15.5 Key Terms

Bait and Switch: Occurs when a business tries to “bait,” or lure in, customers with an incredibly low-priced product. 15.2

Bounce Back: A promotion in which a seller gives customers discount cards or coupons after purchasing. 15.3

Breakeven point (BEP): The point at which total costs equal total revenue. 15.2

Captive Pricing: A strategy firms use when consumers must buy a given product because they are at a certain event or location or they need a particular product because no substitutes will work. 15.3

Cost-Plus Pricing: Companies take the cost of the product and then add a profit to determine a price. 15.3

Demand Backward Pricing: Companies start with the price demanded by consumers (what they want to pay) and create offerings at that price. 15.3

Everyday Low Prices: The price initially set is the price the seller expects to charge throughout the product’s life cycle. 15.3

Fixed Costs: Costs that a company must pay regardless of its level of production or level of sales. 15.2

FOB (Free on Board) Origin: The title changes at the origin—that is, when the product is purchased—and the buyer pays the shipping charges. 15.3

FOB (Free on Board) Destination: The title changes at the destination—that is, after the product is transported—and the seller pays the shipping charges. 15.3

Forward Auction: The process when a buyer lists what he or she wants to buy, sellers may submit bids. 15.3

Going-Rate Pricing: Occurs when buyers pay the same price regardless of where they buy the product or from whom. 15.3

Leader Pricing: Involves pricing one or more items low to get people into a store. 15.3

Loss leaders: Items priced below cost in an effort to get people into stores, are illegal in many states. 15.3

Markup: An amount added to the cost of a product, they are using a form of cost-plus pricing. 15.3

Markdowns:  Price reductions. 15.3

Odd-Even Pricing: Occurs when a company prices a product a few cents or a few dollars below the next dollar amount. 15.3

Online Auction: Sites such as eBay give customers the chance to bid and negotiate prices with sellers until an acceptable price is agreed upon. 15.3

Payment Pricing: Allowing customers to pay for products in instalments, is a strategy that helps customers break up their payments into smaller amounts, which can make them more inclined to buy higher-priced products. 15.3

Penetration Pricing Strategy: One in which a low initial price is set. 15.3

Predatory Pricing: When companies act in a predatory manner by setting low prices to drive competitors out of business. 15.2

Prestige Pricing: Occurs when a higher price is utilized to give an offering a high-quality image. 15.3 

Product Mix Pricing: Includes all the products a company offers. If you want to buy an automobile, the base price might seem reasonable, but the options such as floor mats might earn the seller a much higher profit margin. While consumers can buy floor mats at stores like Walmart for $30, many people pay almost $200 to get the floor mats that go with the car from the dealer. 15.3

Promotional Pricing: A short-term tactic designed to get people into a store or to purchase more of a product. 15.3 

Price Adjustments: Changing the listed prices of their products. 15.3

Price Bundling: Occurs when different offerings are sold together at a price that’s typically lower than the total price a customer would pay by buying each offering separately.15.3

Price Discrimination: Charging different customers different prices for the same product. 15.3

Price Fixing: Occurs when firms get together and agree to charge the same prices, is illegal. 15.2

Price Elasticity: People’s sensitivity to price changes, affects the demand for products. 15.2

Price Elastic: When consumers are very sensitive to the price change of a product—that is, they buy more of it at low prices and less of it at high prices. 15.2

Price Inelastic: The demand for a product stays relatively the same and buyers are not sensitive to changes in its price. 15.2

Price Lining: Neckties are often priced using a strategy. 15.3

Pricing Objectives: What does the company want to accomplish with its pricing. 15.1

Quantity Discount: Involves giving customers discounts for larger purchases. 15.3

Reciprocal Agreements: Agreements in which merchants agree to promote each other to customers. 15.3

Reverse Auction: Occurs if the buyer not only lists what he or she wants to buy but also states how much he or she is willing to pay. 15.3

Robinson-Patman Act: Limits a seller’s ability to charge different customers different prices for the same products. 15.2

Sealed Bid Pricing: The process of offering to buy or sell products at prices designated in sealed bids. 15.3

Skimming Price Strategy: When a company sets a high initial price for a product. 15.3

Status Quo: Sometimes a firm’s objective may be to maintain the status quo or simply meet, or equal, its competitors’ prices or keep its current prices. Airline companies are a good example. Have you ever noticed that when one airline raises or lowers its prices, the others all do the same. 15.1

Total Costs: Include both fixed costs and variable costs. 15.2

Trade Allowances: A manufacturer might give a retail store an advertising allowance to advertise the manufacturer’s products in local newspapers. Similarly, a manufacturer might offer a store a discount to restock the manufacturer’s products on store shelves rather than having its own representatives restock the items. 15.3

Two-Part Pricing: There are two different charges customers pay. 15.3

Unfair Trade Laws: State laws preventing large businesses from selling products below cost (as loss leaders) to attract customers to the store. 15.2

Uniform-Delivered Pricing: Buyers pay the same shipping charges regardless of where they are located. 15.3

Variable Costs: Costs that change with a company’s level of production and sales. 15.2