Chapter 11: Pricing Considerations, Approaches, Strategy

1. Reducing prices unnecessarily can lead to lost profits and damaging price
wars and signal that the price is more important than customer value.
2. Price is the only marketing mix element that produces revenue.
3. Pricing is the least understood marketing variable, yet is controllable in an
unregulated market.
4. The most common pricing mistakes include:
a. pricing that is too cost oriented
b. prices that are not revised to reflect market changes
c. pricing that does not take the rest of the marketing mix
into account
d. prices that are not varied enough for different product items and
market segments
5. Many companies want to set a price that will maximize current profits.
6. Some companies want a dominant market-share position, believing the
largest market share will eventually enjoy low costs and high long-run profit.
7. Price must be coordinated with design, distribution, and promotion decisions
to form a consistent and effective marketing program.
8. A company wants to charge a price that covers costs for producing,
distributing & promoting the product.
9. Fixed costs (aka overhead) are costs that do not vary with production or sales
level.
10.Variable costs vary with the total of units produced.
11.Total costs are the sum of the fixed and variable costs for any given level of
production.
12.While costs set the lower limits of prices, the market and demand set the
upper limit.
13.Before setting prices, a marketer must understand the relationship between
price & demand for a product.
14.Upselling, part of effective revenue management, involves training sales &
reservations employees to continuously offer a higher-priced product.

15.Buyer-oriented pricing means the marketer cannot design a marketing

program and then set the price.
16.Good pricing begins with analyzing consumer needs and price perceptions.
17.Buyers are less price-sensitive when the product is unique or high in quality,
prestige, or exclusiveness.
18.Consumers are less price-sensitive when substitute products are hard to find.
19.If demand is elastic rather than inelastic, sellers generally consider lowering
their prices.
20.Creating the perception that your offering is different from those competitors
avoids price competition.
21.Existence of alternatives of which buyers are unaware cannot affect their
purchase behavior.
22.Customers are more price-sensitive when the price of the product accounts
for a large share of the total cost of the end benefit.
23.Many purchases have nonmonetary costs.
24.The more someone spends on a product, the more sensitive he or she is to
the products price.
25.Consumers tend to equate price with quality, especially when they lack prior
product experience.
26.When reacting to environmental pressures created by the macroenvironment, a company must consider the impact its pricing policies will
have on its micro-environment.
27.Companies set prices by selecting a general pricing approach including one
or more of these sets of factors:
a. the cost-based approach (cost-plus pricing, break-even analysis, and
target profit pricing)
b. the value-based approach (perceived value pricing)
c. the competition-based approach (going rate)
28.The simplest pricing method is cost-plus pricing, adding a standard markup to
the cost of the product.
29.Value-based pricing uses the buyers perceptions of value, not the sellers
cost, as the key to pricing.

30.A strategy of going-rate pricing is the establishment of price based largely on

those of competitors, with less attention paid to costs or demand.
31.When elasticity is hard to measure, firms feel that the going price represents
the collective wisdom of the industry concerning the price that will yield a fair
return.
32.Prestige Pricing - hotels or restaurants seeking to position themselves as
luxurious and elegant enter the market with a high price to support this
position.
33.Market-Skimming Pricing - setting a high price when the market is priceinsensitive.
34.Market-Penetration Pricing - other companies set a low initial price to
penetrate the market quickly & deeply, attracting many buyers and winning a
large market share.
35.Product-Bundle Pricing - sellers combine several products and offer them at a
reduced price.
36.Discriminatory pricing refers to segmentation of the market & pricing
differences based on price elasticity characteristics of these segments.
37.Companies often adjust basic prices to allow for differences in customers,
products, and locations.
38.The concept behind revenue management is to manage revenue & inventory
effectively by pricing differences based on the elasticity of demand for
selected customer segments.
39.An effective revenue management system establishes fences to prohibit
customers from one segment receiving prices intended for another.
40.When companies use promotional pricing, they temporarily price their
products below list price.
41.Excess demand leads to price increases.