| Chapter 13: Pricing Management
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Work with these documents and activities to master chapter learning objectives.

Chapter 13: Pricing Management

  1. Understand the six major stages of the process used to establish prices.

    The six stages in the process of setting prices are (1) developing pricing objectives, (2) assessing the target market’s evaluation of price, (3) evaluating competitors’ prices, (4) choosing a basis for pricing, (5) selecting a pricing strategy, and (6) determining a specific price.

  2. Know the issues that are related to developing pricing objectives.

    Setting pricing objectives is critical because pricing objectives form a foundation on which the decisions of subsequent stages are based. Organizations may use numerous pricing objectives, including short- and long-term ones, and different ones for different products and market segments. Pricing objectives are overall goals that describe the role of price in a firm’s long-range plans. There are several major types of pricing objectives. The most fundamental pricing objective is the organization’s survival. Price usually can be easily adjusted to increase sales volume or combat competition to help the organization stay alive. Profit objectives, which are usually stated in terms of sales dollar volume or percentage change, are normally set at a satisfactory level rather than at a level designed for profit maximization. A sales growth objective focuses on increasing the profit base by increasing sales volume. Pricing for return on investment (ROI) has a specified profit as its objective. A pricing objective to maintain or increase market share implies that market position is linked to success. Other types of pricing objectives include cash flow, status quo, and product quality.

  3. Understand the importance of identifying the target market’s evaluation of price.

    Assessing the target market’s evaluation of price tells the marketer how much emphasis to place on price and may help to determine how far above the competition the firm can set its prices. Understanding how important a product is to customers relative to other products, as well as customers’ expectations of quality, helps marketers to correctly assess the target market’s evaluation of price.

  4. Describe how marketers analyze competitive prices.

    A marketer needs to be aware of the prices charged for competing brands. This allows the firm to keep its prices in line with competitors’ prices when nonprice competition is used. If a company uses price as a competitive tool, it can price its brand below competing brands.

  5. Be familiar with the bases used for setting prices.

    The three major dimensions on which prices can be based are cost, demand, and competition. When using cost-based pricing, the firm determines price by adding a dollar amount or percentage to the cost of the product. Two common cost-based pricing methods are cost-plus and markup pricing. Demand-based pricing is based on the level of demand for the product. To use this method, a marketer must be able to estimate the amounts of a product that buyers will demand at different prices. Demand-based pricing results in a high price when demand for a product is strong and a low price when demand is weak. In the case of competition-based pricing, costs and revenues are secondary to competitors’ prices.

  6. Explain the different types of pricing strategies.

    A pricing strategy is an approach or a course of action designed to achieve pricing and marketing objectives. The major categories of pricing strategies are differential pricing, new-product pricing, product-line pricing, psychological pricing, professional pricing, and promotional pricing. When marketers employ differential pricing, they charge different buyers different prices for the same quality and quantity of products. Negotiated pricing, secondary-market discounting, periodic discounting, and random discounting are forms of differential pricing. Two strategies used in new-product pricing are price skimming and penetration pricing. With price skimming, the organization charges the highest price that buyers who most desire the product will pay. A penetration price is a low price designed to penetrate a market and gain a significant market share quickly. Product-line pricing establishes and adjusts the prices of multiple products within a product line. This category of strategies includes captive pricing, premium pricing, bait pricing, and price lining. Psychological pricing attempts to influence customer’s perceptions of price to make a product’s price more attractive. Psychological pricing strategies include reference pricing, bundle pricing, multiple-unit pricing, everyday low prices, odd-even pricing, customary pricing, and prestige pricing. Professional pricing is used by people who have great skill or experience in a particular field, therefore allowing them to set the price. This concept carries the idea that professionals have an ethical responsibility not to overcharge customers. As an ingredient in the marketing mix, price is often coordinated with promotion. The two variables are sometimes so interrelated that the pricing policy is promotion-oriented. Promotional pricing includes price leaders, special-event pricing, and comparison discounting. Price leaders are products that are priced below the usual markup, near cost, or below cost. Special-event pricing involves advertised sales or price-cutting linked to a holiday, season, or event. Marketers who use a comparison discounting strategy to price a product at a specific level and compare it with a higher price.

  7. Understand how a final, specific price is determined.

    Once a price is determined by using one or more pricing strategies, it will need to be refined to a final price consistent with the pricing practices in a particular market or industry. Using pricing strategies helps in setting a final price. The way that pricing is used in the marketing mix affects the final price. Because pricing is flexible, it is a convenient way to adjust the marketing mix.



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