Marketing Chp. 17

Special Pricing Tactics

-Single-Price Tactic: All goods offered at the same price -Flexible Pricing: Different customers pay different price -Trade-Ins: Exchanging one item for a credit towards another. Used often at car dealerships -Professional Services Pricing: Used by professionals with experience,training or certification -Price Lining: Several line items at specific price points -Leader Pricing: Sell product at near or below cost -Bait Pricing: Lure customers through false or misleading price advertising -Odd-Even Pricing: Odd-number prices imply bargain Even-number prices imply quality -Price Bundling: Combining two or more products in a single package -Two-Part Pricing: Two separate charges to consume a single good -Pay What You Want: Product price chosen by customers

Price Fixing

An agreement between two or more firm on the price they will charge for a product. Price fixing is illegal under the Sherman Act and the Federal Trade Commission Act.

marginal costs

Change in total costs that results from producing one more unit.

Marginal revenue

Change in total revenue from the sale of one more product

Tactics for Fine-Tuning the Base Price

Discounts Geographic pricing Special pricing tactics The base price is the general price level at which the company expects to sell a good or service. The general price level is correlated with the pricing policy: above the market, at the market, or below the market. The final step is to fine-tune the base price.

Price process

Estimate Q to be sold Calculate Ave. Fixed and Var Costs per unit Calculate Ave. Total Cost per unit and profit per unit Find Selling price per unit find expected quantity demand at price

Geographic Pricing types

FOB Origin Pricing: The buyer absorbs the freight costs from the shipping point ("free on board"). Uniform Delivered Pricing: The seller pays the freight charges and bills the purchaser an identical, flat freight charge. Zone Pricing: The U.S. is divided into zones, and a flat freight rate is charged to customers in a given zone Freight Absorption Pricing: The seller pays for all or part of the freight charges and does not pass them on to the buyer. Basic-Point Pricing: The seller charges freight from a basing point, regardless of the city from which the goods are shipped.

New-Product Development Process

First, when establish price goals, its derived from a firm's objectives. need an understanding of the marketplace and your customers 2nd, estimate. Ask, what question is so low that a customer will question its quality, and what price is too high that it gets to expensive and what price is considered a bargain. what is the highest price to still be considered a bargain? Strategy how to send products, etc/ Fine tune- consider price skimming, status quo or price penetration

Unfair Trade Practices

Laws that prohibit wholesalers and retailers from selling below cost In over half the states, unfair trade practice acts put a floor under wholesale and retail prices, and selling below cost is illegal. Wholesalers and retailers must take a certain minimum percentage markup on their combined merchandise cost and transportation cost. The most common markup figures are 6 percent at the retail level and 2 percent at the wholesale level. If a specific wholesaler or retailer can provide "conclusive proof" that operating costs are lower than the minimum required figure, lower prices may be allowed. The intent of unfair trade practice acts is to protect small firms from retail giants like Walmart and Target, which operate efficiently on razor-thin profit margins. State enforcement of unfair trade practice laws has generally been lax, because low prices benefit local consumers.

Reference price

Price customers expect to pat

Discounts, Allowances, Rebates, and Value-Based Pricing

Quantity discounts with lower prices for buying in multiple units of above a specified dollar amount. Cash discounts offered for prompt payment of a bill Functional discounts (trade discounts) are offered when channel intermediaries perform a service for the manufacturer. Seasonal discounts are lower prices for buying merchandise out of season. Promotional allowances (or trade allowance) are payments to dealers for promoting the manufacturer's products. Rebates are cash refunds given for purchasing a product within a specified period. Zero percent financing offers no interest charge to increase sales. However, it does cost the manufacturers. Value-based pricing sets the price at a level that seems to the customer to be a good price compared to other prices. The basic assumption with value-based pricing is that the firm is customer driven, seeking to understand the attributes customers want in the goods and services they buy and the value of that bundle of attributes to customers.

Predatory Pricing

The practice of charging a very low price for a product with the intent of driving competitors out of business or out of a market. Predatory pricing is illegal under the Sherman Act and the Federal Trade Commission. However, proving the use of this practice is difficult and expensive. The Justice Department must show that the predator explicitly tried to ruin a competitor and that the predatory price was below the predator's average variable cost.

The Legality of Price Strategy

Unfair Trade Practices Price Fixing Price Discrimination Predatory Pricing

Rule for maximizing profit

When marginal costs is less than or equal to marginal revenue. Marginal profit is near zero

Markup

a dollar amount added to the cost of products to get the selling price. Markup(percent) - unless otherwise stated means percentage of selling price that is added to the cost to get the selling price. Many intermediaries select a standard markup percent and then apply it to their products. EX: $1.20 Markup. Cost $2.40. Price 3.60. Markup 33.3%

Bid pricing

a new price for every job. using specific price rather than setting a specific price for all jobs

Average cost pricing

adding a reasonable markup to the average cost of a product. Calculation of reasonable price = Expected total Cost + planned profit / planned number of units

Break-even analysis

evaluates whether the firm will be able to cover all its costs at a particular price level

marginal analysis

focuses on changes in total revenue and total costs from selling one more unit to find most profitable price and quantity.

Value in use pricing

how much will the customer save. Setting pries that will capture some of that the customer will save.

Geographic Pricing

practice of modifying a basic list price based on the geographical location of the buyer. It is intended to reflect the costs of shipping to different locations

prestige pricing

pricing at a high price to suggest high quality. if prices is too low, customers will worry about quality and dont buy, but prices can't be too high. Demand looks like a D

Break-even point

quantity where costs = revenue BEP = Total Fixed Cost / Fixed cost contribution per unit BEP in units times the selling price per unit yields the BEP in dollars

demand-backward pricing

setting an acceptable final consumer price and working backwards to see what can be change during production

psychological pricing

setting prices that have special appeal to target customers.

Stockturn rate

the number of times the average inventory is sold in a year.

Markup chain

the sequence of markups firms use at different levels in a channel. determines the price structure in the whole channel. The markup is figured on the selling price at each level of the channel Mass merchandisers like walmart put low markup on fast selling items and high on slow selling items

Price Discrimination

the six elements necessary for a violation of the Robinson-Patman Act: There must be price discrimination Transaction must occur in interstate commerce The seller must discriminate by price among two or more purchasers. Products sold must be commodities or tangible goods Products sold must be of like grade and quality There must be significant competitive injury