Chapter 14: Pricing Concepts for Capturing Value (INTRO TO MKTG)

Balt-and-Switch

A deceptive practice of luring customers into the store with a very low advertised price on an item (the bait), only to aggressively pressure them into purchasing a higher-priced model (the switch) by disparaging the lower-priced item, comparing it unfavorably with the higher-priced model, or professing an inadequate supply of the lower-priced item.

predatory pricing

A firm's practice of setting a very low price for one or more of its products with the intent to drive its competition out of business; illegal under both the Sherman Antitrust Act and the Federal Trade Commission Act.

Competitive Parity

A firm's strategy of setting prices that are similar to those of major competitors.

Pricing Strategy

A long-term approach to setting prices for the firms' products.

Retailers' Cooperative

A marketing channel intermediary that buys collectively for a group of retailers to achieve price and promotion economies of scale. It is similar to a wholesaler, except that the retailer members have some control over, and sometimes ownership of, the cooperative's operations.

Substitution Effect

Consumers' ability to substitute other products for the focal brand, thus increasing the price elasticity of demand for the focal brand.

Individualized Pricing

Refers to the process of charging different prices for goods or services based on the type of customer; time of the day, week, or even season; and level of demand.

Demand Curve

Shows how many units of a product or service consumers will demand during a specific period at different prices.

break-even analysis

Technique used to examine the relationships among cost, price, revenue, and profit over different levels of production and sales to determine the break-even point.

Status Quo Pricing

A competitor-oriented strategy in which a firm changes prices only to meet those of the competition.

Sales Orientation

A company objective based on the belief that increasing sales will help the firm more than will increasing profits.

Customer Orientation

A company objective based on the premise that the firm should measure itself primarily according to whether it meets its customers' needs.

Competitor Orientation

A company objective based on the premise that the firm should measure itself primarily against its competition.

Profit Orientation

A company objective that can be implemented by focusing on target profit pricing, maximizing profits, or target return pricing.

Premium Pricing

A competitor-based pricing method by which the firm deliberately prices a product above the prices set for competing products to capture those consumers who always shop for the best or for whom price does not matter.

Penetration Pricing Strategy

A new product or service pricing strategy in which the initial price is set relatively low with the objective of building sales, market share, and profits quickly and to deter competition from entering the market.

Target Return Pricing

A pricing strategy implemented by firms less concerned with the absolute level of profits and more interested in the rate at which their profits are generated relative to their investments; designed to produce a specific return on investment, usually expressed as a percentage of sales.

Target Profit Pricing

A pricing strategy implemented by firms when they have a particular profit goal as their overriding concern; uses price to stimulate a certain level of sales at a certain profit per unit.

High/Low Pricing

A pricing strategy that relies on the promotion of sales, during which prices are temporarily reduced to encourage purchases.

Maximizing Profits

A profit strategy that relies primarily on economic theory. If a firm can accurately specify a mathematical model that captures all the factors required to explain and predict sales and profits, it should be able to identify the price at which its profits are maximized.

price war

A situation (or competition) that occurs when two or more firms compete primarily by lowering their prices.

Everyday Low Pricing (EDLP)

A strategy companies use to emphasize the continuity of their retail prices at a level somewhere between the regular, nonsale price and the deep-discount sale prices their competitors may offer.

Price Skimming

A strategy of selling a new product or service at a high price that innovators and early adopters are willing to pay in order to obtain it; after the high-price market segment becomes saturated and sales begin to slow down, the firm generally lowers the price to capture (or skim) the next most price-sensitive segment.

Pure Competition

Competition that occurs when different companies sell commodity products that consumers perceive as substitutable; price usually is set according to the laws of supply and demand.

oligopolistic competition

Competition that occurs when only a few firms dominate a market.

Monopolistic Competition

Competition that occurs when there are many firms that sell closely related but not homogeneous products; these products may be viewed as substitutes but are not perfect substitutes.

Gray Market

Employs irregular but not necessarily illegal methods; generally, it legally circumvents authorized channels of distribution to sell goods at prices lower than those intended by the manufacturer.

Loss-Leader Pricing

Loss-leader pricing takes the tactic of leader pricing one step further by lowering the price below the store's cost.

Price Elasticity of Demand

Measures how changes in a price affect the quantity of the product demanded; specifically, the ratio of the percentage change in quantity demanded to the percentage change in price.

Horizontal Price Fixing

Occurs when competitors that produce and sell competing products collude, or work together, to control prices, effectively taking price out of the decision process for consumers.

Vertical Price Fixing

Occurs when parties at different levels of the same marketing channel (e.g., manufacturersand retailers) collude to control the prices passed on to consumers.

monopoly

One firm provides the product or service in a particular industry.

Prestige Products or Services

Products and services that consumers purchase for status rather than functionality.

substitute products

Products for which changes in demand are negatively related; that is, a percentage increase in the quantity demanded for Product A results in a percentage decrease in the quantity demanded for Product B.

complementary products

Products whose demand curves are positively related, such that they rise or fall together; a percentage increase in demand for one results in a percentage increase in demand for the other.

Inelastic

Refers to a market for a product or service that is price insensitive; that is, relatively small changes in price will not generate large changes in the quantity demanded.

Elastic

Refers to a market for a product or service that is price sensitive; that is, relatively small changes in price will generate fairly large changes in the quantity demanded.

Dynamic Pricing

Refers to the process of charging different prices for goods or services based on the type of customer; time of the day, week, or even season; and level of demand.

Income Effect

The change in the quantity of a product demanded by consumers due to a change in their income.

Experience Curve Effect

The drop in unit cost as the accumulated volume sold increases; as sales continue to grow, the costs continue to drop, allowing even further reductions in the price.

Price

The overall sacrifice a consumer is willing to make—money, time, energy—to acquire a specific product or service.

cross-price elasticity

The percentage change in demand for Product A that occurs in response to a percentage change in price of Product B; see also complementary products.

break-even point

The point at which the number of units sold generates just enough revenue to equal the total costs; at this point, profits are zero.

Price fixing

The practice of colluding with other firms to control prices.

Price Discrimination

The practice of selling the same product to different resellers (wholesalers, distributors, or retailers) or to the ultimate consumer at different prices; some, but not all, forms of price discrimination are illegal.

Reference Price

The price against which buyers compare the actual selling price of the product and that facilitates their evaluation process.

contribution per unit

The price less the variable cost per unit. Variable used to determine the break-even point in units.

Manufacturer's Suggested Retail Price (MSRP)

The price that manufacturers suggest retailers use to sell their merchandise.

Total cost

The sum of the variable and fixed costs.

fixed costs

Those costs that remain essentially at the same level, regardless of any changes in the volume of production.

variable costs

Those costs, primarily labor and materials, that vary with production volume.