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14-1 Reading Note –Chapter 14 –Pricing (II) Learning Objectives After reading this summary you should be able to: 1-Describe how to establish the “approximate price level” using demand-oriented, cost-oriented, profit-oriented, and competition-oriented approaches. 2-Recognize the major factors considered in deriving a final list or quoted price from the approximate price level. 3-Identify the adjustments made to the approximate price level on the basis of discounts, allowances, and geography. 4-Name the principal laws and regulations affecting specific pricing practices. I. STEP 4: SELECT AN APPROXIMATE PRICE LEVEL A key to a marketer’s setting a final price for a product is to findan approximate price level to use as a reasonable starting point. There are four common approaches to find this approximate price level. A. Demand-Oriented Pricing Approaches Demand-oriented approaches weigh factors underlying expected customer tastes and preferences more heavily than…Factors such as cost, profit, and competition when selecting a price level. 1.Skimming Pricing. a.Skimming pricinginvolves setting the highest initial price that customers really desiring the product are willing to pay when introducing a new or innovative product. These customers are not very price sensitive. Weigh the new product’s price, and quality against the same characteristics of substitutes. As consumer demand is satisfied, the firm lowers the price to attract another, more price-sensitive segment. Skimming pricing gets its name from skimming successive layers of “cream,” or customer segments, as prices are lowered in a series of steps. b.Skimming pricing is an effective strategy when:
14-2 Enough prospective customers are willing to buy the product at the high initial price to make these 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. These four conditions are most likely to exist when: –Patents or copyrights protect the new product. –Consumers understand and value the product’s uniqueness. 2.Penetration Pricing. a.Penetration pricinginvolves setting a low initial price on a new product to appeal immediately to the mass market—the opposite of skimming pricing. b.The conditions favoring penetration pricing are: Many segments of the market are price sensitive. A low initial price discourages competitors from entering the market. Unit production and marketing costs fall dramatically as production volumes increase. c.A firm using penetration pricing may: Maintain the initial price for a time to gain profit lost from its low introductory level.