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1Faisal Zulhumadi (3298) A072 2007/2008
CHAPTER 4: PRICING CONSIDERATIONS
DIPLOMA IN INTERNATIONAL BUSINESS
(BUS2513)
1
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Part 1 of 2Pricing Decisions
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Strategic Planning for Price
Pricingobjectives
TargetMarket
PricePromotionPlaceProduct
Geographicterms—
who paystransportation
and how
Discounts andallowances—to whom and
when
Price levelsover product
life cycle
Priceflexibility
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The Nature of PriceThe value exchanged for products in a marketing exchange
Definition of Price
Price is the amount of money charged for a product or service, or the sum of all the values that customers give in order to gain benefits of having or using a product or service.
(Armstrong and Kotler, 2007)
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Terms Used To Describe Price
TuitionPremiumFineFeeFareTollRent
CommissionDuesDepositTipsInterestTaxes
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The Importance of Price to Marketers
Profit = Total Revenue – Total CostsProfits = (Price x Quantity Sold) – Total Costs
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Price and Nonprice Competition
• Price Competition Emphasizes price as an issue and matches or
beats competitors’ price To compete effectively- firm should be the low-
cost seller Standardized products Frequent price changes Provides flexibility
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Nonprice Competition
Emphasizes distinctive product:• Features
• Quality
• Promotion
• Packaging
• Other
Distinction must be effective
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Analysis Of Demand
Demand Curve
Demand Fluctuations
Assessing Price Elasticity
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Demand Curve
A graph of the quantity expected to be sold at various prices if other factorsremain constant
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Demand Curve, Price-Quantity Relationship and Increase in Demand
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Demand Curve, Relationship Between Price and Quantity for Prestige Products
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Sample Demand CurveSample Demand CurveSlide12-1
Figure12.1
10
20
30
40
50
60
10,000 20,000 30,000 40,000 50,000
Price per Unit
Quantity Demanded in Units
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Demand Fluctuations
Changes in buyers’ needs
Variations in effectiveness of other marketing mix variables
Presence of substitutes
Environment factors
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Elasticity Of Demand
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Price/Demand Elasticity
Elastic- change in price causes opposite change in total revenue• Price = Total Revenue • Price = Total Revenue
Inelastic- change in price causes same change in total revenue• Price = Total Revenue • Price = Total Revenue
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Price Elasticity Of Demand
Price Elasticity of
Demand= (% Change In Quantity Demanded)
% Change in Price
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Demand, Cost, and Profit Relationships
Marginal AnalysisFixed costsAverage fixed costVariable costsAverage variable costTotal costAverage total costMarginal cost (MC) Marginal revenue (MR)
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Costs AndTheir Relationships
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Pricing Based on CostPricing Based on CostSlide12-6
Markup pricing a pricing approach that adds a percentage to the producer’s cost in order to arrive at a selling price.
Rate of return pricing a pricing approach that involves total costs and then adding a desired rate of return to them to determine the selling price.
Breakeven analysis a technique for determining the sales volume needed to cover all costs at a specific rate.
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Typical Marginal Costs And Average Total Cost Relationship
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Typical Marginal Revenue And Average Revenue Relationship
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Combining Marginal Cost And Marginal Revenue Concepts For Optimal Profit
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Marginal Analysis RelationshipsMarginal Analysis Relationships
DollarsProfit
Quantity Produced and Sold
Dollars
Quantity Produced and Sold
Total Cost
Total Revenue
Marginal Cost
Marginal Revenue
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Demand, Cost, and Profit Relationships
Break-Even AnalysisBreak-even point – point at which the costs of
producing a product equal the revenue made from selling the product
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Determining TheBreak-Even Point
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Breakeven AnalysisBreakeven AnalysisSlide12-7
Figure12.5
Dollars
Quantity Produced and Sold
Total Cost
BreakevenPoint
Total Revenue
Loss
Profit
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Breakeven Point
Breakeven Point =
Fixed CostsPer-Unit Contribution to Fixed Costs
(Price – Variable Costs)
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Factors ThatAffect Pricing Decisions
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Pricing Objectives
Dollar or UnitSales Growth
Growth in Market Share
TargetReturn
MaximizeProfits
MeetingCompetition
NonpriceCompetition
PricingObjectives
SalesOriented
ProfitOriented
Status QuoOriented
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Organizational AndMarketing Objectives
Set prices consistent with organization’s goals and mission
Pricing decisions should be compatible with firm’s marketing objectives
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Costs
Why price below cost?
Match competition
Generate cash flow
Increase market share
Focus on cost reduction
Costs shared with others in product line
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Pricing Decisions Influence Other Mix VariablesDemand
Distribution Intensive
Selective
Exclusive
PromotionPremium = little advertising, personal selling
Complex = potential buyer confusion
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Channel Member Expectations
Profit
Competing product
Time/resources required
Discounts
Support activities- associated costs
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Reference Prices
Internal- developed in buyer’s mind through experience with product
External- comparison price provided by others
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Context Of Price-Buyers Characterized
Value-conscious - concerned about price and quality
Price-conscious - want to pay low prices
Prestige-sensitive - purchase products that signify prominence and status
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Competition
Monopoly Whatever market will bear Government regulation
Oligopoly Barriers to entry Little advantage in price cuts
Monopolistic Competition Distinguishable product Usually nonprice competition
Perfect competition All products the same No flexibility in pricing
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Pricing Based on CompetitionPricing Based on CompetitionSlide12-8
Pricing Below Competition pricing to gain market share and attract cost-conscious buyers. Especially useful to companies with low cost positions.
Matching Competition pricing at competitor’s levels with the intent of distinguishing the product in other ways. Common in oligopolies.
Pricing Above Competition pricing for products that offer greater value, quality, convenience or prestige.
Sealed-Bid Pricing pricing in which the buyer asks potential sellers to submit sealed bids containing the seller’s pricing and availabilities.
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Trade
Quantity Seasonal
DiscountPricing
Sale Cash
Discount Pricing
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Business-To-BusinessPrice Discounting
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Trade (Functional) Discount
A reduction off the list price by a producer to an intermediary for performing certain functions
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Quantity Discount
Deduction from list price that reflect(s) the economies of purchasing in large quantities
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Cumulative Discount
A quantity discount aggregated over a stated time period
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Noncumulative Discounts
A one-time price reduction based on the number of units purchased, the dollar value of the order, or the product mix purchased
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Cash Discount
A price reduction given to buyer for prompt payment or cash payment
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Seasonal Discount
A price reduction to buyers that purchase goods or services out of season
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Allowance
A concession in price to achieve a desired goal
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Allowances
Common Kindsof
Allowances
AdvertisingAllowance
Push MoneyAllowance
Trade-InAllowance
StockingAllowance
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Price Flexibility PoliciesOne-price policy
The same price to all customers who purchase products under essentially the same conditions and quantities
Exchange rate changes may make this difficult in international markets
Flexible pricing (e.g., in channels, business markets, expensive consumer shopping products) Issues:
Use is increasing because of impact of information technology, customer databases, scanners, etc.
Selling costs may be higher if prices are negotiated“Signals” to competitors Customer dissatisfaction may be a problem “Gray channels” and cross-shipping
17-4
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Geographic Pricing Policies
Common Geographic
PricingPolicies
F.O.B.
UniformDelivered
FreightAbsorption
Zone
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Geographic Pricing
F.O.B.FactoryDestination
Uniform geographic (Postage-Stamp)ZoneBase-pointFreight Absorption
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Geographic PricingGeographic PricingSlide13-7
Geographic Pricing Pricing a good or service according to where it is delivered.
FOB Origin Pricing Seller’s price is for the goods at point of shipment, where title passes from buyer to seller.
Uniform Delivered Pricing Seller’s price includes shipping; title passes where buyer receives the goods.
Single-zone Pricing Pricing in which all buyers pay the same price, including delivery.
Multiple-zone pricing Pricing in which buyers in different zones pay different delivery prices.
FOB with freight allowed Pricing in which the seller allows the buyer to deduct shipping costs from the quoted price of the product.
Basing point pricing Pricing in which the seller charges the quoted price plus the cost of delivering from a basing point where the product is made.
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• What is the location of potential buyers?
• Are they organizational buyers or consumers?
• What is the consumption rate of potential buyers?
• What is the financial condition of potential buyers?
• How many potential buyers are in the market?
Demographic Pricing FactorsDemographic Pricing FactorsSlide12-2
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• Will potential buyers be favorably attracted by odd pricing such as 99 cents instead of $1, or $177 instead of $180?
• Will potential buyers perceive the price to be too high relative to what the product offers?
• Are potential buyers concerned enough with prestige to pay more for the product?
• How much will potential buyers be willing to pay for the product?
• Will potential buyers use price as an indicator of the product’s quality?
Psychological Pricing FactorsPsychological Pricing FactorsSlide12-3
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Psychological PricingPsychological PricingSlide13-6
Table13.3
Table 13.3 missing
TYPETYPE DESCRIPTIONDESCRIPTION EXAMPLEEXAMPLE
ProductPricing TechniquePricing Technique
Prestige Pricing
DefinitionDefinition ExampleExample
Setting a high price to convey an image of high quality or exclusivity
Odd-even pricing
Bundle pricing
Setting prices a few dollars or cents below a round number
Offering several products as a package at a single price
The Porsche 911 turbo coupe has a base price of $105,000.
Office Depot advertises a GE cellular phone for $39.99.
A hotel quotes a rate for an over-night stay that includes breakfast the next morning.
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Price Level Policies
“Skim the cream” pricing involves selling at a high
price to those who are willing to pay before aiming at
more price-sensitive consumers.
Price
Quantity
Initialskimmingprice
Secondprice
Finalprice
Skimming Pricing
Sell at highprice beforereducing tonext price leveland repeat
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a
Price
Quantity
Penetration Pricing
Wholemarket price
Penetration pricing involves selling the
whole market at one low price.
Price Level Policies
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Penetration Pricing vs. Price SkimmingPenetration Pricing vs. Price Skimming
Time$
New Product Pricing Strategies
Price Skimming
PenetrationPricing
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Pricing Based on Customer ValuePricing Based on Customer ValueSlide12-9
Dominant Backward Pricing a pricing approach that involves setting a price by starting with the estimated price customers will pay and working backwards with retail and wholesale margins.
Value Pricing a pricing approach that involves setting prices so that the exchange value is higher than the value of competing exchanges.
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Value Pricing
Fits with StrategyPlanning
Fits with StrategyPlanning
Target Market andCompetition
Target Market andCompetition
Focus on CustomerRequirements
Focus on CustomerRequirements????????
????????????????????????????????
$$
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Basic Value PositionsBasic Value PositionsSlide13-1
Table13.1
Price LevelPrice Level
High relative to product class
Value PositionValue Position
High value because of quality and prestige.
ExamplesExamples
Nike athletic shoes (such as Air Jordans); dental work by a widely respected specialist.
Keds tennis shoes; dental work by the neighborhood family dentist.
High value because of good quality at a reasonable price.
High value because of acceptable quality at a low price.
Around average for product class
Low relative to product class
Generic or private-label shoes at a drugstore or discount store; dental work by students being trained at a university clinic.
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Part 2 of 2Setting Prices
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Development of Pricing Objectives
Pricing objectives – goals that describe what a firm wants to achieve through pricing
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Slide13-2
Figure13.2
Evaluate Customer Response and other Pricing Constraints
Set Pricing Objectives
Analyze Profit Potential
Set Initial PriceMake Price Adjustments as Needed
The Pricing ProcessThe Pricing Process
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Stages For Establishing Prices
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Pricing Objectives And Typical Actions To Achieve Them
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Pricing Objectives
SurvivalProfitReturn on Investment (ROI)Market ShareCash FlowStatus QuoProduct Quality
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High-quality products are usually priced to reflect the quality level
© 2005 BMW of North America, LLC, used with permission. The BMW name and logo are registered trademarks.
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Assessment of the Target Market’s Evaluation of Price
Price depends on:Type of productType of target marketPurchase situation (e.g: price of concessions at
movies)
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Evaluation of Competitors’ Prices
Regular function of marketing researchImportance of customer view of pricing
and marketing mix variables Pricing above competition – creates an
exclusive imagePricing below competition – gains market share
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Some prices are set higher than the competition to create an exclusive image
FIJI ® and all other trademarks, copyrights and intellectual property used herein are the property of FIJI Water Company LLC or its affiliates." Used by permission
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Selection of a Basis of Pricing
CostDemandCompetition
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Cost Based Pricing
Cost-based pricing – a dollar amount to the cost of the product
Cost-plus pricing – adding a specified dollar amount to the seller’s costs
Markup – Adding to the cost of the product a predetermined percentage of that cost
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Markup as % of Cost = Markup
Cost= 15 45
= 33.3 %
Markup as %
of Selling Price= Markup
Selling Price= 15 60
= 25.0 %
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Demand-Based Pricing
Customers pay a higher price when demand for the product is strong and a lower price when demand is weak
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Non-Price FactorsAffecting Demand
Product Quality
Range
Nature- essential/luxury
Substitutes
Support Service at point of sale
& after
Advertising/promotion
Distribution Methods
Market
Degree of competition
Competitor action/reaction
General economic conditions
“Demand based pricing”, N. Coulthurst, 4/3/02, http://www.accaglobal.com/publications/studentaccountant/404831
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Point-of-sale service affects demand
Reprinted with permission of Lowe's Companies
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Competition-Based Pricing
Pricing influenced primarily by competitors’ pricesmethod increases when:
competing products are homogeneous organization is serving markets in which price
is a key consideration
www.zillow.com
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Selection of a Pricing Strategy
Differential Pricing – different prices to different buyers for the same product
New-Product PricingProduct-Line Pricing – establishing prices of multiple
products within a product linePsychological Pricing – influence customer perception
to make a product’s price attractiveProfessional Pricing – fees set by experienced people
in particular fieldPromotional Pricing
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Common Pricing Strategies
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Differential Pricing Techniques
Negotiated – final price established through buyer/seller bargaining
Secondary-market – one price for primary target market and different price for another
Periodic discounting – systematic temporary price reduction
Random discounting – unsystematic temporary price reduction
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Steps In Developing New Product Pricing
1) Develop Marketing Strategy
2) Make Marketing Mix Decisions
3) Estimate Demand Curve
4) Calculate Cost
5) Understand Environmental Factors
6) Set Pricing Objectives
7) Determine Pricing
NetMBA, “Pricing Strategy”, 2005,
http://www.netmba.com/marketing/pricing/
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New-Product Pricing
Price skimming – charging the highest possible price that buyers who most desire the product will pay
Penetration pricing – prices set below competing brands to penetrate market and gain market share quickly
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Product-Line Pricing Strategies
Captive – basic product in a product line low while related items higher
Premium – pricing highest-quality product higher than other models
Bait – low pricing on one item in line with intention of selling higher-priced item in the line
Price Lining – limited number of prices for selected lines of merchandise
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For Premium Pricing,Engage The Emotions
1) Taking Care of Me - overstressed people want to pamper selves
2) Connect with Friends & Family - serious money to nurture family, romantic getaways, cosmetic surgery, etc.
3) Questing - consumers appreciate adventure
4) Individual Style - personal taste, differentiate self from others
iBizResources, “For Premium Pricing, engage the Emotions”, 2006,
http://www.familybusinessstrategies.com/articles4/041404f.html
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Psychological Pricing Techniques
Reference pricing – moderate pricing positioned next to a more expensive brand
Bundles pricing – packaging multiple products to be sold at a single price
Multiple-unit pricing – packaging together two or more identical products to be sold at a single price
Everyday low prices (EDLP) – pricing products low on a consistent basis
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More Psychological Pricing Techniques
Odd-even pricing – ending the price with a certain number to influences buyers’ perceptions
Customary pricing – on the basis of traditionPrestige pricing – setting prices at a high level to
convey prestige
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Consumers associate higher prices with higher quality
Reprinted with permission of Mannington Mills, Inc.
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Concept of Professional Pricing
Professional pricing carries the idea that professional have an ethical responsibility not to overcharge customers
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Types OfPromotional Pricing
Price Leader- firm prices a few products below the usual markup, near cost, or below cost
Special-Event- advertised sales or price-cutting linked to a holiday, a season, or an event
Comparison Discounting- price is set at a specific level and simultaneously compares it with a high price
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Special events are often seasonal and employ special-event pricing
Reprinted with permission of Montage, Inc.
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Determination of Price: Pricing Strategy
Yields a certain price- may need refining
Helps in setting final price
In absence of government price controls, remains flexible and convenient to adjust the marketing mix
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Adjusting PricesAdjusting PricesSlide13-5a
Table13.2
DiscountDiscount
Quantity discount
DefinitionDefinition ExampleExample
Reduction in the price per unit for purchasing a larger quantity
Price reduction offered during times of slow demand
Percentage reduction from list price offered to resellers
A catalog for Gardener’s Supply Company offers 1 cedar planter for $32.95 and 2 or more for $30.00 each.
A ski resort offers lower prices during the summer.
Seasonal discount
Trade discount
Cash discount
A publisher sells books to a chain of stores for a fraction of the retail price.
Incentive for buyers to pay quickly or a lower price for payment of cash
An organization receives an invoice that reads, “2/10 net 30.”
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Adjusting PricesAdjusting PricesSlide13-5b
Table13.2
DiscountDiscount
Trade-in allowance
DefinitionDefinition ExampleExample
Discount for providing a product along with monetary payment
Price reduction in exchange for the reseller performing certain promotional activities
A car dealer offers $1,000 off the list price in exchange for a buyer trading in her used car.
A frozen-pizza maker gives a price break to a supermarket that promises to feature the product in its advertising.
Promotional allowance
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Adjusting PricesAdjusting PricesSlide13-5c
Table13.2
ProductDiscountDiscount
Promotional discount
DefinitionDefinition ExampleExample
Short-term discount to stimulate sales or convince buyers to try a product
Setting prices near or below cost in order to attract customers to a store
A Jiffy Lube franchise passes out flyers offering $5 off on an oil change; the discount is good for 30 days.
A supermarket features bananas at 20 cents a pound and Pampers diapers at 50 percent off; the price is below cost, but the store expects buyers to purchase additional items selling at a profit.
Loss leader pricing
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Laws Limiting Pricing PracticesLaws Limiting Pricing PracticesSlide12-10
Table12.3
LawLaw
Price Fixing
Resale Price Maintenance
Deceptive Pricing Practices
Price discrimination that lessens or damages competition; discrimination in the use of promotional pricing
Dumping
Pricing PracticesPricing Practices
Laws of most countries
Sherman Antitrust Act
Consumer Goods Pricing Act
Federal Trade Commission Act
Robinson-Patman Act
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Pricing Product LinesPricing Product LinesSlide13-4
Price Lining Uniform Pricing
all books
$40.00
all CD’s
$15.95
all Cassettes
$9.95 $1.00
$1.00
$1.00
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