Page 385 - Foundations of Marketing

352 Part 4 | Product and Price Decisions

price causes an opposite change in total revenue. Inelastic when demand for a product is strong and a low price when
demand results in a parallel change in total revenue when a demand is weak. In the case of competition-based pricing,
product’s price is changed. costs and revenues are secondary to competitors’ prices.
4. Become familiar with demand, cost, and profit 7. Explain the different types of pricing
relationships. strategies.
Analysis of demand, cost, and profit relationships can be A pricing strategy is an approach or a course of action
accomplished through marginal analysis or break-even analy- designed to achieve pricing and marketing objectives. Pricing
sis. Marginal analysis examines what happens to a firm’s costs strategies help marketers solve the practical problems of
and revenues when production (or sales volume) is changed by establishing prices. The most common pricing strategies are
one unit. Marginal analysis combines the demand curve with differential pricing, new-product pricing, product-line pric-
the firm’s costs to determine the price that will yield a maxi- ing, psychological pricing, and promotional pricing.
mum profit. Fixed costs are those that do not vary with changes When marketers employ differential pricing, they charge
in the number of units produced or sold. Average fixed cost is different buyers different prices for the same quality and quan-
the fixed cost per unit produced. Variable costs vary directly tity of products. For example, with negotiated pricing, the
with changes in the number of units produced or sold. Average final price is established through bargaining between seller
variable cost is the variable cost per unit produced. Total cost and customer. Secondary-market pricing involves setting one
is the sum of average fixed cost and average variable cost price for the primary target market and a different price for
times the quantity produced. The optimal price is the point at another market. Often the price charged in the secondary mar-
which marginal cost (the cost associated with producing one ket is lower than in the primary market. Marketers employ
more unit of the product) equals marginal revenue (the change periodic discounting when they temporarily lower their prices
in total revenue that occurs when one additional unit of on a patterned or systematic basis. The reason for the reduc-
the product is sold). Marginal analysis is only a model—which tion may be a seasonal change, a model-year change, or a holi-
means it can provide guidance but offers little help in pricing day. Random discounting occurs on an unsystematic basis.
new products before costs and revenues are established. Two strategies used in new-product pricing are price
Break-even analysis, determining the number of units that skimming and penetration pricing. With price skimming, the
must be sold to break even, is important in setting price. The organization charges the highest price that buyers who most
point at which the costs of production equal the revenue from desire the product will pay. A penetration price is a low price
selling the product is the break-even point. To use break-even designed to penetrate a market and gain a significant market
analysis effectively, a marketer should determine the break- share quickly.
even point for each of several alternative prices. This makes Product-line pricing establishes and adjusts the prices of
it possible to compare the effects on total revenue, total costs, multiple products within a product line. This strategy includes
and the break-even point for each price under consideration. captive pricing, in which the marketer prices the basic product
However, this approach assumes the quantity demanded is basi- in a product line low and prices related items higher. With
cally fixed and the major task is to set prices to recover costs. premium pricing, prices on higher-quality or more versatile
products are set higher than those on other models in the prod-
5. Examine how marketers analyze competitors’ uct line. Price lining is when the organization sets a limited
prices. number of prices for selected groups or lines of merchandise.
A marketer needs to be aware of the prices charged for com- Psychological pricing attempts to influence customers’
peting brands. This allows the firm to keep its prices in line perceptions of price to make a product’s price more attrac-
with competitors’ when non-price competition is used. If tive. With reference pricing, marketers price a product at a
a company uses price as a competitive tool, it can price its moderate level and position it next to a more expensive model
brand below competing brands. or brand. Bundle pricing is packaging together two or more
complementary products and selling them at a single price.
6. Describe the bases used for setting prices. With multiple-unit pricing, two or more identical products

The three major dimensions on which prices can be based are packaged together and sold at a single price. To reduce or
are cost, demand, and competition. When using cost-based eliminate use of frequent short-term price reductions, some
pricing, the firm determines price by adding a dollar amount organizations employ everyday low pricing (EDLP), setting
or percentage to the cost of the product. Two common cost- a low price for products on a consistent basis. When employ-
based pricing methods are cost-plus and markup pricing. ing odd-even pricing, marketers try to influence buyers’ per-
Demand-based pricing is based on the level of demand for ceptions of the price or the product by ending the price with
the product. To use this method, a marketer must be able to certain numbers. Customary pricing is based on traditional
estimate the amounts of a product buyers will demand at dif- prices. With prestige pricing, prices are set at an artificially
ferent prices. Demand-based pricing results in a high price high level to convey prestige or a quality image.

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