps:

1. understand how the product is going to be used 2. analyze the benefits of the product in the particular usage situation 3. Analyze the costs associated with the use of the product 4. Create a cost/benefit trade-off

In some situations, penetration pricing may follow skimming pricing

A company might initially price a product high to attract price-insensitive consumers and recoup initial research and development costs and introductory promotional expenditures. Once this is done, penetration pricing is used to appeal to a broader segment of the population and increase market share.

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. As cumulative output grows, average prices fall. This usually translates into lower prices from consumers. This kind of pricing is popular in the electronic industry (e.g. with television sets )

Profit-Oriented Pricing Approaches

A price setter may choose to balance both revenues and costs to set price Target profit pricing Target return-on-investment pricing

Trade-in allowance

An allowance given when a used product is brought in and traded for a new product This lowers the price of a new product for the buyer.

Six deceptive practices that are heavily scrutinized by the FTC:

Bait and switch Bargains conditional on other purchases Comparable value comparisons Comparisons with suggested prices Former price comparisons Price gouging

Cost-Oriented Pricing Approaches include:

Break-even analysis (Chapter 13) Standard markup pricing Cost-plus pricing Experience Curve Pricing

Competitive effects

Competitors may retaliate with price changes of their own. Firms generally want to avoid price war. Price war - involves successive price cutting by competitors to increase or maintain their unit sales or market share

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.

Competition-Oriented Pricing Approaches

Customary Pricing Above-, At-, or Below-Market Pricing Loss-Leader Pricing Price leader/Follower pricing Competitive bidding

Five common approaches to finding approximate price level are:

Demand-Oriented or Demand-Based pricing Cost-Oriented or Cost Based Pricing Profit-Oriented or Profit-Based Pricing Competition oriented or Competition-Based Pricing Value-Based Pricing

Deceptive pricing is outlawed by the

FTC, which closely monitors these practices For example, FTC regulates the use of the word "free" in advertising.

Target profit pricing

Firms use target profit pricing when they want to ensure that they earn a specified level of profits through the sale of a specified number of units Given the expected volume, fixed costs, and variable costs, the marketer can then solve for the price.

Many supermarkets use the

Hi-Lo pricing systems, in which certain goods are offered at deeply discounted prices in order to attract people into the store. Profit margins are higher in this system than everyday.

Target profit exam tip

In an exam question, you may be given unit costs; you will have to convert these to total costs in order to perform target profit pricing For example, unit variable cost is $100 per unit and that the quantity is 200. $100 x 200 = 20,000 = Total variable cost

EXAM TIP

Markup percentage is expressed as a percentage of the (selling price) - not the cost of goods sold

Two kinds of quantity discounts

Noncumulative quantity: are based on the size of one individual are based on the size of one individual order, not a series of orders Cumulative quantity: based on the accumulation of purchases over a given time. They encourage more repeat buying than noncumulative quantity discounts

Step 5: Set the List or Quoted Price

Once marketing managers have identified an appropriate price level, they must still seta specific list or quoted price.

a measure of price premium can be used to determine where a company's products are above, at, or below market

Price premium (%) = (Dollar sales market share for a brand / Unit volume market share for a brand) - 1

Prestige pricing demand curve

Refer to photo.

Wholesale price formula

Retail price x ((100-%Markup)/100)

Customer effects

Retailers must be ever-mindful of the effect of pricing decisions on customers. Pricing goods outside of customary price ranges may severely affect demand Pricing goods too low may send unwanted signal to the marketplace: your product lacks the quality of higher-priced, competing brands

In FOB origin pricing, the buyer is responsible for:

Selecting the mode of transportation and paying for all the transportation and handling costs.

Target return-on-investment pricing

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

Price fixing is illegal per se under the

Sherman Act (per se means "in and of itself")

There are four kinds of delivered pricing methods

Single-zone pricing - regardless of distance from the seller, all buyers pay the same price. For example, this is how the postal service prices mail delivery services Multiple-zone pricing - A firm divides its selling territory into geographical zones and uses different prices for each, which vary based on transportation cost and demand and competition levels in that zone FOB with freight allowed pricing (also called freight absorption pricing) - The buyer agrees to pay the transportation costs, making those costs a non-factor Basing-point pricing - involves selecting one or more geographical locations (basing point) from which the list price for products plus freight expenses are charged to the buyer

FOB origin pricing

The "free on board" (FOB) 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 (seller's factory or warehouse).

Thus, price cutting should only occur in these three conditions

The company has a cost or competitive advantage over competitors Lowering prices will enhance primary demand The price cut is only for specific products and consumers

Uniform delivered pricing

The price the seller quotes includes all transportation costs. The seller chooses the mode of transportation, pays freight charges, and retains title to the goods until the buyer receives the goods (thus assuming liability for damages that occur during shipment).

Choose a Price Strategy

Two options are common - a fixed price policy or a dynamic pricing policy

Demand-Oriented

Weight factors underlying expected customer taste and preference more heavily than such factors as cost, profit, and competition when selecting a price level (skimming, penetration, prestige, odd even, target, bundle, yield management, demand-minus pricing, chain markup, dynamic pricing)

Company effects on pricing

When a company is marketing multiple products in a product line, it must engage in product-line pricing

Former price comparisons

When the seller says that the price is reduced, the item has to have been offered for a higher price for some previous trend. A firm can't set a high price and then quickly reduce the price just to say that it has reduced the price

Pricing fixing

a conspiracy among firms to set prices for a product

Competition-Oriented Pricing

a price setter can stress what competitors or "the market" is doing

Cost-Oriented Pricing Approaches

a price setter stresses the cost side of the pricing problem, not the demand side Price is set by looking at the production and marketing costs and then adding enough to cover direct expenses, overhead, and profit

A positive price premium indicates that the brand is selling

above market price

Standard markup pricing

adding a fixed percentage to the cost of all items in a specific product class This percentage markup varies depending on the type of retail store (such as furniture, clothing, or grocery) and the product involved

Geographical adjustments

adjustments to list or quoted prices are made by manufacturers or even manufacturers

Dynamic Pricing Policy

also called a flexible-price policy, involves setting different prices for products and services in real time in response to supply and demand conditions

Fixed-Price Policy

also called a one-price policy, is setting one price for all buyers of a product or service. Example, A car dealership that offers "no haggle" pricing using a one-price policy

Discounts

are reductions from list price given by a seller to buyers who either give up some marketing function or provide the function themselves

Demand-Minus Pricing

arrive at a wholesale price using a desired retail price and percent markup

EDLP promises to reduce the

average price to consumers while minimizing promotional allowances that costs manufacturers billions of dollars every year

A negative price premium indicates that the brand is selling

below market price

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

Managers engage in marginal analysis to

compare the incremental costs of a price change, advertising program, or selling program to the incremental benefits.

A dynamic policy gives sellers

considerable discretion in setting the final price in light of demand, cost, and competitive factors

Standard markup formula

cost of goods / ((100%-%markup)/100)

In the long run price wars only benefit the

customer

Loss-Leader Pricing

deliberately selling a product below its customary price not to increase sales but to attract customers attention in hopes that they will buy other products as well

three special adjustments to the list or quoted price are:

discounts Allowances Geographical adjustments

"Goods" is narrowly defined and does not include

discrimination in services

As price decreases, there is a level at which consumers will become

dubious of the product's quality and will actually demand less of the product. May send a message that makes the product look low quality.

Seasonal Discounts

encourage buyers to stock inventory earlier than their normal demand would require, during nonpeak times For example, a seasonal discount on snow blowers might entice retailers to stock up on their snow blower inventories in July and August

To legally offer promotional allowances to buyers, the seller must do so on a proportionally

equal basis to all buyers distributing the seller's products

If the markup is 0, then the wholesale price is

equal to the retail price

Yield management is an

example of dynamic pricing policy because it involves adjusting price for the buyer's purchase situation, company cost, and competitive conditions.

A retailer must use markup to cover all

expenses and overhead and to earn some profit. Markups for high-volume goods tend to be lower than markups for low-volume goods

Information technology and the proliferation of e-commerce has made

flexible-price policies increasingly popular. For example, a company might monitor a customer's clickstream to determine whether he or she behaves like a price-sensitive customer; if so, he or she will be offered a lower price.

When two or more competitors explicitly or implicitly set prices, this practice is called

horizontal price fixing

Geographical pricing

if there is evidence of a conspiracy to set prices or lessen competition, geographical pricing may come under government scrutiny.

It is important to note that setting a manufacturer's suggested price (MSRP) is not

illegal; it only becomes illegal when manufacturers use coercion to enforce those prices.

Problems with Pure Cost- and Profit-Based Pricing

internal focus - these approaches consider only the internal needs of the organization ( in terms of profits or costs). They completely ignore external market conditions, such as demand and competitive forces. Just because a company knows what its costs are and what it would like to sell doesn't mean that it actually can sell that amount. Ignores demand and competitive factors - these approaches ignore what competitors are doing, and they simply assume that the market wants the product Assumes all that is produced is sold at full price - under these approaches, firms must assume that they are going to sell every unit they make without discounting the price. In reality, firms must sometimes mark down their goods to liquidate inventory Fails to account for economies of scale - As a firm produces more of a good, it may be able to reduce its variable costs.

To perform ROI pricing, firms must make a lot of assumptions about

investment and the response of customers' demand

Vertical price fixing

involves controlling agreements between independent buyers and sellers (a manufacturer and a retailer) whereby sellers are required to not sell products below a minimum retail price This practice, called resale price maintenance, was declared illegal per se in 1975 under provisions of the Consumer goods pricing act

Prestige pricing

involves setting a high price so that quality - or status conscious consumers will be attracted to the product and buy it. refers to the use of price to add value to the product in the mind of consumers. Typically used for luxury goods.

Cost-Plus Pricing

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

Predatory pricing

is the practice of charging a very low price for a product with the intent of driving competitors out of business. once the competitors have been driven out, the firm raises its prices

Everyday low pricing (EDLP)

is the practice of replacing promotional allowances with lower manufacturer list prices.

Value-Based Pricing

is the practice of simultaneously increasing product and service benefits while maintaining or decreasing price Newest form of pricing, and it takes us back to the idea that the purpose of price is to capture value in the mind of the consumer.

Wholesale price

is the retailer's cost of goods; a retail price is the price at which consumers buy products from retailers

Not all price differences are illegal; only those that substantially

lessen competition or create a monopoly are deemed unlawful

In a skimming strategy, as the demand of customers is satisficed, the firm

lowers the price to attract another, more price-sensitive segment.

Marginal analysis does not explicitly address things like

marginal revenue, marginal cost, and elasticity of demand, they engage in this process implicitly

A price premium of zero indicates that the brand is selling at

market price

Competitive bidding

occurs when a price is determined by bidding, either by customers or suppliers Is the most common in business-to-business and business-to-government transactions Becoming more common on sites such as eBay

Price gouging

occurs when price for certain products increase dramatically. For example, when a hurricane is approaching, the prices of necessities like water an batteries often increase to an unreasonable amount

Bait and switch

offering a low price on a product to attract customers to a store, where they are later persuaded to buy higher-priced items by the store's: (1) downgrading the promoted item; (2) failing to have the promoted item in stock; or (3) refusing to take orders for the promoted item

The Robinson Patman Act also covers

promotional allowances

Four kinds of discounts

quantity, seasonal, trade (functional), and cash.

Cash discounts

reductions in price to encourage buyers to pay their bills quickly For example, a bill might quote $1,000 2/10 net 30 (2/10, n/30) This means that the bill is for $1000, but the retailer can take a 2% discount if it pays within 10 days. If not paid within 10 days, the total $1,000 is due within 30 days.

Quantity discounts

reductions in unit costs for a larger order

Deceptive pricing

refers to a number of practices that give the false impression of the product or its price.

What price should the manufacturer charge the distributor? (Chain markup pricing)

retail price x (( 100-retailer markup)/100) x (( 100-distributor markup)/100)

While cost-pricing is most common for business products, it is increasingly being used in the

service sector. Example, lawyer might work for a fixed fee, plus expenses

Penetration Pricing or Market penetration

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

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 For example, Rolex uses above-market pricing, most large department stores use at-market pricing, and manufacturers and retailers with private brands commonly use below-market pricing.

Customary Pricing

setting a price that is dictated by tradition, a standardized channel of distribution, or other competitive factors For example, candy bars in a vending machine are traditionally $1. A departure from this price could severely affect demand

Odd-Even Pricing

setting prices a few dollars or cents under an even or whole number $599.99 For example, a $11.99 price tag is psychologically more attractive than a $12 price tag.

Skimming price or Market skimming

setting the highest initial price that customers who really desire the product are willing to pay These customers are not very price sensitive because they weight the new product's price, quality, and ability to satisfy their needs against the same characteristics of substitutes

Price lining

setting the price of a line of products at a number of different specific pricing

Chain Markup Pricing

similar to demand-minus pricing, but it includes a longer channel than the simple "wholesaler-to-retailer-to-consumer" model used in the demand-minus pricing scheme For example, in many channels, a manufacturer sells it s good through a distributor. Mfr. --> Distributor --> Retailer --> Customer

High volume products usually have

smaller markups than low-volume products

Note that total investment x ROI is the

target profit a firm wishes to achieve (Pie symbol = investment x ROI)

Yield Management pricing

the charging of different prices to maximize revenue for a set amount of capacity at any given time is a complex approach that continually matches demand and supply to customize the price for a service. For example, airlines constantly adjust their prices to match demand and supply

Rule of reason analysis

the circumstances surrounding a case of price fixing can be considered before determining whether the practice is illegal.

Bundle Pricing

the marketing of two or more products in a single package price. Bundling is not always ideal for customers because they may have to buy a product they don't want For example, Delta Airlines sells entire vacation packages at just one price. This tactic lowers the cost to buyers and lowering marketing costs to sellers

Dynamic pricing

the practice of changing prices based on market conditions, consumer behavior, and competitive intelligence An approach in which a firm sets and fluctuates its prices based on supply an demand relationships

Price discrimination

the practice of charging different prices to different buyers for goods of like grade and quality Illegal per se the Clayton Act

product-line pricing

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

Trade (functional) Discounts

to reward wholesalers and retailers for marketing functions they will perform in the future For example, a manufacturer may quite a price as $100 less 30/10/5. This means that the manufacturer's suggested retail price is $100, retailers get a 30% discount; wholesalers get a 10% discount; jobbers get a 5%

Price leader/Follower pricing

used in an oligopolistic market in which there are just a few firms that are able to observe each other's pricing and marketing activities

Comparisons with suggested prices

when few or no sales occur at the suggested retail price, a comparison with that price is deceptive