Money or other considerations exchanged for the ownership or use of a good or service. 

Barter: Exchanging goods or services for other goods or services rather than money. 

The amount paid is not always the same as the list, or quoted, price because of discounts, allowances, and extra fees. 

Consumers are generally willing to pay extra fees or surcharges rather than a higher price. 

Price is often used to indicate value when it is compared with other perceived benefits such as quality, durability, and so on of a product or service. 

Value: The ratio of perceived benefits to price. 

As perceived benefits increase, value increases. 

As perceived benefits decrease, value decreases.

Price influences consumers' perception of overall quality and ultimately its value to consumers.  

Reference value involves comparing the costs and benefits of substitute items. 

Price Equation: 

Final Price = List Price - (Incentives + Allowances) + Extra Fees 

Value Equation:

Value = Perceived Benefits/Price

Profit Equation: 

Profit = Total Revenue - Total Costs 

General Pricing Approaches: 

Demand-Oriented Pricing Approaches

Demand-oriented pricing approaches weigh factors underlying expected consumer tastes and preferences more heavily than such factors as cost, profit, and competition when selecting a price level. 

Skimming Pricing: 

Skimming Pricing means setting the highest price that customers really desiring the product are willing to pay. 

As the demand of these consumers is satisfied, the firm lowers the price to attract another, more price sensitive segment. 

Skimming is effective when: 

• enough prospective customers are willing to buy the product immediately at the high initial price to make the sales profitable
• the high initial price will not attract competitors
• lowering price has only a minor effect on increasing the sales volume and reducing the unit costs 
• customers interpret the high price as signifying high quality 

Penetration Pricing: 

Penetration pricing means setting a low initial price on a new product to appeal immediately to the mass market. 

Conditions favoring penetration pricing includes: 

• many segments of the market are price sensitive
• a low initial price discourages competitors from entering the market
• unit costs and marketing prices fall dramatically as production volumes increase

A firm using penetration pricing may: 

• maintain the initial price for a time to gain profit lost from its low introductory level
• lower the price further, counting on the new volume to generate the necessary profits 

Prestige Pricing: 

Prestige Pricing involves setting a high price so that quality- or status-conscious consumers will be attracted to the product and buy it. 

Odd-Even Pricing: 

Odd-even pricing involves setting prices a few dollars or cents under an even number. 

Target Pricing: 

Target pricing results in the manufacturer deliberately adjusting the composition and features of a product to achieve the target price to consumers. 

Bundle Pricing: 

Bundle pricing is the marketing of two or more products in a single package. 

Yield Management Pricing: 

Yield management pricing is the charging of different prices to maximize revenue for a set amount of capacity at any given time. 

General Pricing Approaches: 

Cost-Oriented Pricing Approah

With cost-oriented pricing approaches, the price setter stresses the cost side of the pricing problem, not the demand side. 

Standard Markup Pricing: 

Standard markup pricing entails adding a fixed percentage to the cost of all items in a specific product class. 

High volume products usually have smaller markups than do low volume products. 

Cost-Plus Pricing: 

Cost-plus pricing involves summing the total unit cost of providing a product or service and adding a specific amount to the cost to arrive at a price. 

This is most commonly used for business products. 

General Pricing Approaches: 

Profit-Oriented Pricing Approaches

With profit-oriented approaches, a price setter may choose to balance both revenues and costs to set prices (they may involve a target of specific dollar volume of profit or express target as a percent of revenue). 

Target Profit Pricing: 

Target Profit Pricing is when a firm sets an annual target of specific dollar volume of profit. 

This depends on accurate estimates of demand. 

Profit Equation: 

Profit = Total Revenue - Total Costs

Solving for price per unit: 

Price per unit = Profit + [(Cost per unit * units sold) + overhead cost] / units sold

Target Return-on-Sales Pricing: 

Target return-on-sales pricing is when a firm tries to set prices that will give them a profit that is a specific percentage of the sales volume. 

Target Return-on-Investment Pricing: 

Target return-on-investment pricing is when a firm tries to set prices to achieve a return on investment target such as a percentage that is mandated by its board of directors or regulators. 

General Pricing Approaches: 

Competition-Oriented Pricing Approaches

With competition-oriented pricing approaches, rather than emphasizing demand, cost, or profit factors, a price setter can stress what competitors or the market is doing. 

Customary Pricing:

Customary pricing is when tradition, a standardized channel of distribution, or other competitive factors dictate the price.  

Above-, At-, or Below-Marketing Pricing: 

The market price of a product is what customers are generally willing to pay, not necessarily the price the firm sets. 

Companies utilize a price premium here. 

Loss-Leader Pricing: 

Loss-leader pricing is when a firm desires not to increase sales but to attract customers in hopes they will buy other products as well

This is a graph relating quantity sold and price, which shows how many units will be sold at a given price (example- graphs on page 273). 

The lower the price, the higher the demand. 

As price falls, more people decide to buy and unit sales increase. 

Three key factors influencing demand:

1. Consumer tastes
2. Price and availability of similar products; substitute products
3. Consumer income

Movement along a demand curve: This is when demand increases, and other factors remain unchanged- consumer tastes, price, substitutes, and consumer income. 

Shift in the demand curve: This is a shift from left to right, which results from changes in consumer tastes, substitutes, or consumer income. 

This is the percentage change in the quantity demanded relative to a percentage change in price. 

This measures how sensitive consumer demand and the firm's revenue are to changes in the product's price. 

Elastic Demand: is a product which a slight decrease in price results in a relatively large increase in demand, or units sold (or a slight increase in price results in a relatively large decrease in demand)

Inelastic Demand: is a product which the slightest increases or decreases in price will not significantly affect the demand, or units sold (example- necessities). 

Price elasticity is determined by a number of factors including: 

• The more substitutes, the more price elastic
• Products and services considered to be non-discretionary has almost no substitutes, and is price inelastic
• Items that require a large cash outlay compared with a person's  disposable income are price elastic 

This is the total money received from the sale of a product. 

Total Revenue = Price * Quantity 

Total Profit = Total Revenue - Total Costs

Total Cost is the total expense incurred by a firm in producing and marketing a product. Total cost is the sum of fixed costs and variable costs. 

Fixed Cost is the sum of the expenses of the firm that are stable and do not change with the quantity of a product that is produced and sold. Examples include: building, executive salaries, and insurance. 

Variable Cost is the sum of the expenses of the firm that vary directly with the quantity of a product that is produced and sold. Examples include: direct materials and sales commissions. 

Total Cost = Fixed Costs + Variable Costs

Unit Variable Costs is expressed on a per unit basis. 

Unit Variable Cost = Variable Cost/ Quantity

This examines the relationship between total revenue and total cost to determine profitability at different levels of output.

Break Even Point: This is the quantity at which total revenue and total cost are equal.  

BEP = Fixed Cost/Unit Price - Unit Variable Cost

These are expectations that specify the role of price in an organization's marketing and strategic plans. 

Profit: 

Three different objectives relate to a firm's profit, which is often measured in terms of return on investment: 

1. Managing for long run profits, which give up immediate profits in exchange for achieving a higher market share
2. Maximizing current profits, which is common in many firms because the targets can be set and performance measured quickly 
3. Target Return, which occurs when a firm sets a profit goal 

These are factors that limit the range of price a firm may set. 

Examples of pricing constraints include: 

• Demand for the product class, product, and brand
• Newness of the product: stage in the product life cycle
• Cost of producing and marketing the product
• Competitor's prices
• Legal and Ethical Considerations
  • Price Fixing, which is illegal under the Sherman Act. 
    • Horizontal Price Fixing
    • Vertical Price Fixing 
    • Resale Price Maintenance 
  • Price Discrimination, which is charging different prices to different consumers 
  • Deceptive Pricing, which are price deals which mislead consumers 
    • Bait and Switch 
  • Predatory Pricing, which is charging a very low price with the intent of driving out competitors 

The final price must be enough to cover the cost of providing the product or service and meet the objectives of the company. 

The final price must also be low enough that the consumers are willing to pay it. 

There are three steps in setting a final price: 

1. Select an approximate price level 
2. Set the list or quoted price
   1. One Price Policy, which is setting one price for all buyers of a product or service. 
   2. Flexible Price Policy, which is setting different prices for products and services depending on individual buyers and purchase situation in the light of demand, cost, and competitive factors.
3. Make Special Adjustments to the List or Quoted Price. There are three special adjustments that can be made: 
   1. Discounts, which are reductions from the list price that a seller gives a buyer as a reward for some activity of the buyer that is favorable to the seller. There are four types of discounts:
      1. Quantity Discounts, which encourage consumers to buy larger quantities of a product 
      2. Seasonal Discounts, which encourage consumers to stock inventory earlier than normal 
      3. Trade (functional) discounts, which reward wholesalers and retailers for marketing functions they will perform in the future
      4. Cash Discount, which encourages retailers to pay their bills quickly
   2. Allowances, which are reductions form list or quoted prices to buyers for performing some activity. There are two types of allowances: 
      1. Trade-in Allowances, which is a price reduction given when a used product is part of the payment on a new product. 
      2. Promotional Allowances, which sellers in the channel of distribution can qualify for promotional allowances for undertaking certain advertising or selling activities to promote a product. 
      3. Some companies used Everyday low pricing, which is the practice of replacing promotional allowances with lower manufacturer list prices. 
   3. Geographical Adjustments, which are made by manufacturers or even wholesalers to list or quoted prices to reflect the cost of transportation of the products from seller to buyer. There are two types: 
      1. FOB origin pricing, which means "free on board" some vehicle at some location, which means the seller pays the cost of loading the product onto the vehicle that is used. 
      2. Uniform delivered pricing, which is when the price the seller quotes includes all the transportation costs.