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Managing the Pricing Function

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Objectives

1. Understand the benefits of the marketing approach to pricing.

2. Present a useful model for settling a price.

3. Explain the importance of establishing pricing policies before individual prices are set.

4. Understand an apply skimming and penetration pricing strategies.

5. Describe how prices are quoted.

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A Pricing Decision Flow Chart

Managing the Pricing Function 14Figure 14.1

Consumer analysis

Legal and ethical analysis

Discounts

MarketingStrategy

PricingObjectives

PriceRange

InitialPrice

FinalPrice

Profit andMarketing

Mix Analysis

Economic analysis

Cost analysis

Competitive analysis

Polices

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The Role of Pricing Objectives in Contemporary Marketing

Managing the Pricing Function 14Figure 14.2

Profitability

4. Pricingpolicies andprocedures

Volume

Meeting competition

Prestige

1. Company objectives

2. Marketing objectives

3. Pricing objectives

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Price and Marketing Mix

Profit maximizationThe point where the addition to total revenue is just balanced by an increase in total cost.

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Target Return Objectives

• Either short-run or long-run goals, usually stated as a percentage of sales or investments.

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Sales maximization• The pricing philosophy analyzed by

economist William J. Beaumol. Beaumol believes that many firms attempt to

maximize sales within a profit constraint.

Market share objective• To control a specific portion of the

market for the firm’s product.

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Status Quo Objectives

• Objectives based on maintaining stable prices.

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Prestige Objectives

• Establishing relatively high prices in order to develop and maintain an image of quality and exclusiveness.

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Pricing Policy and Price Structure

Pricing PolicyA general guideline based on pricing objectives that is intended for use in specific pricing decisions.

Price StructureAn outline of the selling price and the various discounts offered to intermediaries.

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New Product Pricing Policies

Pricing Policy1. Skimming2. Penetration

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Skimming Pricing

• Choosing a high entry price; to sell first to consumers who are willing to pay the highest price, and then reduce the price.

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Penetration Pricing

• An entry price for a product that is lower than what is estimated to be the long-term price.

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Flexible Pricing

• A variable price policy.

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Pricing Practices

1. Price Lining2. Promotional Prices3. Psychological Pricing 4. Unit Pricing

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Price Lining and Promotional Price

Price LiningThe practice of marketing merchandise at a limited number of prices.

Promotional PriceA lower-than-normal price used as an ingredient in a firm’s selling strategy.

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Psychological Pricing and Unit PricingPsychological Pricing

The use of prices to suggest values of a product or attributes of a product/price offering.

Unit PricingStating prices in terms of some recognized unit of measurement (such as grams and litres) or a standard numerical count.

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Loss Leader

• Goods priced below cost to attract customers.

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Odd Pricing

• Prices are set ending in some amount just below the next rounded number.

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Price Limits

• Limits within which product quality perception varies directly with price.

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Price Quotations

List priceThe rate normal quoted to potential buyers.

Market price The amount that a consumer pays.

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Price Quotations

1.List price2.Discounts

a) Cashb) Tradec) Quantity

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3.Allowances

a) Trade-In

b) Promotional

4.Rebates

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Cash discountReduction in price that is given for prompt payment of a bill.

Trade discount Payment to channel members or buyers for performing some marketing function normally required of the manufacturer.

Quality discountPrice reduction granted for large purchases.

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Trade-in

• Deduction from an item’s price of an amount for the customer’s old item that is being replaced.

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Promotional Allowance

• Extra discount offered to retailers so that they will advertise the manufacturer along with the retailer.

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Rebate

• Refund by the seller of a portion of the purchase price.

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Geographic Considerations and Pricing

1. FOB Plant2. Freight Absorption3. Uniform Delivered Price4. Zone Pricing

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FOB PlantThe buyer must pay all the freight.

Freight AbsorptionThe seller permits the buyer to subtract transportation expenses from the bill.

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Uniform Delivered PriceThe same price (including transportation expenses) is quoted to all buyers.

Zone PricingThe market is divided into different zones and a price is established within each.

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Zone Pricing for a Winnipeg Firm

Managing the Pricing Function 14Figure 14.5

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