Chapter 14: Pricing Concepts for Capturing Value
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.
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.
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.
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.
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.
substitution effect
Consumers' ability to substitute other products for the focal brand and increase price elasticity of demand for the focal brand
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.
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.
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.
- Company objectives - Customers - Costs - Competition - Channel members
The Five Cs of Pricing:
- Profit-oriented - Sales-oriented - Competitor-oriented - Customer-oriented
Types of company objectives:
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
status quo pricing
a competitor-oriented strategy in which a firm changes prices only to meet those of competition
competitive parity
a firm's strategy of setting prices that are similar to those of major competitors
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
monopoly
one firm provides the product or service in a particular industry
contribution per unit
price less the variable cost per unit; variable used to determine the break-even point in units
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
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 (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
income effect
the change in the quantity of a product demanded by consumers due to a change in their income
cross-price elasticity
the percentage change in demand for product A that occurs in response to a percentage change in price of product B
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
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
