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Chapter 9

BUS 343 Chapter Notes - Chapter 9: Yield Management, Target Costing, Customer Satisfaction

Business Administration
Course Code
BUS 343
Jason Ho

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Chapter 9: Pricing Strategy
Yes, But what does it cost
Key pricing strategy decisions
Price objective Pricing Policy/Strategies Price Points & Tactics Implementation:
Terms & Conditions Legal Considerations
Monetary and Non-Monetary Prices
Price the value that customers give up, or exchange to obtain a desired product
Marketing is the process that creates exchanges of things of value
Bartering the practice of exchanging a good or service for another good or service of
like value
Consumers take into account other economic costs such as operating costs, switching
costs, and opportunity costs
oOperating costs costs involved in using a product
oSwitching costs costs involved in moving from one brand to another
oOpportunity cost the value of something that is given up to obtain something
Personal investment consumers make in buying and using product is also a cost
Consumers also experiences psychological costs such as stress, hassle, cognitive,
The Importance of Pricing Decisions
Pricing is probably the least understood and least appreciated element of the marketing
Net value received by the customer in an exchange (benefits minus costs) versus the net
value (profit) received by the firm
Good pricing decisions are critical to a firms success
Purchasing agents for firms often put a high priority on getting the best price
oSecond to quality
Developing Pricing Objectives
Pricing objectives must support the broader objectives of the firm
Profit Objectives
Profit objectives pricing products with a focus on a target level of profit growth or a
desired net profit margin
Three main profit objectives
oMaximizing profits
oAchieving a target level of profit growth
oAchieving a desired net profit margin
Fad products can expect a rather short market life
oCharge high price to recover cost and make profit while the product is still a fad
Sales or Market Share Objectives

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Sales or market share objective pricing products to maximize or to attain a desired
sales or market share
If obviously competitive advantage, matching price with other firms might already be
Competitive Effect Objectives
Competitive effect objective pricing that is intended to have an effect on the
marketing efforts of the competition
Some firms a firm deliberately seeks to pre-empt or reduce the effectiveness of one or
more competitors
Price stability is another competitive effect objective
Customer Satisfaction Objectives
Customer satisfaction (and retention) pricing that is intended to maximize customer
satisfaction and retention
Firms that believe focusing on short term profits will lose customer long term
Image Enhancement (Positioning) Objectives
Image enhancement (or positioning) objectives pricing intended to establish a
desired image or positioning to prospective customers
Price is often an important means to communicating not only quality but also image to
prospective customers
High price can communicate high quality and wealthy product
Low price can communicate a different image such as good qua.ity product that is
reasonably priced
Flexibility of Price Objectives
Prices objectives need to be tailored to different geographic areas and time periods
Marketing conditions can change during the year
Price objectives are only one part of price planning, before any prices can e set,
marketers must understand the alternative pricing strategies available to achieve those
Pricing Strategies Policies
Pricing today has more of the continuous decisions-making character of a chess game
oOrganization must think two or three moves ahead and no pricing decisions is set
in stone
Price reductions can discourage new competitors or at least sabotage competitors
product introductions
Marketers whose responsibility it is to develop pricing strategies will consider a number
of alternative strategies and try to anticipate the outcomes
Pricing Strategies to Achieve Profit Objectives
Three main sets of strategies are based on cost, demand, and experience
Cost-Based Pricing Strategies
Cost based strategies are typically associated with a target profit or return objectives
Simple to calculate and are relatively safe

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Ensure that price will cover the costs the company incurs in producing and marketing the
Do not consider factors such as nature of the target market, demand, competition, the
product life cycle, and the products image
But sometimes it is hard to allocate cost
Cost-plus Pricing
Cost plus pricing a method of setting prices in which the seller totals all the until costs
for the product and then adds the desired profit per unit
Users need only estimate the unit cost and add the mark up
Marketers usually calculate either a mark-up on cost or a mark-up on selling price
Calculate the price by adding a predetermined percentage to the cost
Price-Floor Pricing
Price floor pricing a method for calculating price in which, o maintain full plan
operating capacity, a portion of a firms output maybe sold at a price that covers only
marginal costs of product
oSometimes used when the state of the economy or other temporary market
conditions make it impossible or a firm to sell enough units
Fixed costs costs of production that do not change with the number of units produced
Variable costs the costs of production (raw and processed materials, parts, and
labour) that are tied to, and vary depending on, the number of units produced
Selling something at a lower price may cannibalize full price sales and if the lower price
is offered to some retailers and not others, it might anger those not included and
undermine customer loyalty
Demand-Based Pricing
Demand-based pricing a price setting method based on estimates of demand at
different prices
To use pricing strategies based on demand, firms must research demand
Demand curve a plot of the quantity of a product hat customers will buy in a market
during a period of time at various prices if all other factors remain the same
Law of demand if prices decrease, customers will buy more
For prestige products price increase customer will buy more
Strength of demand based pricing strategies is that their use assures a firm that it will be
able to sell what it products at the determined price
Major disadvantage is the difficulty than on the sellers costs
Four specific demand-based pricing strategies are:
oTarget cost pricing, yield management pricing, variable (custom) pricing and
skimming pricing
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