Principles of Marketing - Exam 3 Study Guide

Principles of Marketing - Exam 3 Study Guide - Chapter 14:...

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Chapter 14: Arriving at the Final Price loss-leader pricing – deliberately selling a product below its customary price, not to increase sales, but to attract customers’ attention, in hopes that they will buy other products as well (Wal-Mart, Target, Best Buy) cost-plus pricing – summing the total unit cost of providing a product/service and adding a specific amount to the cost to arrive at a price - 2 types: cost-plus percentage-of-cost pricing and cost-plus fixed-fee pricing - cost-plus percentage-of-cost pricing – a fixed percentage is added to the total unit cost - often used to price one or few-of-a-kind items - cost-plus fixed-fee pricing – a supplier is reimbursed for all costs, regardless of what they turn out to be, but is allowed only a fixed fee as profit that is independent of the final costs of the project - Example: NASA agreed to pay Boeing $1.2 billion as the cost of a space shuttle and agreed to a $100 million fee for providing that space shuttle. Even if Boeing’s cost increased to $2 billion for the space shuttle, its fee would still be $100 million - cost-plus pricing is the most commonly used method to set prices for business products - finding favor among B2B (business-to-business) marketers in the service sector - Example: the rising cost of legal fees has prompted some law firms to adopt a cost-plus pricing approach. Rather than billing clients on an hourly basis, lawyers and their clients agree on a fixed fee based on expected costs plus a profit for the law firm. - many advertising agencies now use this approach also -Example: the client agrees to pay the agency a fee based on the cost of its work plus some agreed-on profit, which is often a percentage of total cost. Demand-Orientated Approaches skimming pricing – setting the highest initial price that customers really desiring the product are willing to pay effective when: 1. enough prospective customers are willing to buy the product immediately at the high initial price to make these sales profitable, 2. the high initial price will not attract competitors, 3. lowering price has only a minor effect on increasing the sales volume and reducing the unit costs, and 4. customers interpret the high price as signifying high quality. - these4 conditions are most likely to exist when the new product is protected by patents/copyrights or its uniqueness is understood and valued by consumers Example: Gillette adopted a skimming strategy for the M3Power shaving system since many of these conditions applied penetration pricing – setting a low initial price on a new product to appeal immediately to the mass market - Example: Nintendo used penetration pricing when it introduced Nintendo DS, to compete with Sony’s PSP, which was using a skimming pricing strategy too. effective when: 1. many segments of the market are price sensitive, 2. a low initial price discourages
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Principles of Marketing - Exam 3 Study Guide - Chapter 14:...

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