Bronis Verhage
ISBN: 9789001818661
http://www.marketingfundamentals.noordhoff.nl
© 2016 Noordhoff Uitgevers bv
GLOSSARY
Chapter 12 Pricing policies and price determination
Profit equation Mathematical formula that demonstrates the relationship between
unit price, quantity sold, total cost, and profit.
Price setting The art of ‘translating’ the product’s value in the eyes of the customer
into the amount of money he is willing to pay.
Pricing policy Strategy to determine the price that a company will charge for its
products and services, which has a major impact on its sales volume and profits
Price A product’s exchange value, expressed in terms of how much money the buyer
is willing to pay in return for the desired product.
Value perception A customer’s perceived ratio of the price paid for a product to the
quality or worth he received in return.
Price discrimination Charging different buyers different prices – not based on
differences in cost – for the same quantity and quality of product or services.
Loss leader Product sold at a lower than usual markup in order to increase store
traffic.
Cost The amount of money needed to support certain activities, such as producing a
product or delivering a service.
Variable cost A cost – such as of raw materials – that varies directly with the number
of units produced and marketed.
Fixed cost A cost – such as insurance premiums – that remains stable at any
production level (Overhead costs).
Price leader The company that, in a competitive market, is usually the first one to
change the price.
Complementary products Products sold or used jointly with other products, such as a
printer and ink cartridges.
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Bronis Verhage
http://www.marketingfundamentals.noordhoff.nl
ISBN: 9789001818661
© 2016 Noordhoff Uitgevers bv
Middlemen Independent companies in the supply chain that link producers and
ultimate consumers (or industrial users), such as wholesalers, retailers and other
resellers (Intermediaries).
Margin The difference between the total unit costs for an item and the selling price.
Gross margin Price minus cost of goods sold, or the difference between revenue and
cost before accounting for certain other costs (Gross profit margin).
Cartel Group of separate companies that collusively determine prices and production
volume in order to maximize mutual profits.
Predatory pricing Trying to drive out a competitor by temporarily pricing at such a low
level that the rival can’t match the price cut and still profit.
Revenue The per unit price multiplied by the number of units sold.
Price mechanism Force in the economic system that typically sends the price up when
demand is greater than supply, and down when supply is greater than demand.
Market mechanism The role of a free market – not distorted by government subsidies
– in allocating resources in a society and decisions about which quantities of products
and services will be produced and distributed.
Demand curve Curve that shows the maximum number of products at various prices
that customers will buy in a market, if other factors remain the same.
Introductory price Price at which a company introduces a new product.
Price limit The maximum and minimum amounts of money for which a product can be
sold.
Prestige product Product positioned and perceived as a high quality item, justifying a
high price based on its added value to status-conscious buyers (Status product).
Price skimming Introducing a new product at an artificially high price that the market
will not sustain in the long run.
Prestige buyer Buyer who is willing to pay high prices for high quality products and
services, from which he derives status.
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Bronis Verhage
http://www.marketingfundamentals.noordhoff.nl
ISBN: 9789001818661
© 2016 Noordhoff Uitgevers bv
Consumer surplus The difference between the total amount that consumers are
willing to pay and the amount that they actually pay for purchasing the number of a
units of a new product that they want, which also reflects the extra revenue earned by
a company with a price skimming strategy.
Penetration price strategy The introduction of a new product at a very low price to
speed up market acceptance and discourage potential competitors.
Pricing strategy Part of the marketing strategy that provides the framework within
which the company translates its pricing objectives into a market price.
Pricing objective Specific pricing goal derived from marketing objectives, often stated
in terms of desired revenues or market share.
Price perception How customers experience or view a product’s price, including
whether it is too high or low.
Price awareness Consumer knowledge about the price of the product or service they
consider buying and of the alternatives.
Price acceptance Extent to which buyers consider the price charged for a product
reasonable.
Price threshold The highest and lowest prices that buyers are willing to pay for a
particular product or service; it may also refer to the minimum order amount at which
free shipping or a quantity discount applies.
Price sensitivity The extent to which consumers respond to a small price change.
Margin generator A less price sensitive product to which retailers – using mark-up
pricing – may add a large profit margin
Market share objective The company’s goal to increase or maintain its share of a
market .
Price war Intense market competition in which competitors – in successive rounds of
price cuts – fight for market share.
Value pricing Strategy to compete on a superior price/quality ratio, rather than the
lowest price (Value-based pricing).
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Bronis Verhage
http://www.marketingfundamentals.noordhoff.nl
ISBN: 9789001818661
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Nonprice competition Marketing strategy emphasizing benefits other than a low
price, such as unique product features, a better warranty or outstanding customer
service.
Price stability Situation in which the prices in an industry or economy remain steady
over time.
Margin stability Situation in which intermediaries enjoy consistent profit margins on
products over time.
Profit margin Measure of how much out of each euro of sales a company keeps in
earnings, expressed as a percentage.
Base price The publicly announced price for which the company expects to sell a
product (List price).
Manufacturer’s suggested retail price The price – recommended by the manufacturer
– that retailers may choose to sell a product for (MSRP).
Quantity discount Price reductions that buyers receive for large-volume orders.
Cumulative quantity discount Price reduction based on the quantity a customer buys
over a year, designed to create customer loyalty.
Noncumulative quantity discount Price reduction based on the size of an individual
purchase order.
Seasonal discount Discount from the list price for buying a product out of season.
Cash discount Reduction in price offered to business buyers in exchange for a prompt
payment.
Functional discount A list price reduction that a manufacturer grants to
intermediaries for their handling of distribution-related tasks, such as warehousing,
installation and customer service (Trade discount).
Allowance Price adjustment that – indirectly – lowers a buyer’s price in exchange for
him trading in a used product, participating in a promotional program or buying in a
period of slow sales.
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Bronis Verhage
http://www.marketingfundamentals.noordhoff.nl
ISBN: 9789001818661
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Trade-in allowance Price reduction granted to customers for turning in a used
product when buying a new one.
Promotional allowance Incentive from the manufacturer to reward resellers for
promoting products through displays, advertising and other activities (Trade
allowance).
Rebate Cash refund of a part of the purchase price by the seller to the buyer of a
product.
Transfer price The price internally charged when a product is sold from one branch,
division or subsidiary of a company to another one.
Average gross margin The typical mark-up in the industry.
Cost-oriented pricing Strategy of setting a product’s price based on its costs, then
adding a mark-up.
Cost-plus pricing Price-setting based on the accounting principle that a product’s price
should equal the variable costs and fixed costs per unit, plus a predetermined
percentage of those costs to provide a profit margin.
Mark-up pricing Pricing a product by calculating the per-unit cost of manufacturing or
purchasing it, and then adding a mark-up percentage to cover its selling costs and
profit.
Mark-up The difference between the merchandise cost and the retail price of a
product, usually expressed as a percentage of the retail price.
Direct cost The total of variable and fixed costs that – in price setting – can be
attributed to producing or selling a particular product.
Indirect costs Costs (such as salaries) that are not directly tied to a product, but that
can allocated to it through a particular mark-up per unit (Overhead).
Stock turnover The number of times a company’s average inventory is sold per year.
Variable-cost pricing Pricing a product based on its variable costs, without fixed costs
or overhead being directly allocated to a particular product (Direct-costing).
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Bronis Verhage
http://www.marketingfundamentals.noordhoff.nl
ISBN: 9789001818661
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Contribution margin Revenue in excess of variable costs, used to absorb (part of) the
company’s fixed costs as well as to provide a profit.
Dumping Selling a product (usually in foreign markets) far below the average market
price, and – in case of excess capacity – even below cost.
Break-even analysis Analyzing the relationship between total revenue (at a given
price) and total cost at various levels of output, in order to calculate the number of
units that must be sold at a certain price for the firm to cover costs and, thus, break
even.
Break-even point The number of units sold at which product revenues match the
total product costs.
Flexible break-even analysis A variation of break-even analysis that shows the costrevenue relationships for each of a series of price alternatives for a new product,
enabling the company to set a price that yields the greatest profit.
Marginal cost The net change in total cost that results from manufacturing and
marketing one additional unit.
Demand-oriented pricing A price-setting strategy based on the price that buyers are
willing to pay, rather than based on the company’s costs.
Perceived value pricing A price-setting strategy based on the buyer’s perception of
value (Value-based pricing).
Non-monetary price The cost to a customer (other than money) to acquire the
product, such as the distance travelled and time spent on shopping, as well as the risk
that the product will not provide the expected benefits.
Price elasticity of demand The extent to which customers on a particular market are
sensitive to price changes.
Price elastic demand Demand that increases as the price of a product goes down, and
decreases as the price goes up.
Unitary elasticity The demand curve for a market reflecting the fact that a change in
price has no effect on total revenue.
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Bronis Verhage
http://www.marketingfundamentals.noordhoff.nl
ISBN: 9789001818661
© 2016 Noordhoff Uitgevers bv
Price inelastic demand Situation in which a price change has no effect on the quantity
bought, meaning that a price cut will lead to a decrease in revenue.
Regression analysis Statistical technique to find a causal relationship between two
variables, e.g. to predict how a product’s price affects demand over time.
Disposable income Personal income less taxes paid.
Discretionary income What’s left of a consumer’s income after paying for necessities
and taxes, which greatly affects luxury purchases.
Income elasticity of demand Relationship between an increase in the consumer’s
disposable income and the corresponding change in consumption (Income sensitivity of
demand).
Engel’s Law Research findings named after Ernst Engel, showing how consumers
change their spending habits as their incomes increase.
Inferior product Products – characterized by a negative income elasticity – for which
expenditure decreases as consumer income increases.
Essential products Products, such as food, for which consumer spending – as a
percentage – increases at a slower rate than the consumer’s income.
Luxury products Products with a high income elasticity of demand, meaning that the
proportion of income spent on these luxury products increases as consumer income
rises.
Cross elasticity of demand The demand for a particular product (e.g. butter) is
influenced by changes in the price of another product (e.g. margarine).
Substitute products Products that are considered alternatives for each other since
they satisfy the same need.
Complementary products A product that is essential to the use of another product
may be characterized by a negative cross elasticity of demand, such as petrol, of which
a price increase will lower the demand for SUVs.
Indifferent goods Products for which a price change of one does not affect the
demand for another.
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ISBN: 9789001818661
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Price lining Offering a product line with numerous items (e.g. clothes) at a limited
number of prices, called price points.
Price gap The difference between the price points in a price lining strategy, which
should be spaced far enough for consumers to note differences among the product
versions.
Price differentiation Demand-oriented pricing strategy in which a product is offered
at different prices that do not reflect proportional cost differences in, for example,
time of delivery, location or product features (Differential or differentiated pricing).
Price discrimination Charging different buyers different prices for the exact same
quality and quantity of goods.
Psychological pricing Demand-oriented pricing in which consideration is given to the
buyers’ perception of a price (as in a prestige price and odd pricing).
Prestige price Artificially high price level for a product to convey prestige or a quality
image.
Contrary demand curve A backward bending (instead of downward sloping) demand
curve, which is typical for prestige pricing: as the price increases, demand increases
(Backward-bending demand curve).
Odd pricing Strategy of setting prices at odd numbers just below round numbers to
get about a favorable psychological response from the customer (Odd-even pricing).
Absolute price difference In odd pricing, the actual difference between two prices
(e.g. €99.95 en €100) is much less than the difference perceived by consumers.
Competition-oriented pricing Pricing strategy in which a company’s competitors’
prices - rather than demand or cost considerations – are its principal basis for price
setting.
Going-rate pricing Form of competition-oriented pricing in which a company tends to
price at or near industry averages.
Me-too pricing Competition-oriented pricing strategy in which companies with
homogeneous products deliberately price ‘at market’.
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Bronis Verhage
http://www.marketingfundamentals.noordhoff.nl
ISBN: 9789001818661
© 2016 Noordhoff Uitgevers bv
Discount pricing Below-market pricing in order to appeal to price-conscious buyers by
firms with e.g. better production technology or greater economies of scale.
Backward pricing Price-setting strategy in which a company works backward from a
product’s ideal consumer price to determine its own (ex-factory) price.
Monopoly Regional or domestic market in which there is only one organization (such
as a utility company) to provide a particular service or product, often with governmentimposed pricing guidelines.
Supply curve Graph showing how much of a product is expected to be offered to the
market and at what price(s), which in a monopolistic market structure will be identical
to the overall demand curve.
Oligopoly Industry structure in which only a few companies control most of the
market.
Undifferentiated oligopoly Oligopoly in which companies sell standardized
commodities (such as aluminum), making buyers focus on price and customer service
(Pure oligopoly).
Differentiated oligopoly Oligopoly in which companies sell products (such as bicycles)
that differ in quality, design and brand image, making them less than perfect
substitutes.
Price rigidity Situation in an oligopolistic market in which companies follow a price
decrease by a competitor, but not necessarily a price increase, resulting in a kinked
demand curve.
Kinked supply curve An individual supplier’s perspective of a kinked demand curve,
with the kink at the current market price caused by the inflexibility of price in an
oligopoly.
Price follower Company that matches any price change made by the price leader in
the industry.
Put-out pricing A strong market leader’s attempt to force smaller competitors with
less financial stamina out of the market by drastically lowering his price.
Stay-out pricing Pricing strategy in which the price is temporarily set so low that other
suppliers do not even try to enter the market.
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http://www.marketingfundamentals.noordhoff.nl
ISBN: 9789001818661
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Monopolistic competition The most common market form in which firms compete
with products that are similar – but not identical – and market entry is fairly easy.
Pure competition A market in which there are so many buyers and sellers of
homogeneous products that none of them is powerful enough to influence price, which
is set by the forces of supply and demand.
Combination pricing Price setting in which components of the cost-, demand- and
competition-oriented pricing strategies are combined.
Competitive bidding Process in an industrial market in which suppliers submit bids
that outline the product specifications, with the contract being awarded to the firm
with the best offer and lowest price.
Tendering Competitive bidding from the buyer’s perceptive, wherein a buyer requests
bid proposals from multiple suppliers in order to obtain the lowest price.
Public tendering Competitive bidding by the government, which requests sealed bids
to get the best price for large projects.
Private tendering Competitive bidding process in which a limited number of favoured
suppliers are invited to take part in a tendering procedure.
Expected profit method Decision rule in bidding in which a supplier tries to maximize
his expected profit by estimating the profit associated with several potential bids as
well as the probability of winning the contract with each of these bids.
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