Topic 8

CHAPTER 19
Pricing Concepts

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 Learning Outcomes
After studying this chapter, you will be able to…
1. Discuss the importance of pricing decisions to the economy and to the individual firm
2. List and explain a variety of pricing objectives
3. Explain the role of demand in price determination
4. Understand the concepts of dynamic pricing and yield management systems
5. Describe cost-oriented pricing strategies
6. Demonstrate how the product life cycle, competition, distribution and promotion strategies,
customer demands, the Internet and extranets, and perceptions of quality can affect price
7. Describe the procedure for setting the right price
8. Explain how discounts, geographic pricing, and other pricing tactics can be
used to fine-tune a base price

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19-1 The Importance of Price

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 19-1 The Importance of Price (1 of 4)

• Organizations that successfully manage prices do

so by creating a pricing infrastructure within the
company, which means:
i. Defining pricing goals
ii. Searching for ways to create greater customer value
iii. Assigning authority and responsibility for pricing
decisions
iv. Creating tools and systems to continually improve
pricing decisions

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 19-1 The Importance of Price (2 of 4)

19.1a What Is Price?

• Price – that which is given up in an exchange to
acquire a good or service
THE SACRIFICE EFFECT OF PRICE
• “That which is given up” usually means money.
• Consumers may also sacrifice time or forego other
products and services.

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 19-1 The Importance of Price (3 of 4)
THE INFORMATION EFFECT OF PRICE
i. Consumers do not always choose the lowest-
priced product in a category.
ii. We infer quality information from price—higher
quality equals to higher price.
iii. Higher prices can also convey prestige and status.
VALUE IS BASED ON PERCEIVED SATISFACTION
• Consumers are interested in obtaining a “perceived
reasonable value” for the price at the time of the
purchase.

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 19-1 The Importance of Price (4 of 4)
19.1b The Importance of Price to Marketing
Managers
i. Revenue – the price charged to customers
multiplied by the number of units sold
− Revenue is what pays for every activity of the
company: production, finance, sales, distribution,
and so on.

ii. Profit – revenue minus expenses

− To earn a profit, managers must choose a price that
is not too high or too low—a price that equals the
perceived value to target consumers.

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19-2 Pricing Objectives
1. Profit-Oriented Pricing Objectives
a. PROFIT MAXIMIZATION
b. SATISFACTORY PROFITS
c. TARGET RETURN ON INVESTMENT

2. Sales-Oriented Pricing Objectives

a. MARKET SHARE
b. SALES MAXIMIZATION

3. Status Quo Pricing Objectives

a. STATUS QUO PRICING

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 8-2 Pricing Objectives (1 of 5)
To survive in today’s highly competitive marketplace, companies
must choose pricing objectives that are specific, attainable, and
measurable.
19.2a Profit-Oriented Pricing Objectives
PROFIT MAXIMIZATION
• Profit maximization means setting prices so that total revenue
is as large as possible relative to total costs while still
remaining competitive.
• In attempting to maximize profits, managers can try to
− (i) expand revenue by increasing customer satisfaction or
− (ii) reduce costs by operating more efficiently, or both.
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 19-2 Pricing Objectives (2 of 5)
SATISFACTORY PROFITS
• Rather than maximizing profits, many organizations strive for profits
that are satisfactory to the stockholders and management.
TARGET RETURN ON INVESTMENT
• The most common profit objective is a target return on investment
(ROI), sometimes called the firm’s return on total assets.
− Return on investment (ROI) – net profit after taxes divided by total assets. A
calculation of the monetary value of an investment versus its cost. The ROI formula is:
(profit minus cost) / cost. If you made RM10,000 from a RM1,000 effort, your return
on investment (ROI) would be 0.9, or 90%

• ROI measures management’s overall effectiveness in generating

profits with the available assets as compared to the industry average.
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 19-2 Pricing Objectives (3 of 5)
19.2b Sales-Oriented Pricing Objectives
• Sales-oriented pricing objectives are based on
market share as reported in dollar or unit sales.
MARKET SHARE
• Market share – a company’s product sales as a
percentage of total sales for that industry
• Larger market shares have often meant higher
profits, thanks to greater economies of scale, market
power, and ability to compensate top-quality
management.

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 19-2 Pricing Objectives (4 of 5)
SALES MAXIMIZATION
• Rather than strive for market share, which is not always an indicator of
profitability, some companies try to maximize sales.

• A firm with the objective of maximizing sales ignores profits,

competition, and the marketing environment as long as sales are
rising.

• To generate a maximum amount of cash in the short run,

management may opt for the price–quantity relationship that
generates the greatest cash revenue.

• Maximization of cash should never be a long-run objective because

cash maximization may mean little or no profitability.

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 19-2 Pricing Objectives (5 of 5)
19.2c Status Quo Pricing Objectives
• STATUS QUO PRICING – a pricing objective that
maintains existing prices or meets the
competition’s prices
• when you choose to sell your products at a set
price that everyone else sells their product for.
• Status quo pricing often leads to suboptimal pricing
because the strategy ignores customers’ perceived
value of both the firm’s goods or services and
those offered by its competitors.

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 Knowledge Check 1

Select a product that interests you, or

perhaps one that you’ve recently purchased,
and determine an appropriate price for that
product. Which type of objective would you
choose—profit-oriented, sales-oriented, or
status quo? What type of strategy do you
think is best? Write a one- or two-paragraph
summary of your rationale supporting your
price determination for your product.

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 19-3 The Demand
Determinant of Price

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 19-3 The Demand Determinant
of Price (1 of 4)
19.3a The Nature of Demand
• Demand – the quantity of a product that will be sold in
the market at various prices for a specified period
− The higher the price, the fewer goods or services consumers
will demand. Conversely, the lower the price, the more goods
or services they will demand.

• Supply – the quantity of a product that will be offered

to the market by a supplier at various prices for a
specified period
− At higher prices, manufacturers earn more capital and can
produce more products.

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 19-3 The Demand Determinant
of Price (2 of 4)
19.3b Elasticity of Demand
• To appreciate the concept of demand, you should
understand elasticity:
− Elasticity of demand – consumers’ responsiveness or
sensitivity to changes in price - the shift in demand for a
product when a change occurs price
i. Elastic demand – a situation in which consumer
demand is sensitive to changes in price
ii. Inelastic demand – a situation in which an
increase or a decrease in price will not significantly
affect demand for the product

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 8-3 The Demand Determinant
of Price (3 of 4)
FACTORS THAT AFFECT ELASTICITY
1. When many substitute products are available, the
consumer can easily switch from one product to
another, making demand more elastic. When there is
no substitute, demand is more inelastic.

2. If a price is so low that it is an inconsequential part

of an individual’s budget, demand will be inelastic.

3. With durable products, consumers often have the

option of repairing rather than replacing them, thus
prolonging their useful life. This makes people more
sensitive to price increases, meaning demand is
more elastic

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 19-3 The Demand Determinant
of Price (4 of 4)
4. The more uses there are for a product, the
more elastic demand tends to be.
5. Consumers with a local identity (respect for
local traditions, cultures, and communities) are
less sensitive to price increases than persons
with a global identity (interest in global culture
and identification).
6. Researchers have found a strong relationship
between overall customer satisfaction and
willingness to tolerate a price increase.

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 Knowledge Check
Which of the following terms is
defined as “consumers’
responsiveness or sensitivity to
changes in price”?
a. Elasticity of demand
b. Supply
c. Inelastic demand
d. Demand

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19-4 Dynamic Pricing and the
Growing Use of Artificial
Intelligence in Setting Prices

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 19-4 Dynamic Pricing and the Growing Use
of AI in Setting Prices (1 of 2)
• When competitive pressures are high, a company must
know when it should raise or lower prices to maximize
its revenues.
• Although dynamic pricing originated with airlines,
dynamic pricing can be used in any industry in which
demand or supply fluctuates.
i. Dynamic pricing – the ability to change prices very
quickly, often in real time using software programs
ii. Surge pricing – occurs in a fluid market, where demand
changes rapidly, often hourly. When demand increases, so
do prices and vice versa

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 8-4 Dynamic Pricing and the Growing Use
of AI in Setting Prices (2 of 2)
19.4a The Addition of Artificial Intelligence (AI) to
Dynamic Pricing
• New pricing systems incorporate huge amounts of historical and real-
time data, both traditional structured data sources of information
(purchased item, price, financing) and newer nonstructured or semi-
structured data sources (videos, emails, photos, blogs, social media
posts, and audio files).

• The new AI pricing software constantly updates the algorithms

based on what the AI software has learned.

• The more AI learns about a consumer, including his or her interests,

hobbies, lifestyle, and past behavior, the more effectively it can target
that consumer with “the right price.”
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19-5 The Cost Determinant
of Price

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 19-5 The Cost Determinant
of Price (1 of 3)
• Sometimes companies minimize or ignore the
importance of demand and decide to price their products
largely or solely on the basis of the company’s costs.
• Prices determined strictly on the basis of costs may
be too high for the target market or too low, resulting in
unnecessarily low returns.
i. Variable cost – a cost that varies with changes in the
level of output
ii. Fixed cost – a cost that does not change as output is
increased or decreased

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 19-5 The Cost Determinant
of Price (2 of 3)
19.5a Markup Pricing
• Markup pricing – the cost of buying the
product from the producer, plus amounts for
profit and for expenses not otherwise
Markup is the difference between a product's
accounted for selling price and cost as a percentage of the
cost. For example, if a product sells for $125 and
• To use markup based on cost or selling price costs $100, the additional price increase is ($125
effectively, the marketing manager must – $100) / $100) x 100 = 25%.
calculate an adequate gross margin—the
amount added to cost to determine price.
• Keystoning – the practice of marking up prices
by 100 percent, or doubling the cost
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 19-5 The Cost Determinant
of Price (3 of 3)
19.5b Break-Even Pricing
• Break-even analysis – a method of determining what
sales volume must be reached before total revenue
equals total costs
• The typical break-even model assumes a given fixed cost
and a constant average variable cost (total cost divided
by quantity of output).
− Advantage: provides a quick estimate of how much the firm
must sell to break even and how much profit can be earned if a
higher sales volume is obtained
− Limitations: hard to know whether a cost is fixed or variable;
hard to know if there is sufficient demand
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19-6 Other Determinants of
Price

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 19-6 Other Determinants of Price (1 of 8)
19.6a Stages in the Product Life Cycle
• Introductory stage:
− Management often sets prices high during the introductory
stage to recover its development costs quickly. However, if
the target market is highly price sensitive, management often
finds it better to price the product at market level or lower.

• Growth stage:
− Prices generally begin to stabilize for several reasons:
i. Competitors have entered the market, increasing the
available supply.
ii. The product has begun to appeal to a broader market.
iii. Economies of scale have begun to lower costs.
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 19-6 Other Determinants of Price (2 of 8)
• Maturity stage:
− Maturity usually brings further price decreases
as competition increases and inefficient, high-
cost firms are eliminated.
− Logistics become a significant cost factor,
however. Because demand is limited and
producers have similar cost structures, the
remaining competitors will probably match price
reductions.

• Decline stage:
− The final stage of the life cycle may see further
price decreases as the few remaining
competitors try to salvage the last vestiges of
demand.
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 19-6 Other Determinants of Price (3 of 8)
19.6b Competition, Price Matching, and
Customer Loyalty
• Competition varies during the product life cycle.
Although a firm may not have any competition at
first, the high prices it charges may eventually
induce another firm to enter the market.
• Fierce competition may drive down prices, but
price matching may actually result in higher
prices.
• Price matching can be a tool for building customer
loyalty, and the more return customers the store
gains over time, the greater the sales volume.
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 19-6 Other Determinants of Price (4 of 8)
19.6c Distribution Strategy
• Although consumers may perceive a price as being
slightly higher than normal, they may buy the
product anyway if it is being sold at a convenient
retail outlet.
19.6d The Impact of the Internet and Extranets
• Technology is linking sellers and buyers like never
before, enabling buyers to quickly and easily
compare products and prices and putting them in a
better bargaining position.
− Extranet – a private electronic network that links a
company with its suppliers and customers
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 19-6 Other Determinants of Price (5 of 8)
USING SHOPPING BOTS
• A shopping bot is a program that searches the Web for the best prices.
• Shopping bots theoretically give pricing power to the consumer by giving
him or her more information to use in making an efficient buying decision.
INTERNET AUCTIONS
• Even though consumers are spending billions on Internet auctions,
business-to-business auctions are likely to be the dominant form in the
future.
• In a reverse auction, the buyer specifies the item or service that he or she
is looking for, and sellers compete to offer the lowest price to win the bid.

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 19-6 Other Determinants of Price (6 of 8)
19.6e Promotion Strategy
• Price is often used as a promotional tool to
increase consumer interest.
• Consumer perceptions of a store’s prices are
more impactful than the actual prices
themselves.
19.6f Price Transparency
• The Internet has enabled consumers to compare
prices in real time online, resulting in a huge
increase in price transparency.

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 19-6 Other Determinants of Price (7 of 8)
19.6g The Appearance of Being Well-Informed or
Not
• Customers who appear to be uninformed are often
quoted significantly higher prices, especially for
services that can fluctuate in price.
19.6h Demands of Large Customers
• Manufacturers find that their large customers, such as
department stores, often make specific pricing
demands that the suppliers must agree to.
• For some product categories, the demands are nearly
wiping out profits for all but the very biggest suppliers.
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 19-6 Other Determinants of Price (8 of 8)
19.6i The Relationship of Price to Quality
• When a purchase decision involves uncertainty,
consumers tend to rely on a high price as a
predictor of good quality.
− In the absence of other information, people typically
assume that prices are higher because the products
contain better materials, because they are made more
carefully, or, in the case of professional services, because
the provider has more expertise.

• Price promotions of higher-priced, higher-quality

brands tend to attract more business than do similar
promotions of lower-priced and lower-quality
brands.
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19-7 How to Set a Price on a
Product

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Exhibit 19.3 Steps in Setting the Right Price
on a Product

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 19-7 How to Set A Price
On A Product (1 of 6)
19.7a Establish Pricing Goals
• Pricing objectives fall into three categories—profit
oriented, sales oriented, and status quo—and
each come with trade-offs.
i. A profit-maximization objective may require a bigger
initial investment than the firm can commit to or wants to
commit to.
ii. Reaching the desired market share often means
sacrificing short-term profit, because without careful
management, long-term profit goals may not be met.
iii. Meeting the competition is the easiest pricing goal to
implement, but managers really should consider demand
and costs, the life-cycle stage, etc.
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 19-7 How to Set A Price
On A Product (2 of 6)
19.7b Estimate Demand, Costs, and Profits
• Total revenue is a function of price and quantity
demanded, and quantity demanded depends on
elasticity.
− After establishing pricing goals, managers should estimate
total revenue at a variety of prices, which may require
marketing research.
− Next, they should determine corresponding costs for each
price.
− Then, they estimate how much profit, if any, and how much
market share can be earned at each possible price.
− The best option can finally be chosen based on this analysis.
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 19-7 How to Set A Price
On A Product (3 of 6)
19.7c Choose A Price Strategy
• Price strategy – a basic, long-term pricing framework that PRICE SKIMMING
establishes the initial price for a product and the intended PENETRATION PRICING
direction for price movements over the product’s life cycle
STATUS QUO PRICING
• The price strategy sets a competitive price in a specific market
segment based on a well-defined positioning strategy.

• A company’s freedom in pricing a new product and devising a

price strategy depends on the market conditions and the other
elements of the marketing mix.
− If a firm launches a new item resembling several others
on the market, it will probably have to charge a price close
to the average market price.
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 19-7 How to Set A Price
On A Product (4 of 6)
PRICE SKIMMING
• Price skimming – a product pricing strategy by which a firm charges the highest initial
price that customers will pay and then lowers it over time., often coupled with heavy
promotion

• This strategy is often used for new products when the product is perceived by the target market
as having unique advantages.

• Price skimming works best when there is strong demand for a good or service, when a product
is well protected legally, when it represents a technological breakthrough, or when it has in
some other way blocked the entry of competitors.

• Apple iPhone, for example – often utilize a price skimming strategy during the initial
launch period. Then, after competitors launch rival products, i.e., the Samsung Galaxy,
the price of the product drops so that the product retains a competitive advantage
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 19-7 How to Set A Price
On A Product (5 of 6)
PENETRATION PRICING
• Penetration pricing – a pricing policy whereby a firm
charges a relatively low price for a product when it
is first rolled out as a way to reach the mass market
− If obtaining a large market share is the firm’s pricing objective,
penetration pricing is a logical choice.
− A penetration strategy tends to be effective in a price-
sensitive market. Price should decline more rapidly when Subscription streaming services like
demand is elastic because the market can be expanded Netflix commonly use penetration
through a lower price. pricing. They run campaigns
offering new customers a special
− It typically discourages or blocks competition from entering a deal, like $10 per month for the first
market. six months.

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 19-7 How to Set A Price
On A Product (6 of 6)
STATUS QUO PRICING
• This pricing strategy means charging a price
identical to or very close to the
competition’s price.
• Although status quo pricing has the advantage
of simplicity, its disadvantage is that the strategy
may ignore demand or cost or both.

$21.99 $22.95 $22.49

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 19-8 Tactics for Fine-Tuning
the Base Price
19.8a Discounts, Allowances, Rebates, 19.8b Geographic Pricing 19.8c Other Pricing Tactics
and Value-Based Pricing
[Link] origin 1. Single-price tactic
[Link] discount 2. Flexible pricing (variable pricing)
2. Cash discount 2. Uniform delivered pricing
3. Zone pricing 3. Price lining
3. Functional discount (trade discount)
4. Freight absorption 4. Leader pricing (loss-leader pricing)
4. Seasonal discount
5. Gambled price discounts 5. Basing-point pricing – 5. Bait pricing
6. New customer discounts 6. Odd-even pricing (psychological
7. Reframing discount and markdown math pricing)
8. Promotional allowance (trade 7. Price bundling
allowance)
9. Rebate 8. Two Part Pricing
10. Coupons 9. Pay What You Want
11. Zero percent financing 10. Package Content Reduction
12. Free shipping

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 19-8 Tactics for Fine-Tuning
the Base Price (1 of 16)
• After managers understand both the legal
and the marketing consequences of price
strategies, they should set a base price.
− Base price – the general price level at which
the company expects to sell the good or
service

• Fine-tuning techniques allow the firm to

adjust for competition in certain markets,
take advantage of unique demand
situations, and meet goals.

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 19-8 Tactics for Fine-Tuning
the Base Price (2 of 16)
19.8a Discounts, Allowances, Rebates, and Value-Based Pricing
• A base price can be lowered through the use of discounts and the
related tactics of allowances, rebates, low or zero percent
financing, and value-based pricing.
• Quantity discount – a price reduction offered to buyers buying in
multiple units or above a specified dollar amount
1. Cumulative quantity discount – a deduction from list price that applies
to the buyer’s total purchases made during a specific period
2. Noncumulative quantity discount – a deduction from list price that
applies to a single order rather than to the total volume of orders
placed during a certain period
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 19-8 Tactics for Fine-Tuning
the Base Price (3 of 16)
3. Cash discount – a price reduction offered to a consumer,
an industrial user, or a marketing intermediary in return
for prompt payment of a bill
4. Functional discount (trade discount) – a discount to
wholesalers and retailers for performing channel functions
5. Seasonal discount – a price reduction for buying
merchandise out of season
6. Gambled price discounts – the customer receives a
discount based on the outcome of a probabilistic gamble
(and which is therefore uncertain)

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 19-8 Tactics for Fine-Tuning
the Base Price (4 of 16)
7. New customer discounts – an initial discount offered to
new customers with the objective of creating a long-term
relationship with a new client and therefore a long-term
revenue stream
8. Reframing discount and markdown math – showing
the sales price with final dollar amounts rather than
percentage discounts, or showing the final cost after all
discounts have been applied, to make price reductions
easier to understand
9. Promotional allowance (trade allowance) – a payment
to a dealer for promoting the manufacturer’s products
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 19-8 Tactics for Fine-Tuning
the Base Price (5 of 16)
10. Rebate – a cash refund given for the purchase
of a product during a specific period
11. Coupons – a discount offered via paper, a
card, a printable web page, or an electronic
code
12. Zero percent financing – a type of loan that
enables purchasers to borrow money to pay for
products with no interest charge
13. Free shipping – lowers the price for
purchasers, but the expense must be built into
the cost of the product
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 19-8 Tactics for Fine-Tuning
the Base Price (6 of 16)
VALUE-BASED PRICING
• Value-based pricing – setting the price at a level that
seems to the customer to be a good price compared
to the prices of other options
• The pricing starts with the customer, considers the
competition and associated costs, and then determines
the appropriate price.
• The basic assumption is that the firm is customer
driven, seeking to understand the attributes customers
want in the goods and services they buy and the value
of that bundle of attributes to customers.
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 19-8 Tactics for Fine-Tuning
the Base Price (7 of 16)
FOB: For example, if a buyer in
19.8b Geographic Pricing Kuala Lumpur buys basketball shoes
from a seller in Chengdu, China, he
• Because many sellers ship their wares to a must pay for the transport costs from
nationwide or even a worldwide market, the cost of the seller's warehouse to the port, cost
of loading goods onto a ship, and all
freight can greatly affect the total cost of a product. transport costs from the shipping port
1. FOB origin pricing – a price tactic that requires the to his warehouse/store.
buyer to absorb the freight costs from the shipping
point (“free on board”)
2. Uniform delivered pricing – a price tactic in which the
seller pays the actual freight charges and bills every
purchaser an identical, flat freight charge - buyers pay the
same shipping charges regardless of where they are located
(also called Single-Zone Pricing.)
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 19-8 Tactics for Fine-Tuning
the Base Price (8 of 16)
3. Zone pricing – a modification of uniform delivered
pricing that divides the United States (or the total
market) into segments or zones and charges a flat
freight rate to all customers in a given zone
4. Freight absorption pricing – a price tactic in
which the seller pays all or part of the actual
freight charges and does not pass them on to the
buyer
5. Basing-point pricing – a price tactic that charges
freight from a given (basing) point, regardless of
the city from which the goods are shipped

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 19-8 Tactics for Fine-Tuning
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19.8c Other Pricing Tactics
1. SINGLE-PRICE TACTIC
• Single-price tactic – a price tactic that offers all goods
and services at the same price (or perhaps two or three
prices)
2. FLEXIBLE PRICING
• Flexible pricing (variable pricing) – a price tactic in
which different customers pay different prices for
essentially the same merchandise bought in equal
quantities
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 19-8 Tactics for Fine-Tuning
the Base Price (10 of 16)
3. PROFESSIONAL SERVICES PRICING
• Lawyers, physicians, and other professionals
typically charge customers at an hourly rate, but
sometimes fees are based on the solution of a
problem or performance of an act rather than on the
actual time involved.
• Those who use professional pricing have an ethical
responsibility not to overcharge a customer and to
be consistent in setting fees.

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 19-8 Tactics for Fine-Tuning
the Base Price (11 of 16)
4. PRICE LINING
• Price lining – the practice of offering a product
line with several items at specific price points
• Price lining reduces confusion for both the
salesperson and the consumer and may result in
fewer markdowns, simplified purchasing, and
lower inventory carrying charges.
• Price lines may also enable a seller to reach
several market segments.

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 19-8 Tactics for Fine-Tuning
the Base Price (12 of 16)
5. LEADER PRICING
• Leader pricing (loss-leader pricing) – a price tactic in which a
product is sold near or even below cost in the hope that
shoppers will buy other items once they are in the store
6. BAIT PRICING
• The opposite of leader pricing is the deceptive practice of bait
pricing.
• Bait pricing – a price tactic that tries to get consumers into a
store through false or misleading price advertising and then
uses high-pressure selling to persuade consumers to buy more
expensive merchandise
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 19-8 Tactics for Fine-Tuning
the Base Price (13 of 16)
7. ODD-EVEN PRICING
• Odd-even pricing (psychological pricing) – a price
tactic that uses odd-numbered prices to connote
bargains and even-numbered prices to imply quality
8. PRICE BUNDLING
• Price bundling – marketing two or more products in
a single package for a special price
• Price bundling can stimulate demand for the bundled
items if the target market perceives the price as a good
value.

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 19-8 Tactics for Fine-Tuning
the Base Price (14 of 16)
9. TWO-PART PRICING
• a price tactic that charges two separate
amounts to consume a single good or service
• Consumers sometimes prefer two-part pricing
because they are uncertain about the number
and the types of activities they might use.
• Two-part pricing can increase a seller’s revenue
by attracting consumers who would not pay a
high fee even for unlimited use.

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 19-8 Tactics for Fine-Tuning
the Base Price (15 of 16)
10. PAY WHAT YOU WANT
• Asking people to pay what they want or think
something is worth is a very risky tactic.
• Social pressures can come into play if an individual
does not want to appear poor or cheap to his or her
peers.
11. PACKAGE CONTENT REDUCTION
• Manufacturers keep the price and package size the
same while reducing the amount of content,
thereby increasing the price per ounce or pound.
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 19-8 Tactics for Fine-Tuning
the Base Price (16 of 16)
19.8d Consumer Penalties
• an extra fee paid by the consumer for violating the
terms of the purchase agreement
• With profit margins in many companies increasingly
coming under pressure, organizations are looking to
stem losses resulting from customers not meeting their
obligations.
• However, the perceived unfairness of a penalty may
affect some consumers’ willingness to patronize a
business in the future.

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 19-9 The Legality of Price Strategy(1 of 3)
Some pricing decisions are subject to government
regulation. Among the issues that fall into this
category are unfair trade practices, price fixing,
price discrimination, and predatory pricing.
19.9a Unfair Trade Practices
• put a floor under wholesale and retail prices.
Selling below cost is illegal.
• The intent of unfair trade practice acts is to
protect small local firms from giants like
Walmart, which operates very efficiently on
razor-thin profit margins

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19-9 The Legality of Price Strategy(1 of 3)

19.9b Price Fixing

• is an agreement between two or
more firms on the price they will
charge for a product.
• Suppose two or more executives
from competing firms meet to
decide how much to charge for a
product or to decide which of them
will submit the lowest bid on a
certain contract.

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 19-9 The Legality of Price Strategy(1 of 3)

19.9c Price Discrimination

• prohibits any firm from selling to two or
more different buyers, at different
prices where the result would be to
substantially lessen competition.
• illegal for a seller to offer two buyers
different supplementary services and for
buyers to use their purchasing power to
force sellers into granting discriminatory
prices or services.

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19-9 The Legality of Price Strategy(1 of 16)

19.9d Predatory Pricing

• the practice of charging a very low
price for a product with the intent of
driving competitors out of business or
out of a market.
• Once competitors have been driven out,
the firm raises its prices.

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 THANK YOU

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