Chapter 11: Pricing Concepts for Establishing Value


the overall sacrifice a consumer is willing to make - money, time, energy - to acquire a specific product or service

profit orientation

a company objective that can be implemented by focusing on target profit pricing, maximizing profits, or target return pricing

target profit pricing

A pricing strategy implemented by firms when they have a particular profit goal as their overriding concern; uses price to stimulate a certain level of sales at a certain profit per unit.

maximising profits

A profit strategy that relies primarily on economic theory. If a firm can accurately specify a mathematical model that captures all the factors required to explain and predict sales and profits, it should be able to identify the price at which its profits are maximised.

target return pricing

A pricing strategy implemented by firms less concerned with the absolute level of profits and more interested in the rate at which their profits are generated relative to their investments; designed to produce a specific return on investment, usually expressed as a percentage of sales.

Sales Orientation

a company objective based on the belief that increasing sales will help the firm more than will increasing profits

premium pricing

a competitor-based pricing method by which the firm deliberately prices a product above the prices set for competing products to capture those consumers who always shop for the best or for whom price does not matter

competitor orientation

a company objective based on the premise that the firm should measure itself primarily against its competition

competitive parity

a firm's strategy of setting prices that are similar to those of major competitors

status quo pricing

a competitor-oriented strategy in which a firm changes prices only to meet those of competition

customer orientation

a company objective based on the premise that the firm should measure itself primarily according to whether it meets its customers' needs

demand curve

shows how many units of a product or service consumers will demand during a specific period at different prices

prestige goods or services

those that customers purchase for status rather than functionality

price elasticity of demand

Measures how changes in a price affect the quantity of the product demanded; specifically, the ratio of the percentage change in quantity demanded to the percentage change in price.


refers to a market for a product or service that is price sensitive; that is, relatively small changes in price will generate fairly large changes in the quantity demanded


Refers to a market for a product or service that is price insensitive; that is, relatively small changes in price will not generate large changes in the quantity demanded.

income effect

refers to the change in the quantity of a product demanded by consumers due to a change in their income

variable costs

those costs, primarily labor and materials, that vary with production volume

fixed costs

those costs that remain essentially at the same level, regardless of any changes in the volume of production

total cost

the sum of the variable and the fixed costs

break-even analysis

technique used to examine the relationships among cost, price, revenue, and profit over different levels of production and sales to determine the break-even point

break-even point

the point at which the number of units sold generates just enough revenue to equal the total costs; at this point, profits are zero

monopolistic competition

Occurs when there are many firms that sell closely related but not homogeneous products; these products may be viewed as substitutes but are not perfect substitutes.

pure competition

occurs when different companies sell commodity products that consumers perceive as substitutable; price usually is set according to the laws of supply and demand


occurs when one firm provides the product in a particular industry

oligopolistic competition

occurs when only a few firms dominate a market

price war

occurs when two or more firms compete primarily by lowering their prices

predatory pricing

the practice of a firm setting a very low price for one or more of its products with the intention of driving its competition out of business

grey market

employs irregular but not necessarily illegal methods; generally, it legally circumvents authorized channels of distribution to sell goods at prices lower than those intended by the manufacturer


when customers visit a store to touch, feel, and even discuss a product's features with a sales associate, and then purchase it online from another retailer at a lower price


The pattern of buying both premium and low-priced merchandise or patronizing both expensive, status-oriented retailers and price-oriented retailers.

cost-based pricing method

An approach that determines the final price to charge by starting with the cost, without recognizing the role that consumers or competitors' prices play in the marketplace.

competition-based pricing method

An approach that attempts to reflect how the firm wants consumers to interpret its products relative to the competitors' offerings; for example, setting a price close to a competitor's price signals to consumers that the product is similar, whereas setting the price much higher signals greater features, better quality, or some other valued benefit.

value-based pricing method

An approach that focuses on the overall value of the product offering as perceived by consumers, who determine value by comparing the benefits they expect the product to deliver with the sacrifice they will need to make to acquire the product.

improvement value method

an estimate of how much more (or less) consumers are willing to pay for a product relative to other comparable products

cost of ownership method

A value-based method for setting prices that determines the total cost of owning the product over its useful life.

market penetration strategy

a growth strategy focused on current customers

experience curve effect

refers to the drop in unit cost as the accumulated volume sold increases; as sales continue to grow, the costs continue to drop, allowing even further reductions in the price

price skimming

A strategy of selling a new product or service at a high price that innovators and early adopters are willing to pay in order to obtain it; after the high-price market segment becomes saturated and sales begin to slow down, the firm generally lowers the price to capture (or skim) the next most price sensitive segment.

Pricing Strategy

A long-term approach to setting prices for the firms' products.

pricing tactics

Short-term methods, in contrast to long-term pricing strategies, used to focus on company objectives, costs, customers, competition, or channel members; can be responses to competitive threats (e.g., lowering price temporarily to meet a competitor's price reduction) or broadly accepted methods of calculating a final price for the customer that is short term in nature.


a pricing tactic aimed at consumers; describes the reductions retailers make on the initial selling price of a product

size discount

The most common implementation of a quantity discount at the consumer level; the larger the quantity bought, the less the cost per unit (e.g., per ounce).

seasonal discounts

Pricing tactic of offering an additional reduction as an incentive to retailers to order merchandise in advance of the normal buying season.


Provides a stated discount to consumers on the final selling price of a specific item; the retailer handles the discount.


A consumer discount in which a portion of the purchase price is returned to the buyer in cash; the manufacturer, not the retailer, issues the refund.


A written agreement under which the owner of an item or property allows its use for a specified period of time in exchange for a fee.

price bundling

Consumer pricing tactic of selling more than one product for a single, lower price than what the items would cost sold separately; can be used to sell slow-moving items, to encourage customers to stock up so they won't purchase competing brands, to encourage trial of a new product, or to provide an incentive to purchase a less desirable product or service to obtain a more desirable one in the same bundle.

leader pricing

Consumer pricing tactic that attempts to build store traffic by aggressively pricing and advertising a regularly purchased item, often priced at or just above the store's cost.

price lining

Consumer market pricing tactic of establishing a price floor and a price ceiling for an entire line of similar products and then setting a few other price points in between to represent distinct differences in quality.

cash discounts

Tactic of offering a reduction in the invoice cost if the buyer pays the invoice prior to the end of the discount period.

advertising allowance

Tactic of offering a price reduction to channel members if they agree to feature the manufacturer's product in their advertising and promotional efforts.

slotting allowances

fees firms pay to retailers simply to get new products into stores or to gain more or better shelf space for their products

quantity discount

Pricing tactic of offering a reduced price according to the amount purchased; the more the buyer purchases, the higher the discount and, of course, the greater the value.

cumulative quantity discount

Pricing tactic that offers a discount based on the amount purchased over a specified period and usually involves several transactions; encourages resellers to maintain their current supplier because the cost to switch must include the loss of the discount.

non-cumulative quantity discount

pricing tactic that offers a discount based on only the amount purchased in a single order, provides the buyer with an incentive to purchase more merchandise immediately

uniform delivered pricing

the transport company charges one rate, no matter where the buyer is located

zone pricing

when a transport company sets different prices depending on a geographical division of the delivery areas