ARRIVING AT THE FINAL PRICE

• Enough customers will buy immediately to make these sales profitable.
• Initial price will not attract competitors.
• Lowering price has only a minor effect on sales & unit costs.
• Customers interpret the price as meaning quality
• Demand is relatively inelastic
• Product is legally protected
• Product represents a technological breakthrough
• Production is limited

1. Charge a high introductory price
2. Often coupled with heavy promotion.
3. Lower the price over the life cycle
4. Enables quick recovery of development costs
5. Can lower the price if perceived as too high by customers.

• Market segments are price sensitive.
• Low price discourages competitors
• Production & marketing costs fall dramatically as volumes increase.
• Relatively low initial price
• To reach mass market in early stages of product life cycle.
• Designed to capture a large market share
• Resulting in lower production costs.
• Can block entry into the market by competitors
• They cannot gain a large enough share of the market to be cost-effective.

• Used for a line of products
• Price at a number of price points
• Assumes that
  • demand is elastic at each of these price points but
  • inelastic between these price points.

• Setting prices a few dollars or cents under an even number.
• In theory, demand increases if the price drops from $500 to $499.99 or $495.
• Research suggests that overuse of odd-ending prices tends to mute its effect on demand.

• Estimate the price that the ultimate consumer would be willing to pay
• Work backward through markups taken in channels
• Determine price to charge wholesalers
• Adjusting the composition and features of a product to achieve the target price

• Marketing of two or more products in a single "package" price.
• Assumes consumers value the package more than the individual items.
• Often provides a lower total cost to buyers and lower marketing costs to sellers.

• Charge different prices
  • to maximize revenue
  • for a set amount of capacity
  • at any given time.

• Cost-plus percentage-of-cost pricing,
  • a fixed percentage is added to the total unit cost. •
• Cost-plus fixed-fee pricing
  • Supplier is reimbursed for all costs plus
  • but is allowed only a fixed fee as profit
  • Regardless of the final cost of the project.
• Most commonly used method to set prices for business products.
• Finding favor among business-to-business marketers in the service sector, such as law firms and advertising agencies.

• Based on the learning effect
  • The unit cost of many products and services declines by 10% to 30% each time a firm's experience at producing and selling them doubles.
  • Prices often follow costs with experience curve pricing
  • Rapid decline in price is possible.

• Used by supermarkets
• Prices give a profit that is a percentage of sales volume.

• Set prices to achieve an annual return-on-investment (ROI) target.

• Price Dictated by
  • Tradition
  • Standardized channel of distribution
  • Competitive factors
• Significant departure from this price may result in a loss of sales

• Rolex emphasizes above-market pricing
• Mass-merchandise chains (Sears, JCPenney) use at-market pricing.
  • They often establish the going market price in the minds of competitors.
  • They provide a reference price for competitors that use above- and below-market pricing.
  • Below-market pricing.
    • Manufacturers of generic products
    • Retailers private brands

• Purpose is not to increase sales of the leader
• Attract customers in hopes they will buy other products as well

• Setting of prices for all items in a product line.
• Cover the total cost and produce a profit for the complete product line
• Not necessarily for each item.

• The lowest priced product and price
  • the traffic builder
  • To capture the hesitant or first-time buyer.
• The highest-priced product and price
  • Positioned as the premium item in quality and features.
• Price differentials for other products in the line.
  • Should make sense to customers
  • Should reflect differences in perceived value of the products
  • Behavioral research suggests that differentials should grow as one moves up the product line.

• Price should satisfy the perceptions or expectations of ultimate consumers
• Retailers have found that they should not price their store brands 20 to 25 percent below manufacturers’ brands because consumers are likely to view the lower price as signaling lower quality and don’t buy
• Manufacturers and wholesalers must choose prices that result in profit for resellers in the channel.

• Anticipate potential price responses from competitors
• Avoid cutthroat price wars .

• Firm has a cost or technological advantage over its competitors.
• Primary demand for a product class will grow if prices are lowered.
• The price cut is confined to specific products or customers (as with airline tickets) and not across the board.

• A continuing, concise trade-off of incremental costs against incremental revenue
• When price is changed or new programs are planned
• Effect on the quantity sold must be considered.

• In over half the states
• Put a lower limit on wholesale & retail prices.
• Selling below cost in these states is illegal.
• Intermediaries usually required to take a minimum markup on
  • Merchandise cost
  • Transportation cost.
• Can limit the use of loss-leader pricing.

• Agreement between two or more firms on the price they will charge for a good or service.
• Has become easier with the internet
• Violation of
  • Federal Trade Commission Act
  • Sherman Act.

• Two or more competitors explicitly or implicitly set prices.

• Controlling agreements between independent buyers and sellers (a manufacturer and a retailer)
• whereby sellers are required not to sell products below a minimum retail
• is illegal per se under the Consumer Goods Pricing Act (1975).

• Circumstances surrounding a practice must be considered before making a judgment about its legality.
• The rule of reason perspective is the direct opposite of the per se rule, which holds that a practice is illegal in and of itself 

• No matter how reasonable or beneficial the results may be.

• not illegal per se.
• Only when manufacturers enforce coercion.

• Charging different prices to different customers for the same product
• Prohibited by the 1936 Robinson-Patman Act.
• Possible defenses for price discrimination:
  • Price differential is justified by
    • different manufacturing costs
    • quantity discount savings
  • Good faith to meet changing market conditions
  • To meet the prices of competition

• Charging a very low price for a product with the intent of driving competitors out of business or out of a market
• When competitors go out, prices go up.

• Illegal under
  • Sherman Act
  • Federal Trade Commission Act.
• Proving the use of this practice is difficult and expensive.

• In general, geographical pricing practices have been immune from illegal and regulatory restrictions
• Except when a conspiracy to lessen competition exists under the Sherman Act or price discrimination exists under the Robinson-Patman Act.