Pricing Glossary provided by Jan Triplett, Ph.D., CEO Business Success Center
©2010, Business Success Center, Austin Texas
www.runitright.biz • 512.933.1983
AUDITION PRICING
BSC ADVICE:
DON’T DO THIS!
COMPETITORS RESPONSE TO
PRICING
FLINCH POINT
HALO EFFECT
MARKET PRICE VS.
LIST PRICE
PRICING
PRICING (PROFIT) OBJECTIVES
Audition Pricing is preparing a buyer for a price and seeking their input.
Example: The cost is $150. How does that sound?
The BSC does not recommend this kind of strategy for most businesses.
Laid-back competitor – do not react quickly or strongly to a given competitor move
Selective competitor – react only to certain kinds of assault on their strengths
Stochastic competitor – react unpredictably
Tiger competitor – react swiftly and strongly to any competitor no matter what size
The point at which the customer values their dollars more than the benefits your product or service delivers is
known as the flinch point.
See also Reservation Point.
Halo Effect refers to the fact that people tend to have more confidence in a business they consider successful.
Market Price is the price a customer pays for a product or service. It may be the same as List Price or not.
List Price is the basic price without any discounts that decrease the Market Price or options that increase the
Market Price.
Pricing should reflect the product quality level and service quality level. It should consider the customers,
competition, and costs. It should consider the long term outlook as well as short term gains before pricing
decisions, policies and procedures are adopted or changed. Incorrect pricing robs future sales because buyers
“stock up” and robs the Owner of the ability to attract a “buyer” interested in acquiring the business through a
buyout, franchise, license, or go public.
There are 5 Pricing or Profit Objectives that the Owner should consider when pricing. These are:
 Competition Objective usually means targeting a particular business and aiming at beating them.
 Market Share means beating out the competition to control the market. It is usually given in percentages.
It can be a pricing objective but may not be a good one because the Owner may have sacrificed too much
for that strength in the market.
 Profit Optimization determines how much profit is enough. It should assure all concerned parties that the
business is stable and can survive downturns.
 Sales Growth means pricing competitively to increase sales as the business grows.
 Target Return means the Owner is looking for a specific return often expressed as a percentage (after
taxes) of dollar sales.
From Small Business Matters by Mary McVicker
Pricing Glossary & Concepts ©Business Success Center • All rights reserved 1
PRICING CONCEPTS
There are nine basic pricing concepts the Owner can base pricing strategy on. The Owner should choose the
most appropriate strategy based on the business and SBU, choice of customers, level of profit desired and
transference goal.
 Cost-Plus Pricing – Pricing each product or service to achieve a fair return. This is usually determined by
the person responsible for managing the finances of the business. This can result in prices that are
reactive – either too high or too low and do not take into consideration changes that can occur due to
economies of scale. It can lead to overpricing in weak markets and under pricing in strong markets. It is
based on the perception that you can determine sales levels first, then calculate unit cost and profit
objectives, and then set price.
 Customer-Driven Pricing – Pricing based on what customers will pay. This is usually determined by sales
or product managers who have a good understanding of how to satisfy existing customers.
 Competition-Driven Pricing is determined by competitive conditions. The object is to achieve sales
objectives – i.e. more sales, a greater share of the market.
 Neutral Pricing does not use either high or low price to gain market share.
 Penetration Pricing sets prices low to gain market share or volume. (NOTE: high or low is a relative term,
relative to the economic value the customer places on the product or service.)
 Skimming – strategies set prices high to go after those who are not price sensitive.
 Sequential Skimming refers to a company’s desire to continually market to the least price-sensitive
market. It starts with those who are insensitive to price and “skims” those first. Then it lowers its price to
get to the next most lucrative market, and so on and so on. It works best when the product or service
changes slightly and is a little less desirable than before to prevent customers from simply waiting for the
next price decrease. It is a particularly useful concept for selling durable goods or something someone
would only buy once, such as a ticket or house by a homebuilder.
 Strategic Pricing is pricing based on value, It is proactive and asks the two key questions: “How much
more sales must we achieve to earn additional profit from a lower price than competitors?” and “How
much in sales volume can we lose and still stay profitable?” The goal is to maximize the difference
between the value created for the customer and the cost created for the company.
 Seasonal or Variable Response Pricing refers to prices that change due to seasonal reasons or reasons
beyond the control of the manufacturer – such as an increase in oil prices.
PRICE SENSITIVITY EFFECTS
Price Sensitivity Effects are factors that affect the customers’ perception of price.
PRICING STRATEGIES
Pricing has a direct effect on income and profits. But it also has an indirect effect on marketing/sales and on the
image of your company and products and services by customers, vendors, employees, and the community. All
of these must be considered when you develop and adopt your pricing strategy.
SBU – STRATEGIC BUSINESS
UNIT
The Owner may decide to use multiple pricing strategies. However, the more strategies used, the more
complicated the sales and potentially, the more complicated to transfer the pricing strategy into sales and
marketing collateral process. Following is a list of pricing strategies:
 Retail Cost – follows manufacturer’s suggested retail pricing.
 Competitive Pricing – prices are based on competition’s pricing.
 Pricing Below Competition – pricing assumes that the market is price driven.
 Pricing Above Competition – pricing assumes that the market is NOT price driven.
 Price Lining – targets a specific segment of the market by offering products or services only in a specific
price range.
 Multiple Pricing – combines different items into bundled price or discount.
 Service/Product Cost – pricing materials, labor, overhead and margin used to determine price.
 True Total Cost – includes all costs, development, promotion, etc.
 Positioning/Value-Based – price is determined by value brought to customer by product or service.
An SBU, or Strategic Business Unit, is a self-contained grouping of organizations, products, services or
technologies that serve an identified market and competes with identified competitors. It is what you sell and
what you measure. These are existing or proposed revenue producers.
Pricing Glossary & Concepts ©Business Success Center • All rights reserved 2
SEGMENTATION PRICING
TRUE TOTAL COSTS
SEGMENTATION PRICING
Thomas Nagle and Reed Holden, authors of The Strategy and Tactics of Pricing, identify seven legal and
effective forms of segmentation pricing:
 By buyer. Example: Demographics - Longer hair, higher price, or if the buyer complains provide a
different price.
 By purchase location. Example: At the door sales price vs. online.
 By time of purchase. Example: Annual sales events, matinee pricing, peak-load pricing (time of day).
 By purchase quantity:
 Volume discounts (usually indicates a price sensitive customer) encourage retention of large customers;
 Order discounts encourage large orders less frequently;
 Step discounts or block discounts do not apply to the total quantity purchased but amount over a specified
amount; and
 Two part pricing. Example: Nightclubs with a cover charge and a drink charge.
 By product design, or pricing by features offered or eliminated. Example: Airline seats, cars, PDAs.
 By product bundling. Example: Restaurants where a la carte items are bundled into a fixed-price dinner.
 By tie-ins. Example: Movie theatres require customers to buy food on premises and not bring it in from
outside.
 By metering. Price is tied to number of uses of the product. Example: Copier price that also charges
monthly fee for photocopies.
 The Owner should consider Price Segmentation just as they use MARKET SEGMENTATION to market more
effectively.
True Total Costs are all the costs that went into a particular product or service from concept to support. These
are: development, production, promotion, distribution, support, and profit. In arriving at pricing, it is only one
third of the answer. Under development should be included research, “invention” of the product or service,
initial “prototype” and revisions, final version, and initial marketing. It also should include profit and
contingency. The other two areas to consider in your pricing system are customers and competitors.
Thomas Nagle and Reed Holden, authors of The Strategy and Tactics of Pricing, identify seven legal
and effective forms of segmentation pricing:
 By buyer. Example: Demographics - Longer hair, higher price, or if the buyer complains provide
a different price.
 By purchase location. Example: At the door sales price vs. online.
 By time of purchase. Example: Annual sales events, matinee pricing, peak-load pricing (time of
day).
 By purchase quantity:
 Volume discounts (usually indicates a price sensitive customer) encourage retention of large
customers;
 Order discounts encourage large orders less frequently;
 Step discounts or block discounts do not apply to the total quantity purchased but amount over a
specified amount; and
 Two part pricing. Example: Nightclubs with a cover charge and a drink charge.
 By product design, or pricing by features offered or eliminated. Example: Airline seats, cars,
PDAs.
 By product bundling. Example: Restaurants where a la carte items are bundled into a fixed-price
dinner.
 By tie-ins. Example: Movie theatres require customers to buy food on premises and not bring it in
from outside.
 By metering. Price is tied to number of uses of the product. Example: Copier price that also
charges monthly fee for photocopies.
 The Owner should consider Price Segmentation just as they use MARKET SEGMENTATION to
market more effectively.
Pricing Glossary & Concepts ©Business Success Center • All rights reserved 3