A guide to some of the terms most commonly used when discussing pricing and real world examples whenever possible.
Anchor pricing takes advantage of the human tendency to rely too heavily on the first piece of information received and make later judgements in relation to it.
The practices of bundling products and services into a "package deal" with a single price or breaking them out into separate line items.
When discussing bundling these terms are often used interchangeably but there are important differences that should be understood.
The loss, or cannibalization, of per-unit profit when a product is discounted.
Charming pricing, the practice or ending prices with the number nine, is one of the most common pricing tactics.
Understanding that different people have differing degrees of sensitive to price depending on the situation and the product helps price more effectively.
Decoy prices are introduced to make another, usually more profitable, price seem more attractive.
A strategy of price discrimination that may also involve product differentiation, where slightly different versions of a product are used to allow for more pricing options.
With increased consumption of a product there is a decline in the marginal utility that comes from the consumption of each additional unit.
Part of a larger price discrimination strategy hurdles are used to separate those customers that place a lower value on a product and offer them prices tailored to that valuation.
The inverse relationship between quantity and price – as price increases demand decreases. Similarly a decrease in price will result in greater demand.
Price discrimination, also referred to as price differentiation or differential pricing, involves selling identical, or very similar, products at different prices.
Any research on pricing you will mention “price elasticity”. Shortened from “price elasticity of demand” it is important (but easy) to understand.
Distinguishing products to make them more attractive to a particular target market and, hopefully, more profitable. This can involve differentiating from competitors' products or a firm's own products.
Reservation price (sometimes referred to as reserve price) is the limit on the price of a good or service.
Revenue Management aims to maximize revenue by understanding customers' perception of product value and accurately aligning product prices, placement and availability with each customer segment.
Slack fill, de-sheeting and weight-out – different terms describing the common practice of stealthily increasing price by decreasing quantity.
Be prepared when you hear someone dismiss good profit with a comment like "sure, but profit is just a trailing indicator" by understanding the term.
Veblen goods contradict the law of demand. Demand for a Veblen good increases, rather than decreases, alongside increases in price.
In the cost plus pricing model volume discounts typically reflect efficiencies of scale. In value based pricing they tend to be more closely tied to the diminishing marginal utility of a product and can be far more aggressive.