Pricing the Product
Read this chapter. Pricing is a difficult issue because most products will sell at some volume at just about any price level. Some customers are willing to pay almost any price for a specific product, but how many of those customers exist? Marketers could consider a value-priced model, but this may make the product's price so low that there is no way to profit. One common pricing strategy is known as "the loss leader", which involves selling one product below the cost to manufacture it to get it in customers' hands. They make up for this loss later with complementary goods. This is commonly seen in video game console sales. Console system manufacturers like Sony and Nintendo will price the system below the cost to manufacture it. Consumers adopt the systems due to the attractive price point, and the manufacturer makes up for the initial loss on the system with sales of proprietary accessories and video games.
MARKETER'S VOCABULARY
Demand curve Quantity demanded at various price levels.
Nonprice competition Organization uses strategies other than price to attract customers.
Price war Pricing significantly lower than competition.
Penetration pricing Accepting a lower profit margin during the introduction of a product.
Price skimming Price set relatively high to generate a high profit margin.
Price lining Selling a product with several price points.
Quantity discounts Reduction in base price given as the result of a buyer purchasing some predetermined quantity of merchandise.
Seasonal discounts Price discount given on out-of-season merchandise.
Cash discounts Reduction on base price given customers for paying cash or paying within a short period of time.
Trade discount Price reductions given to middlemen to encourage them to stock and give preferred treatment to an organization's product.
Spiffs Prize money given to retailers to pass on to the retailer's sales personnel for selling certain items.
Price bundling Grouping similar complementary products and charging a total price that is lower than if they were sold separately.
Mark-up Difference between the average cost and price of a product.
Break-even price Price that will produce enough revenue to cover all costs at a given level of production.
Value-based pricing What that product is worth to that customer at that point in time.