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Pricing
Introduction to Price
Competitive Dynamics and Pricing
Demand Analysis
Inputs to Pricing Decisions
Pricing Objectives
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Pricing
(continued)
General Pricing Strategies
Specific Pricing Strategies
Pricing Tactics
Pricing Legal Concerns
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Pricing > Introduction to Price
Introduction to Price
• What is a Price?
• Terms Used to Describe Price
• The Importance of Price to Marketers
• Value & Relative Value
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Pricing > Introduction to Price
What is a Price?
• When you ask about the cost of a good or service, you're really asking how much
you will have to give up in order to get it.
• For the business to increase value, it can either increase the perceived benefits or
reduce the perceived costs.Both of these elements should be considered
elements of price.
• Viewing price from the customer's perspective helps define value -- the most
important basis for creating a competitive advantage.
• There are two different ways to look at the role price plays in a society; rational
man and irrational man.
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Pricing > Introduction to Price
Terms Used to Describe Price
• From a customer's point of view, value is the sole justification for price.
• The price of an item is also called the price point, especially when it refers to
stores that set a limited number of price points.The words charge and fee are
often used to refer to the price of services.
• The transportation industry charges a fare for its services.
A London Bus
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Pricing > Introduction to Price
The Importance of Price to Marketers
• Price is important to marketers because it represents marketers' assessment of
the value customers see in the product or service and are willing to pay for a
product or service.
• Adjusting the price has a profound impact on the marketing strategy, and
depending on the price elasticity of the product, it will often affect the demand and
sales as well.
• Pricing contributes to how customers perceive a product or a service.
Pricing and the Marketing Mix
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Pricing > Introduction to Price
Value & Relative Value
• Value is the worth of goods and services as determined by markets.
• Something is only worth what someone is willing to pay for it.
• The utility for the seller is not as an object of usage, but as a source of income.
• In term of pricing, prices of valued items undergo questionable fluctuations.
Value or Price
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Pricing > Competitive Dynamics and Pricing
Competitive Dynamics and Pricing
• Price Competition
• Nonprice Competition
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Pricing > Competitive Dynamics and Pricing
Price Competition
• Price is a very important decision criteria that customers use to compare
alternatives.It also contributes to the company's position.
• The pricing process normally begins with a decision about the company's pricing
approach to the market.
• In general, a business can price itself to match its competition, price higher, or
price lower.
Kmart
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Pricing > Competitive Dynamics and Pricing
Nonprice Competition
• Non-price competition can be contrasted with price competition, which is where a
company tries to distinguish its product or service from competing products on the
basis of a low price.
• Firms will engage in non-price competition, in spite of the additional costs
involved, because it is usually more profitable than selling for a lower price and
avoids the risk of a price war.
• Although any company can use a non-price competition strategy, it is most
common among oligopolies and monopolistic competition, because these firms
can be extremely competitive.
Amazon.com
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Pricing > Demand Analysis
Demand Analysis
• The Demand Curve
• Supply and Demand Influence Price
• Elasticity of Demand
• Yield Management Systems
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Pricing > Demand Analysis
The Demand Curve
• Demand does not only have to do with the need to have a product or a service,
but it also involves the willingness and ability to buy it at the price charged for it.
• The demand curve for all consumers together follows from the demand curve of
every individual consumer.The individual demands at each price are added
together.
• The negative slope of the demand curve is often referred to as the "law of
demand," which means people will buy more of a service, product, or resource as
its price falls.
Figure 2
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Pricing > Demand Analysis
Supply and Demand Influence Price
• There are four basic laws of supply and demand.
• Since determinants of supply and demand other than the price of the good in
question are not explicitly represented in the supply-demand diagram, changes in
the values of these variables are represented by moving the supply and demand
curves (often described as "shifts" in the curves).
• Responses to changes in the price of the good are represented as movements
along unchanged supply and demand curves.
Supply and Demand
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Pricing > Demand Analysis
Elasticity of Demand
• Price elasticities are almost always negative; only goods which do not conform to
the law of demand, such as a Veblen good and a Giffen good, have a positive
PED.
• In general, the demand for a good is said to be inelastic (or relatively inelastic)
when changes in price have a relatively small effect on the quantity of the good
demanded.
• The demand for a good is said to be elastic (or relatively elastic) when changes in
price have a relatively large effect on the quantity of a good demanded.
• A number of factors can thus affect the elasticity of demand for a good.
Equation
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Pricing > Demand Analysis
Yield Management Systems
• Yield management is the process of understanding, anticipating, and influencing
consumer behavior to maximize yield or profits from a fixed, perishable resource
(such as airline seats or hotel room reservations).
• Yield management is particularly suitable when selling perishable products, which
are goods that become unsellable at a point in time (for example, airline tickets
just after a flight takes off).
• While yield management systems tend to generate higher revenues, the revenue
streams tend to arrive later in the booking horizon as more capacity is held for late
sale at premium prices.
Airline Tickets
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Pricing > Inputs to Pricing Decisions
Inputs to Pricing Decisions
• Marginal Analysis
• Fixed Costs
• Break-Even Analysis
• Organizational Objectives
• Other Inputs: Customer Needs, Competitive Environment, & Legal and
Regulatory Factors
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Pricing > Inputs to Pricing Decisions
Marginal Analysis
• Firms tend to accomplish their objective of profit maximization by increasing their
production until marginal revenue equals marginal cost.
• At the output level at which marginal revenue equals marginal cost, marginal profit
is zero and this quantity is the one that maximizes profit.
• In some cases, a firm's demand and cost conditions are such that marginal profits
are greater than zero for all levels of production up to a certain maximum; thus,
output should be produced at the maximum level.
Marginal Profit Maximization
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Pricing > Inputs to Pricing Decisions
Fixed Costs
• The distinction between fixed and variable costs is crucial in forecasting the
earnings generated by various changes in unit sales and thus the financial impact
of proposed marketing campaigns.
• Fixed costs are not permanently fixed - they will change over time - but are fixed
in relation to the quantity of production for the relevant period.
• Average fixed cost (AFC) is an economic term that refers to fixed costs of
production (FC) divided by the quantity (Q) of output produced.
Fixed Costs and Variable Costs
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Pricing > Inputs to Pricing Decisions
Break-Even Analysis
• In the linear Cost-Volume-Profit Analysis model, the break-even unit of sales can
be directly computed in terms of total revenue and total costs.
• Unit contribution margin is the marginal profit per unit, or alternatively the portion
of each sale that contributes to fixed costs.
• Break-even analysis is a simple and useful analytical tool, yet has a number of
limitations as well.
Break-Even Analysis
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Pricing > Inputs to Pricing Decisions
Organizational Objectives
• A business can cut its costs, it can sell more, or it can find more profit with a
better pricing strategy.
• When costs are already at their lowest and sales are hard to find, adopting a
better pricing strategy is a key option to stay viable.
• A pivotal factor in determining a price is how consumers will perceive it.
Oil Price Sensitivity
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Pricing > Inputs to Pricing Decisions
Other Inputs: Customer Needs, Competitive Environment, &
Legal and Regulatory Factors
• Economic Value to Customers (EVC) is based on the insight that a customer will
buy a product only if its value to them outweighs the value of the closest
alternative.
• To sell a product, a firm needs to price at or below its competitor's price plus the
value advantage its product has to the customer over the rival product.
• Price controls are governmental restrictions on the prices that can be charged for
goods and services in a market.
Price Controls
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Pricing > Pricing Objectives
Pricing Objectives
• Survival
• Profit
• Return on Investment
• Market Share / Sales
• Cash Flow
• Status Quo
• Product Quality
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Pricing > Pricing Objectives
Survival
• New and improved products may hold the key to a firm's survival and ultimate
success.
• All business enterprises must earn a long term profit in order to survive in the long
run.
• Just as survival requires a long term profit for a business enterprise, profit
requires sales.Sales patterns should be altered to ensure success.
• Management of all firms, large and small, are concerned with maintaining an
adequate share of the market so their sales volume will enable the firm to survive
and prosper. Prices must be set to attract the appropriate market segment in
McDonald's Surviving the Recession
significant numbers.
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Pricing > Pricing Objectives
Profit
• In launching new products or considering the pricing of current products,
managers often start with an idea of the dollar profit they desire and ask what
level of sales will be needed to reach it. This can be done through profit-based
sales targets.
• Profit is equal to total revenue (TR) minus total cost (TC).The profit maximizing
output is the one at which this difference reaches its maximum.The corresponding
price will depend on whether the firm is a perfect competitor.This is the TR-TC
method.
• Marginal profit (Mπ) equals marginal revenue (MR) minus marginal cost (MC).If
MR is greater than MC at some level of output, marginal profit is positive and thus
Total Profit Maximization
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a greater quantity should be produced.When MR = MC, Mπ is zero and this
quantity is the one that maximizes profit.
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Pricing > Pricing Objectives
Return on Investment
• Return on investment is one way of considering profits in relation to capital
invested.
• Marketing not only influences net profits but also can affect investment levels,
too.New plants and equipment, inventories, and accounts receivable are three of
the main categories of investments that can be affected by marketing decisions.
• ROI provides a snapshot of profitability adjusted for the size of the investment
assets tied up in the enterprise.
Chart showing ROI
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Pricing > Pricing Objectives
Market Share / Sales
• Marketers need to be able to translate sales targets into market share because
this will determine whether forecasts are to be attained by growing with the
market or by capturing share from competitors.
• Market share is a key indicator of market competitiveness—that is, how well a
firm is doing compared to its competitors.It enables them to judge not only total
market growth or decline but also trends in customers' selections among
competitors.
• Losses in market share can signal serious long-term problems that require
strategic adjustments.Firms with market shares below a certain level may not be
viable.
Netflix Pricing Strategies
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Pricing > Pricing Objectives
Cash Flow
• Some companies will set prices so that they can recover cash flow as quickly as
possible.This strategy could be due to the company spending too much of its
resources on developing products.
• One way to get cash flow quickly is through seasonal discounts.Seasonal
discounts are price reductions given on out-of-season merchandise.
• Another option is cash discounts.Cash discounts are reductions on the base price
given to customers for paying cash or within some short time period.
Seasonal Sales Generate Cash Flow
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Pricing > Pricing Objectives
Status Quo
• A small firm can avoid a price war by setting prices in line with its competition.It is
best to respond to changes as quickly as possible or else it could signal to
competitors that you are ready to engage in a price war.
• Charging what the competition is charging can be quite popular where costs are
difficult to measure or where the response of competitors is uncertain.
• The major advantage of setting prices to maintain the status quo is that is requires
little planning.It's pretty much a passive policy.
Walmart Supercenter
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Pricing > Pricing Objectives
Product Quality
• Some of these consequences of poor quality include loss of business, liability,
decreased productivity, and increased costs.
• Good quality has its own costs, including prevention, appraisal, and failure.
• Successful management of quality requires that managers have insights on
various aspects of quality such as understanding the costs and benefits of quality
and recognizing the consequences of poor quality.
• Understanding the determants of quality, such as design of the product and the
"ease of use" of the product, will help managers price the products accordingly.
High Quality Cars
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Pricing > General Pricing Strategies
General Pricing Strategies
• Cost-Based Pricing
• Demand-Based Pricing
• Competitor-Based Pricing
• Markup Pricing
• Profit Maximization Pricing
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Pricing > General Pricing Strategies
Cost-Based Pricing
• Implementation of cost-based pricing presents problems in practice.
• A company must know its costs to implement cost-based pricing.
• Costs are a function of sales, which are in turn a function of prices; therefore, the
calculation of these values is circular.
• Cost-based pricing is misplaced in industries where there are high fixed costs and
near-zero marginal costs.
Cost-Based Pricing Equation
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Pricing > General Pricing Strategies
Demand-Based Pricing
• Price skimming is a pricing strategy in which a marketer sets a relatively high
price for a product or service at first, then lowers the price over time.
• Price discrimination exists when sales of identical goods or services are
transacted at different prices from the same provider.
• Psychological pricing is a marketing practice based on the theory that certain
prices have a psychological impact.
• Bundle pricing is a marketing strategy that involves offering several products for
sale as one combined product.
• Penetration pricing is the pricing technique of setting a relatively low initial entry
price, often lower than the eventual market price, to attract new customers.
Price Skimming
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• Value-based pricing sets prices primarily on the value, perceived or estimated, to
the customer rather than on the cost of the product or historical prices.
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Pricing > General Pricing Strategies
Competitor-Based Pricing
• Sometimes this simply takes the form of a firm copying their competitor's pricing
and not conducting their own pricing research.
• Sometimes such pricing can take the form of a firm setting a market share objective and discounting their price relative to their competitor until they attain it.
• Its main advantage is ease of use.Extensive marketing research and statistical
analysis are not required.
• Instead of setting market share objectives, firms should focus on identifying the
most profitable segments to serve, and finding ways of profitably serving them
while protecting themselves from price wars.
Competitor Analysis
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Pricing > General Pricing Strategies
Markup Pricing
• Markup pricing is used primarily because it is easy to calculate and requires little
information.
• The first step to determine markup price involves calculation of the cost of
production, and the second step is to determine the markup over costs.
• In markup pricing, we use quantity to calculate price, but price is the determinant
of quantity.To avoid this problem, the quantity is assumed.
Cost-Plus Price Equation
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Pricing > General Pricing Strategies
Profit Maximization Pricing
• Fixed costs, which occur only in the short run, are incurred by the business at any
level of output, including zero output.
• Variable costs change with the level of output, increasing as more product is
generated.
• The profit-maximizing output is the one at which the difference between total cost
and total revenue reaches its maximum.
• If a firm is not a perfect competitor in the output market, the price to sell the
product at can be read off the demand curve at the firm's optimal quantity of
output.
Total Profit Maximization
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Pricing > Specific Pricing Strategies
Specific Pricing Strategies
• New Product Pricing
• Product Line Pricing
• Psychological Pricing
• Pricing during Difficult Economic Times
• Everyday Low Pricing
• High/Low Pricing
• Other Pricing Strategies
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Pricing > Specific Pricing Strategies
New Product Pricing
• Penetration pricing is the pricing technique of setting a relatively low initial entry
price, often lower than the eventual market price, to attract new customers.The
strategy works on the expectation that customers will switch to the new brand
because of the lower price.
• Skimming involves goods being sold at higher prices so that fewer sales are
needed to break even.By selling a product at a high price, sacrificing high sales to
gain a high profit is therefore "skimming" the market.
• The decision of best strategy to use depends on a number of factors.A
penetration strategy would generally be supported by the opportunity to keep
costs low, and the anticipation of quick market entry by competitors.A skimming
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strategy is most appropriate when the opposite conditions exist.
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Pricing > Specific Pricing Strategies
Product Line Pricing
• Line pricing is beneficial to customers because they want and expect a wide
assortment of goods, particularly shopping goods.Many small price differences for
a given item can be confusing.
• From the seller's point of view, line pricing is simpler and more efficient to
use. The product and service mix can then be tailored to select price points.
• Line pricing suffers during inflationary periods, where such a strategy can be
inflexible.
Traditional five and dime stores
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Pricing > Specific Pricing Strategies
Psychological Pricing
• Products and services frequently have customary prices in the minds of
consumers.A customary price is one that customers identify with particular items.
• Odd prices appear to represent bargains or savings and therefore encourage
buying.Thus, marketers often use odd prices that end in figures such as 5, 7, 8, or
9.
• A somewhat related pricing strategy is combination pricing, such as two-for-one or
buy-one-get-one-free.Consumers tend to react very positively to these pricing
techniques.
Odd Pricing
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Pricing > Specific Pricing Strategies
Pricing during Difficult Economic Times
• Many companies are tempted to slash prices during a recession, but this strategy
should be carefully considered.
• Cutting prices can degrade the value of the brand, lead to a price war, and also
lead customers to put off buying when times are good in expectation of price cuts
when times are bad.
• Unlike traditional brands that are designed with target consumers in mind, fighter
brands are created specifically to combat a competitor that is threatening to take
market share away from a company's main brand.
• When the strategy works, a fighter brand not only defeats a low-priced competitor,
but also opens up a new market.
Price cuts during a recession
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Pricing > Specific Pricing Strategies
Everyday Low Pricing
• Every day low pricing saves retail stores the effort and expense needed to mark
down prices in the store during sale events, as well as to market these events.
• One 1994 study of an 86-store supermarket grocery chain in the United States
concluded that a 10% EDLP price decrease in a category increased sales volume
by 3%, while a 10% Hi-Low price increase led to a 3% sales decrease.
• Trader Joe's is an example of successful EDLP.It is unique because it does not
market itself like other grocery stores do, nor are customers required to obtain
membership to enjoy its low prices - at Trader Joe's, its everyday low prices are
available to everyone.
Everyday Low Pricing at Trader Joe's
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Pricing > Specific Pricing Strategies
High/Low Pricing
• The lower promotional prices are designed to bring customers to the organization
where the customer is offered the promotional product as well as the regular
higher priced products.
• The basic type of customers for the firms adopting high-low price do not have a
clear idea about what a product's price would typically be or have a strong belief
that "discount sales = low price".
• The way competition prevails in the shoe and fashion industry is through high-low
price strategies.
High-Low Pricing Strategies
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Pricing > Specific Pricing Strategies
Other Pricing Strategies
• Cost-plus pricing is the simplest pricing method.The firm calculates the cost of
producing the product and adds on a percentage (profit) to that price to give the
selling price.
• Dynamic pricing allows online companies to adjust the prices of identical goods to
correspond to a customer's willingness to pay.The airline industry is often cited as
a success story.Most of the passengers on any given airplane have paid different
ticket prices for the same flight.
• Non-price competition means that organizations use strategies other than price to
attract customers.Advertising,credit, delivery, displays, private brands, and
convenience are all examples of tools used in non-price competition.
Airlines and Dynamic Pricing
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Pricing > Pricing Tactics
Pricing Tactics
• Discounting
• Value-Based Pricing
• Geographic Pricing
• Transfer Pricing
• Consumer Penalties
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Pricing > Pricing Tactics
Discounting
• Seasonal discounts are price reductions given for out-of-season merchandise
([[fig:12734]]).
• Cash discounts are reductions on base price given to customers for paying cash
or within some short time period.
• Senior discounts are discounts offered to customers who are above a certain age,
typically a round number such as 50, 55, 60, 65, 70, and 75.
• Educational or student discounts are price reductions given to members of
educational institutions, usually students but possibly also to educators and to
other institution staff.
Discounts
• Quantity discounts are reductions in base price given as the result of a buyer
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purchasing some predetermined quantity of merchandise.A noncumulative
quantity discount applies to each purchase and is intended to encourage buyers
to make larger purchases.
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Pricing > Pricing Tactics
Value-Based Pricing
• Value-based pricing is most successful when products are sold based on
emotions (fashion), in niche markets, in shortages (e.g., drinks at open air festival
at a hot summer day), or for indispensable add-ons (e.g., printer cartridges,
headsets for cell phones).
• Although it would be nice to assume that a business has the freedom to set any
price it chooses, this is not always the case.Firms are limited by constraints such
as government restrictions.
• Value-based pricing is predicated upon an understanding of customer value.In
many settings, gaining this understanding requires primary research through
interviews with customers and various surveys.The results of such surveys often
Value based pricing
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depict a customer's willingness to pay.
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Pricing > Pricing Tactics
Geographic Pricing
• Zone pricing is a pricing tactic where prices increase as shipping distances
increase. This is sometimes done by drawing concentric circles on a map with the
plant or warehouse at the center and each circle defining the boundary of a price
zone.
• FOB origin (Free on Board origin) is a pricing tactic where the shipping cost from
the factory or warehouse is paid by the purchaser.Ownership of the goods is
transferred to the buyer as soon as it leaves the point of origin.
• Freight-absorption pricing is where the seller absorbs all or part of the cost of
transportation.This amounts to a price discount and is used as a promotional
tactic.
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Pricing > Pricing Tactics
Transfer Pricing
• Transfer pricing refers to the setting, analysis, documentation, and adjustment of
charges of goods and services within a multi-divisional organization, particularly in
regard to cross-border transactions.
• Intra-company transactions across borders are growing rapidly and are becoming
much more complex.Compliance with the differing requirements of multiple
overlapping tax jurisdictions is a complicated and time-consuming task.
• Division managers are provided incentives to maximize their own division's
profits.The firm must set the optimal transfer prices to maximize company profits
or each division will try to maximize their own profits leading to lower overall
profits for the firm.
Optimal Transfer Pricing Diagram
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Pricing > Pricing Tactics
Consumer Penalties
• Most organizations reserve the right to restrict a user's access to the service if
they violate the terms in the agreement.
• Other forms of penalties can exist as fees.An early-termination fee is charged by
a company when a customer wants or needs to be released from a contract
before it expires.
• Early payment penalties and fees also exist when people pay off a loan earlier
than expected, making a firm lose out on interest fees.The fees typically negate
this advantage at least in part.
Mobile phones
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Pricing > Pricing Legal Concerns
Pricing Legal Concerns
• Unfair Trade Practices
• Illegal Price Advertising
• Predatory Pricing
• Price Discrimination
• Price Fixing
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Pricing > Pricing Legal Concerns
Unfair Trade Practices
• Unfair business acts are generally prohibited by law, so committing them may
force a company to provide for the award of compensatory damages, punitive
damages, and payment of the plaintiff's legal fees.
• Two major forms of unfair trade practice are fraud and misrepresentation.
• Unfair trade practices not only affect consumers, but may affect other
stakeholders as well, such as competitors and investors.
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Pricing > Pricing Legal Concerns
Illegal Price Advertising
• While deceptive price advertising is usually illegal, in practice, it can be difficult to
stop or difficult to enforce any law relating to it.
• False and deceptive advertising methods include hidden fees and surcharges,
"going out of business" sales, manipulation of measurement units, fillers,
oversized packaging, bait and switch, etc.
• Advertising need not be proven to be deceptive for it to be illegal.What matters is
the potential to deceive, which happens when consumers see the advertising to
be stating to them, explicitly or implicitly, a claim that they may not realize is false
and material.
Listerine advertisement, 1932
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Pricing > Pricing Legal Concerns
Predatory Pricing
• After the weaker competitors are driven out, the surviving business can raise
prices to supra competitive levels.The predator hopes to generate revenues and
profits in the future that will more than offset the losses it incurred during the
predatory pricing period.
• While predatory pricing is illegal in many countries, it is very difficult to prove that
a company has undertaken a strategy of predatory pricing rather than competitive
pricing.
• Critics argue that the prey know that the predator cannot sustain low prices
forever, so it is essentially a game of chicken: if they can ride it out, they will
survive.
Oil refinery
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Pricing > Pricing Legal Concerns
Price Discrimination
• In theoretical markets there exists perfect information, no transaction costs, and
perfect substitutes, and in these cases price discrimination can only exist in
monopolistic or oligopolistic markets.
• For price discrimination to take place, companies must be able to identify market
segments by their price elasticity of demand, and they must be able to enforce the
scheme.
• There are four degrees of price discrimination (including reverse price
discrimination), that all occur under slightly different circumstances, depending on
the market structure and the company's ability to discriminate.
Third degree price discrimination
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Pricing > Pricing Legal Concerns
Price Fixing
• Price fixing is inefficient, transferring some of the consumer surplus to producers
and results in a deadweight loss.
• Price fixing is illegal in most developed countries.In the US, price fixing can be
prosecuted as a criminal federal offense.However, price fixing is perfectly legal in
many countries.
• When sovereign nations rather than individual firms come together to control
prices, the cartel may be protected from lawsuits and criminal antitrust
prosecution.
Heineken cans
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Appendix
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Pricing
Key terms
• accounts receivable Accounts receivable refers to the money owed to a business by its clients (customers) and shown on its
balance sheet as an asset.
• Activity-Based Pricing Pricing based on all costs such as labor, building, and administration instead of only fixed costs.
• bait-and-switch Relating to use of bait and switch (offering one attractive exchange initially, but not honoring the offer) in
business, politics, and elsewhere.
• bartering system Barter is a medium of exchange by which goods or services are directly exchanged for other goods or
services without using a medium of exchange, such as money.
• basing-point pricing goods shipped from a designated city are charged the same amount
• belief mental acceptance of a claim as truth regardless of supporting or contrary empirical evidence
• benefit an advantage, help or aid from something
• break-even point The point where total costs equal total revenue and the organization neither makes a profit nor suffers a loss.
• cash flow The movement of money into or out of a business.
• collusion A secret agreement for an illegal purpose; conspiracy.
• competitor A person or organization against whom one is competing.
• conjoint analysis Conjoint analysis is a statistical technique used in market research to determine how people value different
features that make up an individual product or service.
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Pricing
• consumer buying process There are 5 stages of a consumer buying process.They are: The problem recognition stage, the
search for information, the possibility of alternative options, the choice to purchase the product, and then finally the actual
purchase of the product.This shows the complete process that a consumer will most likely, whether recognizably or not, go
through when they go to buy a product.
• consumer surplus The monetary gain obtained by consumers because they are able to purchase a product for a price that is
less than the highest price that they would be willing to pay.
• customary price A price that customers identify with particular items.
• deadweight loss a loss of economic efficience that can occur when equilibrium for a good or service is not Pareto optimal.
• demand curve The graph depicting the relationship between the price of a certain commodity and the amount of it that
consumers are willing and able to purchase at that given price.
• derived demand when demand for a factor of production or intermediate good occurs as a result of the demand for another
intermediate or final good
• discretion The freedom to make one's own judgements.
• discretionary Available at one's discretion; able to be used as one chooses; left to or regulated by one's own discretion or
judgment.
• Economic Value for the Customer (EVC) Criteria used by marketers to determine price, based on the insight that a customer
will only buy a product if its value to them outweighs the value of the closest alternative.
• economies of scale The cost advantages that an enterprise obtains due to expansion.As the scale of output is increased,
factors such as facility size and usage levels of inputs cause the producer's average cost per unit to fall.
• equilibrium price The price of a commodity at which the quantity that buyers wish to buy equals the quantity that sellers wish to
sell.
• everyday low price Everyday low price ("EDLP") is a pricing strategy promising consumers a low price without the need to wait
for sale price events or comparison shop.
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Pricing
• fighter brand A pricing strategy where a company prices items lower than the competition in order to protect or gain market
share.
• forecast An estimation of a future condition.
• fraud Any act of deception carried out for the purpose of unfair, undeserved, or unlawful gain.
• fringe Outside the mainstream.
• functional discount payments to distribution channel members for performing some service
• game theory A branch of applied mathematics that studies strategic situations in which individuals or organizations choose
various actions in an attempt to maximize their returns.
• generic Not having a brand name.
• Giffen good A good which people consume more of as the price rises; Having a positive price elasticity of demand.As price
rises, more is consumed which increases demand.
• Giffen good A good which people consume more of as the price rises; Having a positive price elasticity of demand.As price
rises, more is consumed which increases demand.
• heterogeneity This term describes the uniqueness of service offerings.
• Hi-low price High-low pricing (or hi-low pricing) is a type of pricing strategy adopted by companies, usually small- and mediumsized retail firms, where a firm charges a high price for an item and later sells it to customers by giving discounts or through
clearance sales.
• inventory The stock of an item on hand at a particular location or business.
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Pricing
• lease A contract granting use or occupation of property during a specified period in exchange for a specified rent.
• List Price The manufacturer's suggested retail price (MSRP), list price or recommended retail price (RRP) of a product is the
price which the manufacturer recommends that the retailer sell the product.
• List Price The manufacturer's suggested retail price (MSRP), list price or recommended retail price (RRP) of a product is the
price which the manufacturer recommends that the retailer sell the product.
• low-cost signalling A strategy of signalling to competitors that you intend to pursue a low-cost strategy.
• marginal cost Marginal cost is the change in total cost that arises when the quantity produced changes by one unit.That is, it is
the cost of producing one more unit of a good.
• marginal cost The increase in cost that accompanies a unit increase in output; the partial derivative of the cost function with
respect to output.The additional cost associated with producing one more unit of output.
• marginal cost The increase in cost that accompanies a unit increase in output; the partial derivative of the cost function with
respect to output.The additional cost associated with producing one more unit of output.
• marginal revenue Marginal revenue is the additional revenue that will be generated by increasing product sales by one unit.
• marginal revenue Marginal revenue is the additional revenue that will be generated by increasing product sales by one unit.
• marginal utility The additional utility to a consumer from an additional unit of an economic good.
• market penetration having gained part of a market in which similar products already exist
• Market Share The percentage of a market (defined in terms of either units or revenue) accounted for by a specific entity.
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• Market Share The percentage of some market held by a company.
• Market Share The percentage of a market (defined in terms of either units or revenue) accounted for by a specific entity.
• marketing mix A business tool used in marketing products; often crucial when determining a product or brand's unique selling
point.Often synonymous with the four Ps: price, product, promotion, and place.
• marketing mix A business tool used in marketing products; often crucial when determining a product or brand's unique selling
point.Often synonymous with the four Ps: price, product, promotion, and place.
• misrepresentation A false statement of fact made by one party to another party, which has the effect of inducing that party into
the contract.
• off-price retailer firms that purchase goods below wholesale cost and sell below normal retail price
• oligopolies An oligopoly is a market form in which a market or industry is dominated by a small number of sellers
(oligopolists).Because there are few sellers, each oligopolist is likely to be aware of the actions of the others.
• Opportunity Costs The costs of activities measured in terms of the value of the next best alternative forgone (that is not
chosen).
• perishable That which perishes or is short-lived.
• predatory pricing A strategy of selling goods or services at a very low price in order to drive one's competitors out of business
(at which point one can raise one's prices more freely).
• price The cost required to gain possession of something.
• price discrimination Occurs when sales of identical goods or services are transacted at different prices from the same provider.
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• price fixing In antitrust law, collusion between competitors in order to raise prices, at the expense of competitive pricing.
• price point Price points are prices at which demand for a given product is supposed to stay relatively high.
• price point The price of an item, especially seen as one of a number of pricing options.
• Price Points Price points are prices at which demand for a given product is supposed to stay relatively high.
• price war Price war is a term used in the economic sector to indicate a state of intense competitive rivalry accompanied by a
multi-lateral series of price reductions.One competitor will lower its price, then others will lower their prices to match.If one of
them reduces their price again, a new round of reductions starts.
• product line pricing the practice of charging different amount for goods or services that are variations on a base good or service
• psychological pricing a marketing practice based on the theory that nominally different prices may be perceived differently
• quality the ability of a product or service to consistently meet or exceed customer requirements or expectations.
• quantity discount price reductions given for large purchases
• receivables All the debts owed to a company by its debtors or customers.
• recession A period of reduced economic activity
• return on quality An internal management approach that evaluates the financial return of investments in quality.
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• seasonal discount price reductions given when an order is placed in a slack period
• shopping goods Goods that require more thought and comparison than convenience goods.Consumers compare multiple
attributes such as price, style, quality, and features.
• status quo The state of things; the way things are, as opposed to the way they could be; the existing state of affairs.
• straight rebuy the repurchase of a good with no changes to the details of the order
• strategy a plan of action intended to accomplish a specific goal
• supermarket a large self-service store that sells groceries and, usually, medications, household goods and/or clothing
• surcharge An addition of extra charge on the agreed or stated price.
• surcharge An addition of extra charge on the agreed or stated price.
• Surplus value The part of the new value made by production that is taken by enterprises as generic gross profit.
• target market a group of people whose needs and preferences match the product range of a company and to whom those
products are marketed
• Total cost Total cost (TC) describes the total economic cost of production and is made up of variable costs, which vary
according to the quantity of a good produced and include inputs such as labor and raw materials, plus fixed costs, which are
independent of the quantity of a good produced and include inputs (capital) that cannot be varied in the short term, such as
buildings and machinery.
• Total Revenue Total revenue is the total receipts of a firm from the sale of any given quantity of a product.
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• utility The ability of a commodity to satisfy needs or wants; the satisfaction experienced by the consumer of that commodity.
• value a customer's perception of relative price (the cost to own and use) and performance (quality)
• value a customer's perception of relative price (the cost to own and use) and performance (quality)
• Veblen good A good for which people's preference for buying them increases as a direct function of their price, as greater price
confers greater status.As the price gets higher, demand rises.
• Veblen good A good for which people's preference for buying them increases as a direct function of their price, as greater price
confers greater status.As the price gets higher, demand rises.
• viable Able to be done, possible.
• willingness to pay The willingness to pay (WTP) is the maximum amount a person would be willing to pay, sacrifice, or
exchange in order to receive a good or to avoid something undesired, such as pollution.
• zone pricing the practice of modifying a basic list price based on the geographical location of the buyer
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Pricing
Example of Zone Pricing
Zone pricing can be used to determine pricing in train services.The further passengers travel, the more they pay.
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Pricing
Oil refinery
Low oil prices in the 1990's were considered a case of alleged predatory pricing.
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Pricing
A London Bus
The price to ride a bus is expressed by the term "fare."
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Odd Pricing
Odd pricing involves using a number such as $8.99.
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Price Tags
Price tags are a way to demonstrate the money someone charges for a good or service.
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Pricing
Equation
This is the price elasticity of demand equation.
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Total Average Cost Equation
The total average cost for a product is determined by dividing the total fixed costs (TFC) and total variable costs (TVC) by the quantity of the product
produced, and then summing these together.
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Pricing
Premium Products
Price skimming is used in pricing premium products.
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Seasonal Sales Generate Cash Flow
A quick way to generate cash flow is to offer seasonal discounts.
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Chart showing ROI
This chart shows the rate of return on investments after training teachers.
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McDonald's Surviving the Recession
Pricing plays a significant role in attracting and retaining market share during tough economic times.
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Everyday Low Pricing at Trader Joe's
Trader Joe's is not an ordinary store.It is unique because it doesn't require membership for its customers to enjoy its low prices.Its everyday low prices
are available to everyone.
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Walmart Supercenter
Walmart and Amazon are engaged in a price war with online books.
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Third degree price discrimination
Third degree price discrimination: Instead of supplying one price and taking the profit (labelled "old profit"), the total market is broken down into two submarkets, and these are priced separately to maximize profit.For example, tourist and business airline passengers.
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Break-Even Calculation
We can derive the calculation for the break-even quantity from the relation of total revenue to total costs.
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Kmart
Kmart discovered that it is hard to go upscale when you're known for low prices.
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Mobile phones
Mobile phone service providers often charge an early termination fee on their service, which is a form of consumer penalty.
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Samuel Israel III
Samuel Israel III was a former hedge fund manager who ran the former fraudulent Bayou Hedge Fund Group, and faked his suicide to avoid
jail.Approximately $450 million was raised by the group from investors.Its investors were defrauded from the start with funds being misappropriated for
personal use.After poor returns in 1998, the investors were lied to about the fund's returns and a fake accounting firm was set up to provide misleading
audited results.
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Netflix Pricing Strategies
The decision to change pricing strategy may be part of a longer-term strategy to increase market share in on-line video streaming.
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Marginal Profit Maximization
This series of cost curves shows the implementation of profit maximization using marginal analysis.
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Value based pricing
Value-based pricing focuses entirely on the customer as a determinant of the total price/value package.
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Pricing
Willing to Pay the Price
The price you are willing to pay could be monetary, time, or the exchange of another good.
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Flickr. "All sizes | Money | Flickr - Photo Sharing!." CC BY http://www.flickr.com/photos/68751915@N05/6848823919/sizes/m/in/photostream/ View on
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Pricing
Pricing and the Marketing Mix
Pricing might not be as glamorous as promotion, but it is the most important decision a marketer can make.
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Flickr. "All sizes | 1961 Sears: Tower Automatic 127 | Flickr - Photo Sharing!." CC BY http://www.flickr.com/photos/nesster/5917603945/sizes/m/in/photostream/
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Pricing
Value or Price
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Wikipedia. "Relative Prices of commonly valued items what is value?." CC BY
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Pricing
Amazon.com
Amazon.com makes shopping and researching products, prices, and seller reliability quick and easy for its customers.Its prices are low, but not
necessarily the lowest.
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Flickr. "2010_01_08_amazon_1 | Flickr - Photo Sharing!." CC BY http://www.flickr.com/photos/docsearls/4256200927/lightbox/ View on Boundless.com
Pricing
Heineken cans
Heineken were fined €219.3m for their role in a price fixing cartel in Holland in 2007.
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Fotopedia. CC BY http://www.fotopedia.com/items/flickr-2185294624 View on Boundless.com
Pricing
Diamond Deliveries bikes
Our hypothetical company, Diamond Deliveries, delivers packages on bicycles.
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OpenCage Systems. "Flood of bicycle. Nagoya is strange! by OpenCage - 2014/02/03." CC BY-SA http://opencage.info/pics.e/large_9263.asp View on
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Pricing
Fixed Costs and Variable Costs
This graph breaks down the difference between fixed costs and variable costs.
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Wikimedia. "CVP-TC-FC-VC." Public domain http://commons.wikimedia.org/wiki/File%253ACVP-TC-FC-VC.svg View on Boundless.com
Pricing
Cost-Plus Price Equation
A cost-plus price will equal average variable costs plus average fixed costs plus markup per unit.
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Wikipedia. "Cost-plus pricing." GNU FDL http://en.wikipedia.org/wiki/Cost-plus_pricing View on Boundless.com
Pricing
Price Skimming
These are graphical representations of price skimming. Price skimming is sometimes referred to as riding down the demand curve.
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Wikimedia. "Price skimming small." CC BY-SA http://commons.wikimedia.org/wiki/File%253APrice_skimming_small.png View on Boundless.com
Pricing
Optimal Transfer Pricing Diagram
From marginal price determination theory, the optimum level of output is where marginal cost equals marginal revenue.
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Wikimedia. "Price trans-no ext-small." CC BY-SA http://commons.wikimedia.org/wiki/File:Price_trans-no_ext-small.jpg View on Boundless.com
Pricing
Total Profit Maximization
This series of cost curves shows one way of implementing profit maximization.
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Wikimedia. "Profit max total small." CC BY-SA http://commons.wikimedia.org/wiki/File%253AProfit_max_total_small.svg View on Boundless.com
Pricing
Total Profit Maximization
This linear total revenue curve represents the case in which the firm is a perfect competitor in the goods market, and thus cannot set its own selling
price.
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Wikimedia. "Profit max total small." CC BY-SA http://commons.wikimedia.org/wiki/File%253AProfit_max_total_small.svg View on Boundless.com
Pricing
Traditional five and dime stores
Traditional five and dime stores followed a line pricing strategy, where all goods were either 5 cents or 10 cents.The dollar store is a modern equivalent.
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Wikimedia. "The nickel and dime store, WPA poster, ca. 1941." Public domain
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Pricing
Competitor Analysis
Companies that employ competitor-based pricing can use computer programs such as this to analyze market share.
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Flickr. "All sizes | Market Research Competitor Analysis Worksheet Templates - MS Word+Excel Screenshots | Flickr - Photo Sharing!." CC BY
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Pricing
Oil Price Sensitivity
This graph depicts the price fluctuation of oil once consumers began having significant access to information regarding the commodity.
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Wikimedia. "Oil price chronology." Public domain http://commons.wikimedia.org/wiki/File%253AOil_price_chronology.gif View on Boundless.com
Pricing
High-Low Pricing Strategies
There are many big firms using this type of pricing strategy, especially in the shoe industry (ex: Reebok, Nike, Adidas).
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Wikimedia. "Nike swoosh on the tongue of a shoe (blue on white)." CC BY-SA
http://commons.wikimedia.org/wiki/File:Nike_swoosh_on_the_tongue_of_a_shoe_(blue_on_white).jpg View on Boundless.com
Pricing
Figure 2
Demand Curve
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Connexions. "The price factor." CC BY 3.0 http://cnx.org/content/m23084/latest/ View on Boundless.com
Pricing
Supply and Demand
The price P of a product is determined by a balance between production at each price (supply S) and the desires of those with purchasing power at each
price (demand D).The diagram shows a positive shift in demand from D1 to D2, resulting in an increase in price (P) and quantity sold (Q) of the product.
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Wikipedia. "Supply and demand." GNU FDL http://en.wikipedia.org/wiki/Supply_and_demand View on Boundless.com
Pricing
Price cuts during a recession
Slashing prices on low value goods (while maintaining prices on high value goods) is a potential pricing strategy during difficult economic times.
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Geograph. "Woolworths Closing-down Sale, Grimsby (C) David Wright :: Geograph Britain and Ireland." CC BY-SA http://www.geograph.org.uk/photo/1076911
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Pricing
Total Profit Maximization
This linear total revenue curve represents the case in which the firm is a perfect competitor in the goods market, and thus cannot set its own selling
price.
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Wikimedia. "Profit max total small." CC BY-SA http://commons.wikimedia.org/wiki/File%253AProfit_max_total_small.svg View on Boundless.com
Pricing
Discounts
Discounts, such as 75% off, are used to draw customers to purchase items.
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Wikimedia. "Even 75% off does not bring in the crowds." CC BY http://commons.wikimedia.org/wiki/File:Even_75%2525_off_does_not_bring_in_the_crowds.jpg
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Pricing
Fighter Brands
The Celeron microprocessor is a case study of a successful fighter brand.
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Wikimedia. "Slocket PCB Slot 1 to PGA370." Public domain http://commons.wikimedia.org/wiki/File:Slocket_PCB_Slot_1_to_PGA370.jpg View on Boundless.com
Pricing
Airlines and Dynamic Pricing
Dynamic pricing allows online companies to adjust the prices of identical goods to correspond to a customer's willingness to pay.
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Wikimedia. "Aircanada.a340.c-gdvw.arp." Public domain http://commons.wikimedia.org/wiki/File:Aircanada.a340.c-gdvw.arp.jpg View on Boundless.com
Pricing
Cost-Based Pricing Equation
To calculate price based on costs, multiply one plus the percent of markup by the sum of unit variable cost and average fixed cost.
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OER Commons. [no BPE content] FLAG CC BY-NC-SA http://www.oercommons.org/courses/pricing-spring-2010/view View on Boundless.com
Pricing
Price Controls
An example of a poster declaring regulatory pricing in the United States.
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Wikimedia. ""Prices charged in this store will not exceed those indicated in the most recent list of Fair Prices applicable to this - NARA - 512556." Public domain
http://commons.wikimedia.org/wiki/File:%2522Prices_charged_in_this_store_will_not_exceed_those_indicated_in_the_most_recent_list_of_Fair_Prices_applicable
Pricing
High Quality Cars
The Mercedes-Benz SLR McLaren has a reputation for extremely high quality, and it's hand made engine is a sign of this quality.Customers are willing to
pay a very steep price for this product.
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Wikipedia. "Mercedes-Benz SLR McLaren 2 cropped." Public domain http://en.wikipedia.org/wiki/File:Mercedes-Benz_SLR_McLaren_2_cropped.jpg View on
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Pricing
Value or Price
This chart attempts to highlight the fact that commonly valued items of constant utility tend to vary in price over time.
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Wikimedia. CC BY-SA http://upload.wikimedia.org/wikipedia/commons/thumb/a/af/Relative_Prices_of_commonly_valued_items_what_is_value%253F.jpg/800pxRelative_Prices_of_commonly_valued_items_what_is_value%253F.jpg View on Boundless.com
Pricing
Break-Even Analysis Using Contribution Margin
A break-even quantity can also be found using contribution margin.
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Wikipedia. "Break-even (economics)." GNU FDL http://en.wikipedia.org/wiki/Break-even_(economics) View on Boundless.com
Pricing
Airline Tickets
Your ticket may cost more or less than mine due to yield management.
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Flickr. "All sizes | My airline ticket hisses at me | Flickr - Photo Sharing!." CC BY http://www.flickr.com/photos/bryanalexander/296567921/sizes/m/in/photostream/
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