Pricing Study Guide
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An introductory marketing study guide from the University of Minnesota.
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Pricing - Study Guide
Price is the only marketing variable that generates money for a company. All the other variables (product, communication, distribution) cost organizations money. A product’s price is the easiest marketing variable to change and also the easiest to copy. Before pricing a product, an organization must determine its pricing objective(s). A company can choose from pricing objectives such as maximizing profits, maximizing sales, capturing market share, achieving a target return on investment (ROI) from a product, and maintaining the status quo in terms of the price of a product relative to competing products.
In addition to setting a pricing objective, a firm has to look at a number of factors before setting its prices. These factors include the offering’s costs, the customers whose needs it is designed to meet, the external environment—such as the competition, the economy, and government regulations—and other aspects of the marketing mix, such as the nature of the offering, the stage of its product life cycle, and its promotion and distribution. In international markets, firms must look at environmental factors and customers’ buying behavior in each market. For a company to be profitable, revenues must exceed total costs.
Both external and internal factors affect pricing decisions. Companies use many different pricing strategies and price adjustments. However, the price must generate enough revenues to cover costs in order for the product to be profitable. Cost-plus pricing, odd-even pricing, prestige pricing, price bundling, sealed bid pricing, going-rate pricing, and captive pricing are just a few of the strategies used. Organizations must also decide what their policies are when it comes to making price adjustments, or changing the listed prices of their products. Some companies use price adjustments as a short-term tactic to increase sales.
What is the difference between leader pricing and a loss leader?
Which pricing approaches do you feel work best long term?
When is price discrimination legal?
Which pricing strategies have you noticed when you shop?
What new products have you purchased in the last two years that were priced using either a penetration or a skimming approach?
In order to understand revenues and costs, get a two-liter bottle of soda, ten to twenty cups, and a bucket of ice. Fill each cup with ice and then fill it with soda. Assume each cup of soda sells for at least $1 and you paid $1 for the soda and $1 for the cups. How much profit can you make?
Go to a fast-food restaurant for lunch. Figure out how much the price of a bundled meal is versus buying the items separately. Then decide if you think many consumers add a soda or fries because they feel like they’re getting a deal.
Principles of Marketing by [Author removed at request of original publisher] is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.
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The University of Minnesota Libraries Publishing edition, 2015 is adapted from a work originally produced in 2010 by a publisher who has requested that it not receive attribution.