Pricing Concepts for Establishing Value
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| The five C's of pricing | Competition, Costs, Company Objectives, Customers, Channel Members.
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| Price | The overall sacrifice a consumer is willing to make to acquire a specific product or service.
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| Company Objectives and Pricing Strategy Implications | Profit-Oriented, Sales-Oriented, Competitor Oriented, Customer-Oriented.
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| Profit-Oriented | Institute a companywide policy that all products must provide for at least an 18% profit margin to reach a particular profit goal for the firm.
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| Sales-Oriented | Set prices very low to generate new sales and take sales away from competitors, even if profits suffer.
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| Competitor-Oriented | To discourage more competitors from entering the market, set prices very low.
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| Customer-Oriented | Target a market segment of consumers who highly value a particular product benefit and set prices relatively high (referred to as premium pricing)
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| Profit Orientation | Specifically by focusing on target profit pricing, maximizing profits, or target return pricing.
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| Target Profit Pricing | A pricing strategy implemented by firms when they have a particular profit goal as their overriding concern; uses price to simulate a certain level of sales at a certain profit per unit.
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| Maximizing Profits | A profit strategy that relies primarily on economic theory. If a firm can accurately specify a mathematical model that captures all the factors req to explain & predict sales & profits, it should be able to identify the price at which its profits maxed.
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| Premium Pricing | A competitor-based pricing method by which the firm deliberately prices set for competing products to capture those consumers who always shop for the best or for whom price doesn't matter.
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| Competitor Orientation | A company objective based on the premise that the firm should measure itself primarily against its competition.
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| Competitive Parity | A firm's strategy of setting prices that are similar to those of major competitors.
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| Status Quo Pricing | A competitor-oriented strategy in which a firm changes prices only to meet those of competition.
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| Customer Orientation | A company objective based on the premise that the firm should measure itself primarily according to whether it meets its customers' needs.
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| Demand Curve | Shows how many units of a product or service consumers will demand during a specific period at different prices.
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| Prestige Products or Services | Those that customers purchase for status rather than functionality.
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| Price Elasticity of Demand | Measures how change in a price affect the quantity of the product demanded; specifically, the ratio of the percentage change in quality demanded to the percentage change in price.
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| Elastic | Refers to a market for a product or service that is price sensitive; that is, relatively small changes in price will generate fairly large changes in the quantity demanded.
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| Inelastic | Refers to a market for a product or service that is price insensitive; that is, relatively small changes in price will not generate large changes in the quantity demanded.
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| Income Effect | Refers to the change in the quantity of a product demanded by consumers due to a change in their income.
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| Substitution Effect | Refers to consumers' ability to substitute other products for the focal brand, thus increasing the price elasticity of demand for the focal brand.
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| Cross-Price Elasticity | The percentage change in demand for product A that occurs in response to a percentage change in the price of product B; see complimentary products.
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| Complimentary Products | Products whose demand curves are positively related, such that they rise or fall together; a percentage increase in demand for one results in a percentage increase in demand for the other.
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| Substitute Products | Products for which changes in demand are negatively related; that is, a percentage increase in the quantity demanded for product A results in a % decrease in the quantity demanded for product B.
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| Variable Costs | Those costs, primarily labor and materials, that vary with production volume.
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| Fixed Costs | Those costs that remain essentially at the same level, regardless of any changes in the volume of production.
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| Total Cost | The sum of variable and fixed costs.
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| Break-Even Analysis | Technique used to examine the relationships among cost, price, revenue, and profit over different levels of production and sales to determine the break-even point.
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| Break-Even Point | The point at which the number of units sold generates just enough revenue to equal the total costs; at this point, profits are zero.
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| Contribution Per Unit | Equals the price less the variable cost per unit. Variable used to determine the break-even point in units.
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| Monopoly | One firm provides the product or service in a particular industry.
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| Oligopolistic Competition | Occurs when only a few firms dominate the market.
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| Price War | Occurs when two or more firms compete primarily by lowering their prices.
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| Predatory Pricing | A firm's practice of setting a very low price for one or more of its products with the intent to drive its competition out of business; illegal under both the Sherman Antitrust Act and FTC Act.
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| Monopolistic Competition | Occurs when there are many firms that sell closely related but not homogeneous products; these products may be viewed as substitutes but are not perfect substitutes.
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| Pure Competition | Occurs when different companies sell commodity products that consumers perceive as substitutable; price usually is set according to the laws of supply and demand.
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| Gray Market | Employs irregular but not necessary illegal methods; generally, it legally circumvents authorized channels of distribution to sell goods at prices lower than those intended by the manufacturer.
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