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CLEP Principles of Marketing Study Notes

Rate of diffusion how quickly a new product is

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Rate of diffusion - how quickly a new product is adopted by consumers. Less complex a product is, and the greater trialability, compatibility, and observability individuals perceive in a product, the faster its rate of diffusion, or the faster it will be adopted. Very complex products can take a long time to diffuse, and may require significant interaction with the consumer to get them to adopt the product. 2 types of pioneer pricing strategies, or strategies for setting the base price for a new product: 1. Price Skimming strategy - charging the highest possible price that buyers who most desire the product will pay. Can be beneficial by keeping demand consistent with a firm's production capabilities when it first releases a product, and it can also generate initial cash flows to help offset sizable development costs. It is called price skimming because after the initial introductory period, the firm usually lowers its price gradually. 2. Penetration Pricing strategy - setting a price below the prices of competing brands. Low introductory prices often allow the firm to gain a large share of the market more quickly than starting out with high prices. Can allow a firm to quickly gain a large market share and often discourages potential competitors from entering. However, the firm has less pricing flexibility; it is easier to lower the price of a product than to raise it. Pricing method is a mechanical procedure for setting prices on a regular basis. In Cost -Based Pricing , a dollar amount or percentage is added to the cost of a product. Cost-Based Pricing - does not necessarily take into account supply and demand. 2 cost-based pricing techniques: 1. Cost-Plus pricing - which involves determining prices by adding a predetermined level of profit to product costs 2. Return-On-Investment pricing - where product prices are set to enable the firm to achieve a specified rate of return. Demand-Based Pricing (aka: Psychological Pricing) - pricing method where instead of basing the price of a product on its cost, they base it on the level of demand for the product. Results in a high price when demand for the product is strong, and a low price when demand is weak. Competition-Based Pricing - an organization considers competitor s' prices and chooses a price below, equal to, or above the competition depending on factors such as product costs. Include Customary Pricing and Price Leadership . Another example of competition-based pricing,or setting prices according to those charged by competitors, is Price Leadership --one firm is the first to change prices from previous levels, and the rest of the industry follows this change. Customary Pricing falls under Competition-Based Pricing, and involves pricing goods primarily on the basis of tradition. Applies to goods such as candy bars .
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