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Chapter 9 - Pricing
Price - money or other considerations exchanged for the ownership or use of a good or service
Barter - exchanging goods and services for other goods and services
Value = perceived benefits/Price
Value pricing - the practice of increasing a product's benefits while maintaining or decreasing
price
Firm's profit equation:
Profit = Total Revenue - Total Cost
= (Unit price x Quantity sold) - Total Cost
Pricing decisions affect both total revenue (sales) and total cost
General Pricing Approaches:
First, find a "approximate price level" to use as a reasonable starting point. 4 common
approaches to do this are demand-oriented, cost-oriented, profit-oriented, and
competition-oriented approaches
Demand-Oriented Approaches:
o Skimming Pricing - setting highest initial price that customers really wanting the
product are willing to pay
o Penetration Pricing - setting low initial price to appeal immediately to mass
market
o Prestige Pricing - setting a high price so quality- or status-conscious consumers
will buy it
o Odd-even Pricing - setting prices a few dollars or cents under an even number
o Target Pricing - manufacturers estimate the price the consumer would pay for
product and then work backward through mark-ups taken by retailers to determine
what price they can charge for product
o Bundle Pricing - marketing two or more products in one single "package" price
o Yield Management Pricing - charging of difference prices to maximize revenue
for a set amount of capacity at a given time (price varies based on time, day,
week, season to match demand and supply)
Cost-Oriented Approaches:
o Standard Markup Pricing - sell products at price that exceeds costs of producing,
sourcing, and marketing them. The difference between selling price and its cost is
markup (SP-Costs/SP)
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o Cost-Plus Pricing - summing total unit cost of providing a product/service and
adding a specific amount to the cost to arrive at a price
Profit-Oriented Approaches:
o Target Profit Pricing - when firm sets an annual target of a specific dollar amount
of profit. This method depends on accurate estimate of demand. For new or
unique products.
o Target Return-on-Sale Pricing - set prices that will give them a profit that is a
specified percentage of the sales volume
o Target Return-on-Investment Pricing - set prices to achieve a return-on-
investment (ROI) target
Competition-Oriented Approaches
o Customary Pricing - tradition, a standardized channel of distribution, or other
competitive factors dictate the price (vending machine have customary price of
$1)
o Above-, At-, or Below-Market Pricing - the "market-price" of product is what
customers are generally willing to pay for. (Rolex is above-market pricing)
o Loss-Leader Pricing - for special promotion, retail stores deliberately sell a
product below its regular price to attract attention
ESTIMATING DEMAND and REVENUE
Demand curve - graph relating quantity sold and price, which shows how many units will be
sold at a given price
Other key factors in estimating demand (Demand Factors):
o Consumer tastes (demographics, culture, technology)
o Price & availability of similar products (substitution)
o Consumer income (in general, as income increases so does demand)
If price changes, this causes a movement along the demand curve
If other factors change, this causes a shift of the demand curve
Price elasticity: how sensitive consumer demand is to price
Elastic demand: slight change in price causes large change in demand
Inelastic demand: large change in price causes slight change in demand
o Short-term phenomenon
Fundamentals of Estimating Revenue
Demand curves lead directly to total revenue
Total Revenue (TR) = Unit Price (P) X Quantity Sold (Q)
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