MGT 3 Ch 14 Concepts

Name the principal laws and regulations affecting specific pricing practices.

There are four principal laws that affect six major pricing practices. The Sherman Act specifically prohibits horizontal price fixing and predatory pricing. The Consumer Goods Pricing Act makes it illegal for companies to engage in vertical price fixing (also called resale price maintenance agreements). The Federal Trade Commission Act outlaws deceptive pricing. Provisions in this act also address aspects of predatory pricing and geographical pricing. Finally, the Robinson Patman Act prohibits price discrimination for goods of like grade and quality, covers the use of promotional allowances, and addresses certain aspects of geographical pricing.

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

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 competi- tive 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 pref- erences, 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.

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 accumula- tion 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.

Describe how to establish the "approximate price level" using demand-oriented, cost-oriented, profit-oriented, and competition-oriented approaches.

Demand, cost, profit, and competition influence the initial consideration of the approximate price level for a product or service. Demand-oriented pricing approaches stress consumer demand and revenue implications of pricing and include eight types: skimming, penetration, prestige, price lining, odd-even, target, bundle, and yield management. Cost-oriented pricing approaches emphasize the cost aspects of pricing and include three types: standard markup, cost-plus, and experience curve pricing. Profit-oriented pricing approaches focus on a balance between revenues and costs to set a price and include three types: target profit, target return-on-sales, and target return-on- investment pricing. And finally, competition-oriented pricing approaches stress what competitors or the market- place are doing and include three types: customary; above-, at-, or below-market; and loss-leader pricing. Although these approaches are described separately, some of them overlap, and an effective marketing manager will consider several in searching for an approximate price level.

Recognize the major factors considered in deriving a final list or quoted price from the approximate price level.

Given an approximate price level for a product or service, a manager sets a list or quoted price by considering three additional factors. First, a manager must decide whether to follow a fixed-price versus a dynamic pricing policy. Second, the manager should consider the effects of the proposed price on the company, customer, and competitors. Finally, consideration should be given to balancing incremental costs and revenues, particularly when price and cost changes are planned.

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.

Identify the adjustments made to the approximate price level on the basis of discounts, allowances, and geography.

Numerous adjustments can be made to the approximate price level. Discounts are reductions from the list or quoted price that a seller gives a buyer as a reward for some activity of the buyer that is favorable to the seller. These include quantity, seasonal, trade (functional), and cash discounts. Allowances offered to buyers also reduce list or quoted prices. Trade-in allowances and promotional allowances are most common. Finally, geographical adjustments are made to list or quoted prices to reflect transportation costs from sellers to buyers. The two general methods for quoting prices related to transportation costs are FOB origin pricing and uniform delivered pricing.

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.

In pricing a new product, what circumstances might sup- port 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 under- stood and valued by consumers. Penetration pricing is an effec- tive 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 mar- ket; (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 introduc- tory level; and (6) a firm wants to lower the price further, count- ing on the new volume to generate the necessary profit.

What is standard markup pricing?

Standard markup pricing entails adding a fixed per- centage 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.

Which pricing practices are covered by the Sherman Act?

The Sherman Act prohibits (1) horizontal price fixing, which is when two or more competitors ex- plicitly 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 busi- ness. Once competitors have been driven out, the firm raises its prices.