Chapter 20
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LO 20-1 Identify issues related to developing
pricing objectives
LO 20-2 Discuss the importance of identifying the
target market’s evaluation of price
LO 20-3 Explain how marketers analyze
competitors’ prices
LO 20-4 Describe the bases used for setting prices
LO 20-5 Explain the different types of pricing
strategies
LO 20-6 Describe the selection of a specific price
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LO 20-1
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O Step one of the price-setting process:
O Pricing Objectives
O Goals that describe what a firm wants to
achieve through pricing
O Should be consistent with organizational and
marketing objectives
O Can be short- or long-term and marketers can
employ multiple pricing objectives
LO 20-1
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LO 20-1
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otherwise on a password-protected website for classroom use.
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O The second step in the price-setting
process:
O Importance of price depends on:
O Type of product
O Type of target market
O Purchase situation
O Value combines a product’s price and
quality attributes
O Customers use value to differentiate between
competing brands
LO 20-2
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O The third step in the price-setting
process:
O Marketers should use competitors’
prices to help them establish their
own prices
O Competitors’ prices may be closely guarded
O Pricing above competition creates an
LO 20-3
exclusive image
O Pricing below competition can
increase market share
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otherwise on a password-protected website for classroom use.
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O The fourth step in the price-setting
process:
O The three major dimensions on which
prices can be based are:
O Cost
O Demand
O Competition
LO 20-4
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otherwise on a password-protected website for classroom use.
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O An organization usually considers
multiple dimensions
O Type of product
O Market structure of the industry
O Brand’s market share position relative to
competing brands
O Customer characteristics
LO 20-4
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otherwise on a password-protected website for classroom use.
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O Cost-Based Pricing
O Adding a dollar amount or percentage to the
cost of the product
O Cost-Plus Pricing
O Determine the seller’s cost and add a specified
dollar to it
O Is used when production costs are difficult to
predict
O Markup Pricing
O Adding a predetermined percentage of the cost
to the price of the product
LO 20-4
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O Markup can be stated as a percentage
of cost of making the product or a
percentage of selling price
Markup as
% of Cost
=
Markup as %
of Selling Price
LO 20-4
Markup 15
= 45
Cost
= 33.3%
Markup
15
=
=
Selling Price
60
= 25.0%
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O Customers pay a higher price when demand for
the product is strong and a lower price when
demand is weak
O Marketers must be able to calculate how much
customers will buy at different price points
LO 20-4
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otherwise on a password-protected website for classroom use.
 Determine whether each example is
based on cost-plus pricing, markup
pricing, demand-based pricing, or
competition-based pricing:
 Joe’s Sandwich company determines the
cost of making each sandwich and then
adds a certain dollar amount to set the
final price.
 To undercut its rivals, a new furniture
company prices its products below
competing brands.
 Airlines often price their tickets higher on
the weekend because more people are
purchasing tickets.
 Costco and Sam’s Club add 14 percent of
the cost to the cost of the product to
set the price.
LO 20-4
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O Market
O Degree of competition
O Competitor action/reaction
O General economic conditions
O Product
O Quality
O Range
O Nature-essential/luxury
O Substitutes
LO 20-4
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O Support
O Service at point of sale and after
O Advertising/promotion
O Distribution Methods
LO 20-4
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otherwise on a password-protected website for classroom use.
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O Pricing influenced primarily by
competitors’ prices
O Importance of this method increases
when:
O Competing products are homogeneous
O Organization is serving markets in which price
is a key consideration
O May necessitate frequent price
adjustments
LO 20-4
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otherwise on a password-protected website for classroom use.
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O The fifth step in the price-setting
process:
O A pricing strategy is an approach or
course of action designed to achieve
pricing and marketing objectives
LO 20-5
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otherwise on a password-protected website for classroom use.
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LO 20-5
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O Differential Pricing
O Charging different prices to different buyers for
the same quality and quantity of product
O Negotiated Pricing
O Establishing a final price through bargaining
between seller and customer
O Secondary-Market Pricing
O One price for primary target market and a
different price for another market
LO 20-5
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otherwise on a password-protected website for classroom use.
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O Periodic Discounting Pricing
O Temporary reduction of prices on a patterned
or systematic basis
O Random Discounting Pricing
O Temporary reduction of prices on an
unsystematic basis
LO 20-5
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O Setting the price for new products is
one of the most fundamental
decisions in the marketing mix
O Price Skimming
O Charging the highest possible price that buyers
who most desire the product will pay
O Penetration Pricing
O Setting the price below those of competing
brands to penetrate a market and gain a
significant market share quickly
LO 20-5
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otherwise on a password-protected website for classroom use.
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O Product-Line Pricing
O Establishing and adjusting prices of multiple
products within a product line
O The goal is to maximize profits for an entire
product line
O Captive Pricing
O Pricing the basic product in a product line low,
while pricing related items higher
LO 20-5
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otherwise on a password-protected website for classroom use.
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O Premium Pricing
O Pricing the highest-quality or most versatile
products higher than other models in the
product line
O Bait Pricing
O Pricing an item in a product line low with the
intention of selling a higher-priced item in the
line
O Price Lining
O Setting a limited number of prices for selected
groups or lines of merchandise
LO 20-5
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otherwise on a password-protected website for classroom use.
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LO 20-5
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 Read the following examples. Determine
the type of differential or new-product
pricing used as the pricing strategy.
 Every year Dillard’s offers a Fourth of July




sale on its products.
Coca-Cola quickly gained market share in
a new market by pricing products lower
than competitors.
At car dealerships it is common to haggle
over the final price of a car purchase.
A U.S. textbook publisher sells textbooks
in the United States at one price, but will
sell foreign editions at a lower price for
students in other countries.
Tiffany & Co. introduced a new emerald
necklace by charging the highest
possible price to reflect its prestige.
LO 20-5
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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O Psychological Pricing
O Pricing that attempts to influence a customer’s
perception of price to make a product’s price
more attractive
O Reference Pricing
O Pricing a product at a moderate level and
displaying it next to a more expensive model or
brand
LO 20-5
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O Bundle Pricing
O Packaging together two or more
complementary products and selling them at a
single price
LO 20-5
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O Multiple-Unit Pricing
O Packaging together two or more identical
products and selling them at a single price
O Everyday Low Prices (EDLP)
O Pricing products low on a consistent basis
O Odd-Even Pricing
O Ending the price with certain numbers to
influence buyers’ perceptions of the price or
product
LO 20-5
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O Customary Pricing
O Pricing certain goods on the basis of tradition
O Prestige Pricing
O Setting prices at an artificially high level to
convey prestige or a quality image
LO 20-5
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 Customers are so used to purchasing regular
 Read the following
examples. Determine the
type of psychological
pricing used as the
pricing strategy:




cheeseburgers for $1 at fast-food restaurants
that McDonald’s maintains this price even
when meat costs rise.
Walmart places its Great Value brand next to
a competing brand that costs more to
demonstrate its value.
Rolex sets prices at high levels to create an
image of status and exclusivity.
To get customers to purchase more, Carl’s Jr.
offers its hamburger combination meals at a
lower price than what they would be if the
items were bought individually
Target tries to compete against Walmart by
emphasizing the fact that it offers quality
products at low prices.
LO 20-5
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O Fees set by people with great skill or
experience in a particular field
O Professional prices do not relate to the time or
effort expended
O A standard fee
O Professionals have an ethical
responsibility not to overcharge
customers
LO 20-5
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O Price is often coordinated with
promotion
O Price Leader
O Products priced below the usual markup, near
cost, or below cost
O Management hopes sales of regularly priced
merchandise will offset the reduced revenues
from the price leaders
LO 20-5
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otherwise on a password-protected website for classroom use.
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O Special-Event Pricing
O Advertised sales or price-cutting is used to
increase sales volume and is linked to a holiday,
a season, or other event
O Comparison Discounting
O The pricing of a product at a specific level and
simultaneously comparing it to a higher price
LO 20-5
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O The final step in the price-setting
process:
O Pricing Strategy:
O Yields a certain price, which may need refining
O Helps in setting final price
O In absence of government controls, pricing
remains flexible and a convenient way to adjust
the marketing mix
LO 20-6
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otherwise on a password-protected website for classroom use.
 Menus at Panera Cares are like regular menus
 At Panera Cares
Community Cafes
customers are allowed to
pay whatever they think is
fair for a meal.
except they lack prices and instead have
“suggested funding levels.”
 Panera’s CEO wants to create a chain of
“shared responsibility” among the
customers.
 He believes this encourages customers who
can pay a little extra to cover meals for those
that cannot afford to pay.
 While some have abused the pay-what-youwant pricing strategy, the majority of
customers pay the suggested amount, and 20
percent pay more than the suggested
amount.
LO 20-6
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.