MKT 337 Lecture Notes - Lecture 14: Target Costing, Loss Leader, Price Fixing

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4 Jan 2017
Chapter 14: Arriving at the final price
Demand-Oriented Pricing Approach
Demand-Oriented Pricing Approach weigh factors underlying expected customer
tastes and preferences more heavily than such factors as cost, profit and
competition when selecting a price
Skimming Prices: setting the highest initial price that customer really desiring the
product is willing to pay. As the demand of these customers is satisfied, the firm
lowers the price to attract another, more price-sensitive segment. Skimming pricing
is an effective strategy when:
(1) Enough prospective customers are willing to buy the product immediately at
the high initial price to make these sales profitable
(2) The high initial price will not attract competitors
(3) Lowering price has only a minor effect on increasing he sales volume and
reducing the unit cost
(4) Customers interpret the high price as signifying high quality
Penetration pricing: setting a low initial price on a new product to appeal
immediately to the mass market. The conditions favoring penetration pricing are
the reverse of skimming.
(1) Many segments of the market are price sensitive
(2) A low initial price discourages competitions from entering a market
(3) Unit production and market costs fall dramatically as production volume
A firm using penetration pricing may
(1) Maintain the initial price for a time to gain profit lost from its low
introductory level
(2) Lower the price further, counting on the new volume to generate the
necessary profit
Prestige Pricing: involves setting a high price so the quality or status-conscious
consumers will be attracted to the product and buy it.
Price Lining: Often a firm that is selling not just a single product but a line of
products may price them at a number of different specific pricing points. This
assumes that the demand is elastic at each of these price points but inelastic
between these price points
Odd-Even Pricing: setting prices a few dollars or cents under an even number
Target Pricing: Manufacturers will sometimes estimate the price that the ultimate
consumer would be willing to pay for a product. They then work backward through
markups taken by retailers and wholesalers to determine what price they can
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charge wholesalers for the product. Manufacturer deliberately adjusting the
composition and features of a product to achieve the target price to consumers
Bundle Pricing: marketing of two or more products in a single package price. Based
on the idea that consumers value the package more than the individual item
Yield management pricing: charging of different prices to maximize revenue for a
set amount of capacity at any given time. Continually matches demand and supply to
customize the price for a service.
Cost- Orientation Pricing Approaches
Price setter stresses the cost side of the pricing problem, not the demand side. Price
is set by looking at the production and marketing costs and then adding enough to
cover direct expenses, overhead and profit
Standard Markup Pricing: adding a fixed percent to the cost of all items in a specific
product class. These markups must cover all expenses of the store.
Cost-Plus pricing: summing the total unit cost of providing a product or service and
adding a specific amount to the cost to arrive at a price. Most commonly used
method to set prices for business products
- Cost-plus percentage-of-cost pricing: a foxed percentage is added to the
total unit price
- Cost-plus fixed-fee pricing: a supplier is reimbursed for all costs,
regardless of what they run out to be, but is allowed only a fixed fee as
profit that is independent of the final cost of the product
Experience Curve Pricing: unit cost of many products and services declines by 10%
to 30% each time a firms experience at producing and selling doubles
Profit-Oriented Pricing Approach
A price setter may choose to balance both revenue and costs to set price using
profit-oriented approaches.
Target Profit Pricing: a firm may set an annual target of a specific dollar volume of
Target Return-on-Sales Pricing: helps set typical prices that will give them a price
that is a specified percentage.
Target return on sales = Total profit/ total revenue
= Total revenue total cost / Total revenue
= P x Q [FC+(UVC x Q)]/ Total revenue
Total Return-on-investment Pricing: public owned corporations and public utilities
set annual ROI targets such 20 percent. Target return on investment pricing is a
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