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Chapter 11 Notes

Price is the money or other considerations (including other products and services) exchanged for
the ownership or use of a product or service
Barter: exchanging products and service for other products and services rather than money
Special fees and surcharges: this practice is driven by consumers zeal for low prices combined
with the ease of making price comparison on the Internet
Buyers are more willing to pay extra fees than a higher list price, so sellers use add- on charges
as a way of having the consumer pay more without raising the list price
Price equation: final price = list price incentives + allowance + extra fees
Price is often used to indicate value when it is compared with the perceived benefits such as
quality, durability, and so on of a product or service
Value: the ratio of perceived benefits to price or : value = perceived benefits / price
This relationship shows that for a given price, as perceived benefits increase, value increases
Firms profit equation: profit = total revenue total cost
= (unit price x quantity sold) (fixed cost + variable cost)
Price affects the quantity sold
4 common approaches to find approximate price level are: demand oriented, cost oriented, profit
oriented, competition oriented
Demand oriented: weigh factors underlying expected customer tastes and preferences more
heavily than such factors as cost, profit, and competition when selecting a price level
- skimming pricing: setting the highest initial price that customers really desiring the
product are willing to pay
- Customers are not price sensitive because they weigh the new products price, quality,
and ability to satisfy their needs against the same characteristic of substitutes
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 the price has only a minor effect on increasing the sales volume and reducing
the unit costs
4 customers interpret the high price as a signal of high quality
Penetration pricing: setting a low initial price on a new product to appeal immediately to
the mass market

Conditions favoring penetration pricing

1 many segments of the market
2 low initial pricing discourages competitors from entering the market
3 unit production and marketing costs fall dramatically as production volumes increase
Prestige pricing: involves setting a high price so that quality- or status- conscious
consumers will be attracted to the product and buy it
Odd- Even pricing: involves setting prices a few dollars or cents under an even number
Target pricing: estimate the price that the ultimate consumer will pay for a product, then
work backward through markups taken by retailers and wholesalers to determine what
price they can charge wholesalers for the product
Target pricing results in the 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 purchased and enhanced
satisfaction from one item given the presence of another
Bundle pricing often provides a lower total cost to buyers and lower marketing costs to
Yield Management Pricing: charging of different prices to maximize revenue for a set
amount of capacity at any given time
Cost oriented pricing approaches: a 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 percentage to the cost of all items in a specific
product class
- 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
Product- Oriented Pricing Approaches: price setter may choose to balance both revenues
and costs to set price using profit oriented approaches
- Target profit pricing: firm sets an annual target of a specific dollar volume of profit
- Target return- on- sales pricing: set prices that will give firms a profit that is specified
percentage of the sales volume
- Target return on investment pricing: set prices to achieve a return on investment target
such as a percentage that is mandated by its board of directors or regulators
Competition- Oriented Pricing Approaches: price setter stresses what competitors or the
market is doing

Customary Pricing:
Above- , at-, or below- market pricing:
Loss leader pricing: retail stores deliberately sell a product below its customary price to
attract attention to it ; purpose is to attract customers in hopes they will buy other
products as well
A demand curve: a graph relating the quantity sold and the price which shows the
maximum number of units that will be sold at a given price
3 factors:
1 consumer tastes
2 price and availability of similar products
3 consumer income
Price elasticity of demand: the percentage change in quantity demanded relative to a
percentage change in price; it measures how sensitive consumer demand and the firms
revenues are to changes in the products price
A product with elastic demand is one in which a slight decrease in price results in a
relatively large increase in demand or units sold
A product with inelastic demand means that slight increases or decreases in price will not
significantly affect the demand or units sold for the product
Total revenue equation: TR = P x Q
Total profit = total revenue total cost
4 cost concepts: total cost, fixed cost, variable cost, unit variable cost
Total cost: the sum of their fixed costs
Variable costs: exceed the total revenue over an extended period of time
Break- even analysis: a technique that analyzes the relationship between total revenue
and total cost to determine profitability at various levels of output
Break even point: quantity at which total revenue and total costs are equal
BEP quantity equation: BEP quantity =
Fixed cost =
________________________ ____________
Unit price unit variable cost =
Pricing objectives: specify the role of price in an organizations marketing and strategic
-normally carried to lower levels in the organization
3 main objectives of profit
1 managing for long run profits

2 maximizing current profit

3 target return objective: occurs when a firm sets a profit goat
Pricing Constraints: factors that limit the range of prices a firm may set
4 Special pricing practices
1 price fixing: a conspiracy among firms to set prices for a product
*when two or more competitors collude to explicitly or implicitly set prices (horizontal price
fixing )
* controlling agreements between independent buyers and sellers whereby sellers are required to
not sell products below a minimum retail price (vertical price fixing)
2 price discrimination: practice of charging different prices to different buyer for goods of like
grade and quality
3 Deceptive pricing: price deals that mislead consumers
4 predatory pricing: practice of charging a low price for a product with the intent of driving
competitors out of business
Steps to setting a final price
1 select an approximate price level
2 set the list or quoted price
3 make special adjustments to the list or quoted price
Discounts: reductions from list price that a seller gives a buyer as a reward for some activity of
the buyer that is favorable to the seller
4 kinds of discounts:
1 quantity: encourage customers to buy larger quantities of a product
2 seasonal: encourage buyers to stock inventory earlier than their normal demand would require
3 trade (functional): reward wholesalers and retailers for marketing functions they will perform
in the future
4 cash: typically expressed as percentage off the list price
Allowances: reductions from list or quoted prices to buyers for performing some activity
Trade in allowances: a price reduction given when a used product is part of the payment on a
new product
Promotional allowances: sellers in the channel of distribution undertake certain advertising or
selling activities to promote a product