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Chapter 16 Version 3e 1©2003 South-Western
chapterPricing ConceptsPricing Concepts
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Prepared byPrepared byDeborah BakerDeborah Baker
Texas Christian UniversityTexas Christian University
Chapter 16 Version 3e 2©2003 South-Western
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Learning ObjectivesLearning Objectives
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1.1. Discuss the importance of pricing decisions Discuss the importance of pricing decisions to the economy and to the individual firm.to the economy and to the individual firm.
2. List and explain a variety of pricing 2. List and explain a variety of pricing objectives.objectives.
3. Explain the role of demand in price 3. Explain the role of demand in price determination.determination.
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Learning Objectives (continued)Learning Objectives (continued)
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4. Understand the concept of yield 4. Understand the concept of yield management systems.management systems.
5. Describe cost-oriented pricing strategies.5. Describe cost-oriented pricing strategies.
6. Demonstrate how the product life cycle, 6. Demonstrate how the product life cycle, competition, distribution and promotion competition, distribution and promotion strategies, customer demands, the Internet strategies, customer demands, the Internet and extranets, and perceptions of quality and extranets, and perceptions of quality can affect price.can affect price.
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Learning ObjectivesLearning Objectives
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7.7. Describe the procedure for settingDescribe the procedure for settingthe right price.the right price.
8. Identify the legal and ethical constraints 8. Identify the legal and ethical constraints on pricing decisions.on pricing decisions.
9. Explain how discounts, geographic pricing, 9. Explain how discounts, geographic pricing, and other special pricing tactics can be and other special pricing tactics can be used to fine-tune the base price.used to fine-tune the base price.
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Learning Objective Learning Objective 11
Discuss the importance of Discuss the importance of pricing decisions to the economy pricing decisions to the economy
and to the individual firm.and to the individual firm.
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The Importance of PriceThe Importance of Price
To the consumer...To the consumer...Price is the cost Price is the cost
of somethingof something
To the consumer...To the consumer...Price is the cost Price is the cost
of somethingof something
In the broadest sense, price allocates In the broadest sense, price allocates resources in a free-market economyresources in a free-market economy
What is Price?What is Price?What is Price?What is Price?To the seller...To the seller...
Price is revenuePrice is revenueand profit sourceand profit source
To the seller...To the seller...Price is revenuePrice is revenueand profit sourceand profit source
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What is Price?What is Price?11
Price is that which is given
up in an exchange to
acquire a good or service.
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The Importance of PriceThe Importance of Priceto Marketing Managersto Marketing Managers
RevenueRevenue The price charged to customers
multiplied by the number of units sold.
The price charged to customers multiplied by the
number of units sold.
ProfitProfit Revenue minus expensesRevenue minus expenses
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The Importance of PriceThe Importance of Price
Revenue = Unit Price Number of units sold
Revenue pays for every activity. What’s left over is Profit.
Marketers must select a price Marketers must select a price that is not too highthat is not too high
or not too low, or not too low, a price that equals a price that equals
the perceived value to target consumersthe perceived value to target consumers
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Trends Influencing Price SettingTrends Influencing Price Setting
Trends Trends in thein the
MarketMarket
Trends Trends in thein the
MarketMarket
High rate of new product introduction
High rate of new product introduction
Increased availability ofbargain-priced dealer and
generic brands
Increased availability ofbargain-priced dealer and
generic brands
Price cutting as a strategy tomaintain or regain
market share
Price cutting as a strategy tomaintain or regain
market share
More efficient and betterinformed buyers
More efficient and betterinformed buyers
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Learning Objective Learning Objective 22
List and explain a variety List and explain a variety of pricing objectives.of pricing objectives.
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Pricing ObjectivesPricing Objectives
Profit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing Objectives
Sales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing Objectives
Status Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing Objectives
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Profit-Oriented Pricing ObjectivesProfit-Oriented Pricing Objectives
Profit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing Objectives
ProfitMaximization
ProfitMaximization
SatisfactoryProfits
SatisfactoryProfits
Target Return on
Investment
Target Return on
Investment
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Profit MaximizationProfit Maximization22
Setting prices so that
total revenue is as large
as possible relative
to total costs.
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Return on InvestmentReturn on Investment
Net profit after taxes
divided by total assets.
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ROI = ROI = Net Profit after taxesNet Profit after taxes Total assetsTotal assets
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Sales-Oriented Pricing ObjectivesSales-Oriented Pricing Objectives
MarketShare
MarketShare
SalesMaximization
SalesMaximization
Sales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing Objectives
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Market ShareMarket Share
A company’s product sales
as a percentage of total
sales for that industry.
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Sales MaximizationSales Maximization22
Short-term objective to maximize sales
Ignores profits, competition, and the marketing environment
May be used to sell off excess inventory
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Status Quo Pricing ObjectivesStatus Quo Pricing Objectives
Maintainexistingprices
Maintainexistingprices
Meetcompetition’s
prices
Meetcompetition’s
prices
Status Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing Objectives
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Learning Objective Learning Objective
Explain the role of demand Explain the role of demand in price determination.in price determination.
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Demand and SupplyDemand and Supply
DemandDemand The quantity of a product that
will be sold in the market at various prices for a specified period.
The quantity of a product that will be sold in the market at various
prices for a specified period.
SupplySupply
The quantity of a productthat will be offered to the marketby a supplier at various prices
for a specific period.
The quantity of a productthat will be offered to the marketby a supplier at various prices
for a specific period.
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Elasticity of DemandElasticity of Demand
Consumers’ responsiveness or
sensitivity to changes
in price.
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Elasticity of DemandElasticity of Demand
Elastic Elastic Demand Demand Elastic Elastic
Demand Demand
Consumers buy more or lessof a product when the price changes
InelasticInelasticDemandDemandInelasticInelasticDemandDemand
An increase or decrease in price will not significantly affect demand
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Elasticity of DemandElasticity of Demand
Price Goes...Price Goes...Price Goes...Price Goes... Revenue Goes...Revenue Goes...Revenue Goes...Revenue Goes... Demand is...Demand is...
Down Up Elastic
Down Down Inelastic
Up Up Inelastic
Up Down Elastic
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Factors that Affect ElasticityFactors that Affect Elasticity
FactorsFactorsThat Affect That Affect Elasticity Elasticity
ofofDemandDemand
FactorsFactorsThat Affect That Affect Elasticity Elasticity
ofofDemandDemand
Availability of SubstitutesAvailability of Substitutes
Price relative toPurchasing Power
Price relative toPurchasing Power
Product DurabilityProduct Durability
Product’s Other UsesProduct’s Other Uses
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Learning Objective Learning Objective 44
Understand the concept of Understand the concept of yield management systems.yield management systems.
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Yield Management SystemsYield Management Systems
A technique for adjusting
prices that uses complex
mathematical software
to profitably fill
unused capacity.
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Yield Management SystemsYield Management Systems
Discounting early purchases
Discounting early purchases
YMSPrice
Adjustments
YMSPrice
AdjustmentsLimiting early sales at
discounted pricesLimiting early sales at
discounted prices
Overbooking capacityOverbooking capacity
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Learning Objective Learning Objective
Describe cost-oriented pricing strategies.Describe cost-oriented pricing strategies.
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The Cost Determinant of PriceThe Cost Determinant of Price
Deviate with changes in level of output
Deviate with changes in level of output
Types of CostsTypes of CostsTypes of CostsTypes of Costs
VariableVariableCostsCosts
VariableVariableCostsCosts Fixed CostsFixed CostsFixed CostsFixed Costs
Do not deviate as level of output changes
Do not deviate as level of output changes
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The Cost Determinant of PriceThe Cost Determinant of Price55
Markup pricingMarkup pricing
Methods used to set priceMethods used to set priceMethods used to set priceMethods used to set price
Break-even pricingBreak-even pricing
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Markup PricingMarkup Pricing
Markup Pricing
Markup Pricing
The cost of buying the product from the producer plus amounts for
profit and for expenses not otherwise accounted for.
The cost of buying the product from the producer plus amounts for
profit and for expenses not otherwise accounted for.
Example: If a pen costs $1.80 and sells for is $2.20, the markup is $.40, or 22% of
cost
Example: If a pen costs $1.80 and sells for is $2.20, the markup is $.40, or 22% of
cost
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Break-Even PricingBreak-Even Pricing55
QuantityQuantity
Pri
ceP
rice
2,0002,000
00 1,0001,000 2,0002,000 3,0003,000 4,0004,000 5,0005,000 6,0006,000
4,0004,000
Fixed costsFixed costs
LossLoss
ProfitProfitTotal RevenueTotal Revenue
Total CostsTotal CostsBreak-even pointBreak-even point
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Learning Objective Learning Objective 66
Demonstrate how the product life Demonstrate how the product life cycle, competition, distribution cycle, competition, distribution
and promotion strategies, and promotion strategies, customer demands, the Internet customer demands, the Internet
and extranets, and perceptions of and extranets, and perceptions of quality can affect price.quality can affect price.
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Other Determinants of PriceOther Determinants of Price66
Perceived QualityPerceived Quality
Promotion StrategyPromotion Strategy
Distribution StrategyDistribution Strategy
CompetitionCompetition
Stages of theProduct Life Cycle
Stages of theProduct Life Cycle
Other Factors Other Factors ThatThat
InfluenceInfluencePricePrice
Other Factors Other Factors ThatThat
InfluenceInfluencePricePrice
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Stages in the Product Life CycleStages in the Product Life CycleIntroductoryIntroductory
StageStageGrowthGrowthStageStage
DeclineDeclineStageStage
$$
HighHigh$$
StableStable$$
DecreaseDecrease
MaturityMaturityStageStage
$$DecreaseDecrease
StableStable
HighHigh
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Distribution StrategyDistribution Strategy
Offer a larger profit margin
Offer a larger profit margin
Convincing DistributorsConvincing Distributorsto Carry Productto Carry Product
Convincing DistributorsConvincing Distributorsto Carry Productto Carry Product
Give dealers a largetrade allowance
Give dealers a largetrade allowance
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The Impact of the InternetThe Impact of the Internet66
Allows price and product comparisons
Prices are coming down
Data collection allows sellers to tailor products and prices
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ExtranetExtranet66
A private electronic network
that links a company
with its suppliers
and customers.
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Prestige PricingPrestige Pricing66
Charging a high price to
help promote a high-quality
image.
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Indicators of QualityIndicators of Quality66
Brand NameBrand Name
PricePrice
AppearanceAppearance
Retailer Retailer ReputationReputation
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Learning Objective Learning Objective 77
Describe the procedure for Describe the procedure for setting the right price.setting the right price.
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Steps in Setting the Right PriceSteps in Setting the Right Price
Results lead to the right price
Fine tune with pricing tacticsFine tune with pricing tactics
Choose a price strategyChoose a price strategy
Estimate demand, costs, and profitsEstimate demand, costs, and profits
Establish pricing goalsEstablish pricing goals
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Pricing ObjectivesPricing Objectives
Profit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing Objectives
Sales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing Objectives
Status Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing Objectives
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Price StrategyPrice Strategy77
A basic, long-term pricing
framework, which
establishes the initial price
for a product and the
intended direction for
price movements over the
product life cycle.
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Choosing a Price StrategyChoosing a Price Strategy
Basic StrategiesBasic Strategiesforfor
Setting PricesSetting Prices
Basic StrategiesBasic Strategiesforfor
Setting PricesSetting Prices
Status Quo Pricing Status Quo Pricing
Price SkimmingPrice Skimming
Penetration PricingPenetration Pricing
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Price SkimmingPrice Skimming
SituationsSituationswhenwhenPrice Price
SkimmingSkimmingis is
SuccessfulSuccessful
SituationsSituationswhenwhenPrice Price
SkimmingSkimmingis is
SuccessfulSuccessful
Superior Product
Legal Protection of Product
Limited Production
Technological Breakthrough
Inelastic Demand
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Penetration PricingPenetration Pricing77
A pricing policy whereby
a firm charges a relatively
low price for a product
initially as a way to
reach the mass market.
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Penetration PricingPenetration Pricing
AdvantagesAdvantagesAdvantagesAdvantages
Discourages or blocks competition from market entry
DisadvantagesDisadvantagesDisadvantagesDisadvantages
Requires gear up for mass production
Selling large volumes at low prices
Strategy to gain market share may fail
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Status Quo PricingStatus Quo Pricing
AdvantagesAdvantagesAdvantagesAdvantages
Simplicity
Safest route to long-term survival for small firms
DisadvantagesDisadvantagesDisadvantagesDisadvantages
Strategy may ignore demand or cost
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Learning Objective Learning Objective 88
Identify the legal and ethical constraints Identify the legal and ethical constraints on pricing decisions.on pricing decisions.
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The Legality and Ethics ofThe Legality and Ethics ofPrice StrategyPrice Strategy
Issues Issues That LimitThat LimitPricing Pricing DecisionsDecisions
Issues Issues That LimitThat LimitPricing Pricing DecisionsDecisions
Unfair Trade PracticesUnfair Trade Practices
Price FixingPrice Fixing
Price DiscriminationPrice Discrimination
Predatory PricingPredatory Pricing
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Unfair Trade Practice ActsUnfair Trade Practice Acts
Laws that prohibit
wholesalers and retailers
from selling below cost.
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Price FixingPrice Fixing
An agreement between two
or more firms on the
price they will charge
for a product.
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Price DiscriminationPrice Discrimination88
The Robinson-Patman Act of 1936:
Prohibits any firm from selling to two or more different buyers at different prices if the result would lessen competition
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Robinson-Patman Act DefensesRobinson-Patman Act Defenses88
Seller Defenses Seller Defenses Seller Defenses Seller Defenses
CostCost MarketConditions
MarketConditions CompetitionCompetition
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Predatory PricingPredatory Pricing
The practice of charging a
very low price for a product
with the intent of driving
competitors out of business
or out of a market.
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Learning Objective Learning Objective
Explain how discounts, geographic Explain how discounts, geographic pricing, and other special pricing, and other special
pricing tactics can be used topricing tactics can be used to fine-tune the base price.fine-tune the base price.
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Tactics for Fine-Tuning Tactics for Fine-Tuning the Base Pricethe Base Price
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Fine-TuningFine-TuningPricingPricingTacticsTactics
Fine-TuningFine-TuningPricingPricingTacticsTactics
Special Pricing Tactics
Special Pricing Tactics
DiscountsDiscounts
Geographic PricingGeographic Pricing
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Tactics for Fine-Tuning Tactics for Fine-Tuning the Base Pricethe Base Price
CommonCommonTacticsTactics
for for Fine-TuningFine-Tuning
the Base Pricethe Base Price
CommonCommonTacticsTactics
for for Fine-TuningFine-Tuning
the Base Pricethe Base Price
Quantity DiscountsQuantity Discounts
Cash DiscountsCash Discounts
Functional DiscountsFunctional Discounts
Seasonal DiscountsSeasonal Discounts
Promotional AllowancesPromotional Allowances
RebatesRebates
Value-Based PricingValue-Based Pricing
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Value-Based PricingValue-Based Pricing
The price is set at a level
that seems to the customer
to be a good price
compared to the prices of
other options.
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Trade LoadingTrade Loading
The practice of temporarily
lowering the price to
induce wholesalers and
retailers to buy more
goods than can be sold
in a reasonable time.
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Geographic PricingGeographic Pricing
Basing-Point Pricing
Basing-Point Pricing
Freight AbsorptionPricing
Freight AbsorptionPricing
Zone PricingZone Pricing
Uniform Delivered Pricing
Uniform Delivered Pricing
FOB PricingFOB Pricing
Common Common Methods ofMethods ofGeographicGeographic
PricingPricing
Common Common Methods ofMethods ofGeographicGeographic
PricingPricing
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Geographic PricingGeographic Pricing
FOB OriginPricing
FOB OriginPricing
The buyer absorbs the freight costs from the shipping point
(“free on board”).
The buyer absorbs the freight costs from the shipping point
(“free on board”).
UniformDelivered
Pricing
UniformDelivered
Pricing
The seller pays the freight charges and bills the purchaser an
identical flat freight charge.
The seller pays the freight charges and bills the purchaser an
identical flat freight charge.
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Geographic PricingGeographic Pricing99
Zone PricingZone PricingThe U.S. is divided into zones and
a flat freight rate is charged to customers in a given zone.
The U.S. is divided into zones and a flat freight rate is charged to
customers in a given zone.
FreightAbsorption
Pricing
FreightAbsorption
Pricing
The seller pays for all or part of the freight charges and does not
pass them on to the buyer.
The seller pays for all or part of the freight charges and does not
pass them on to the buyer.
Basing-PointPricing
Basing-PointPricing
The seller designates a location as a basing point and charges all buyers
the freight costs from that point.
The seller designates a location as a basing point and charges all buyers
the freight costs from that point.
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Special Pricing TacticsSpecial Pricing TacticsSingle-Price Tactic Single-Price Tactic
Flexible PricingFlexible Pricing
Professional Services PricingProfessional Services Pricing
Leader PricingLeader Pricing
Bait PricingBait Pricing
Odd-Even PricingOdd-Even Pricing
Price BundlingPrice Bundling
Two-Part Pricing Two-Part Pricing
All goods offered at the same price All goods offered at the same price
Different customers pay different priceDifferent customers pay different price
Used by professionals with experience,training or certificationUsed by professionals with experience,training or certification
Sell product at near or below costSell product at near or below cost
Lure customers through false or misleading price advertisingLure customers through false or misleading price advertisingOdd-number prices imply bargainEven-number prices imply qualityOdd-number prices imply bargainEven-number prices imply qualityCombining two or more products in a single packageCombining two or more products in a single package
Two separate charges to consume a single goodTwo separate charges to consume a single good
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Consumer PenaltiesConsumer Penalties99
An irrevocable loss of revenue
is suffered
An irrevocable loss of revenue
is suffered
Additional transaction costs
are incurred
Additional transaction costs
are incurred
Businesses Impose Businesses Impose Consumer Penalties if...Consumer Penalties if...
Businesses Impose Businesses Impose Consumer Penalties if...Consumer Penalties if...