A dictionary of pricing terms and concepts.
62 terms found
The application of artificial intelligence and machine learning algorithms to automate, optimize, and personalize pricing decisions. AI pricing systems analyze vast datasets including demand patterns, competitor prices, inventory levels, customer behavior, and market conditions to recommend or automatically set optimal prices. Capabilities include demand forecasting, price elasticity modeling, competitive response prediction, and real-time price optimization across thousands of products.
Systems and processes that adjust prices automatically based on predefined rules, algorithms, or market conditions without manual intervention. Automated pricing enables rapid response to market changes, consistent rule application across large product catalogs, and reduced operational overhead. Implementation ranges from simple rule-based systems (e.g., match competitor price minus 5%) to sophisticated machine learning models optimizing for multiple objectives.
Special offers, discounts, or value-added benefits provided to encourage customers to purchase product bundles rather than individual items. Bundle incentives may include percentage discounts, bonus products, exclusive access, or enhanced services. These incentives increase perceived value of bundled offerings and motivate customers to increase their purchase commitment.
A pricing strategy that combines multiple products or services into a single package offered at a lower total price than purchasing items individually. Bundling increases perceived value, simplifies purchase decisions, moves slow-selling inventory, and increases average transaction value. Types include pure bundling (only available as a package) and mixed bundling (available separately or bundled).
Aggressive price reductions applied to products to expedite their sale, typically at the end of a season, product lifecycle, or when excess inventory must be liquidated. Clearance pricing prioritizes cash recovery and inventory turnover over profit margins, often pricing below cost to free storage space and capital for new merchandise. Common in fashion, seasonal goods, and perishable products.
The systematic tracking and analysis of competitors' pricing, products, promotions, and market activities. Competitor monitoring provides intelligence for pricing decisions, identifies market opportunities and threats, and enables responsive competitive strategies. Modern monitoring leverages automated scraping, price tracking software, and market intelligence platforms to deliver real-time competitive insights across thousands of products and multiple competitors.
A pricing strategy where the selling price is determined by adding a fixed percentage markup to the total cost of producing a product or delivering a service. The formula is: Price = Cost × (1 + Markup Percentage). While straightforward and ensuring cost coverage, cost-plus pricing ignores market demand, competitor pricing, and perceived customer value, potentially leaving money on the table or pricing products out of the market.
A cognitive bias phenomenon where introducing a third, asymmetrically dominated option (the decoy) influences consumers to change their preference between two original options. The decoy is strategically priced to make the target option appear more attractive by comparison. Also known as the "attraction effect" or "asymmetric dominance effect," this technique is widely used in subscription pricing, product tiers, and retail displays to steer customers toward higher-margin options.
Price reductions offered to motivate specific customer behaviors, such as early payment, bulk purchases, loyalty program participation, or first-time purchases. Discount incentives can be structured as percentage-off, fixed-amount, buy-one-get-one, or conditional offers. Effective discount strategies balance customer acquisition and retention benefits against margin erosion and brand positioning impacts.
A flexible pricing approach where prices fluctuate based on market conditions, demand levels, time, inventory, customer segments, or other real-time factors. Unlike static pricing, dynamic pricing continuously optimizes prices to maximize revenue or profit. Common in airlines, hotels, ride-sharing, and e-commerce, where sophisticated algorithms adjust prices multiple times daily based on supply-demand dynamics and competitive intelligence.
A pricing philosophy focused on ensuring prices are perceived as reasonable, transparent, and equitable by customers. Fair pricing considers customer expectations, market norms, cost structures, and ethical standards. While subjective, perceived fairness significantly impacts customer satisfaction, trust, and long-term relationships. Violations of perceived fairness (e.g., price gouging during shortages) can severely damage brand reputation.
A business model combining "free" and "premium" where basic products or services are provided at no cost while advanced features, functionality, or capacity require payment. Popular in software, apps, and digital services, freemium reduces customer acquisition barriers and enables viral growth. Success requires careful balance—free offerings must be valuable enough to attract users while premium features compelling enough to drive conversion (typically 2-5% of free users).
A pricing strategy that varies prices based on customer location, accounting for factors such as shipping costs, local market conditions, purchasing power, competitive landscape, and regulatory requirements. Geographic pricing may include zone pricing, freight absorption, basing point pricing, or uniform delivered pricing. Digital businesses often implement geographic pricing based on IP address location or customer billing address.
Google's product comparison and shopping platform that displays products from retailers alongside prices, images, and reviews. Google Shopping functions as both a discovery channel and a competitive pricing benchmark. Retailers submit product feeds to appear in results, competing on price visibility. The platform provides consumers transparent price comparisons and gives retailers access to high-intent shoppers, making competitive pricing essential for visibility and conversion.
An economic valuation method that decomposes the price of a good into the implicit prices of its constituent characteristics. Hedonic pricing models estimate how much each attribute contributes to the total price, enabling analysis of factors not directly traded in markets. Originally developed by Sherwin Rosen in 1974, it is commonly applied in real estate (location, amenities, environmental quality), automobiles, and consumer products to understand value drivers and optimize product configurations.
Temporary pricing offers provided when launching new products or entering new markets, designed to attract initial customers and generate trial. Introductory prices are typically lower than eventual regular prices and may include special promotions, discounts, or enhanced value propositions. The strategy aims to overcome customer inertia, build awareness, and establish market presence before transitioning to standard pricing.
A traditional retail pricing method where the selling price is set at exactly double the wholesale or cost price, resulting in a 50% gross margin and 100% markup. Formula: Retail Price = Wholesale Cost × 2. While simple to calculate and apply, keystone pricing ignores market conditions, competitor pricing, and varying demand elasticity across products. Best suited for markets with limited price transparency and competition.
A strategy of selling selected products below cost to attract customers with the expectation they will purchase additional, profitable items during the same visit. Loss leaders drive store traffic, increase basket size, and can establish price perception. Common products include staples, high-demand items, or products with strong complementary relationships. Success requires careful product selection and effective cross-selling.
A pricing approach for high-end, exclusive products where high prices are integral to brand positioning and perceived value. In luxury markets, price itself signals quality, exclusivity, and social status—lowering prices can actually decrease demand. Luxury pricing requires meticulous brand management, controlled distribution, exceptional quality, and customer experiences that justify premium positioning.
The price or cost associated with producing or selling one additional unit of a product or service. In economic theory, profit maximization occurs when marginal price equals marginal cost. Marginal pricing is particularly relevant in industries with high fixed costs and low variable costs, where pricing can vary significantly based on capacity utilization and incremental demand.
The practice of reducing original selling prices, typically expressed as a percentage off the original price. Markdowns are used to stimulate sales, clear inventory, respond to competition, or correct initial pricing errors. Strategic markdown management balances revenue maximization with inventory turnover, using timing, depth, and frequency of markdowns to optimize overall profitability.
A pricing method that adds a predetermined percentage or fixed amount to the cost of a product to determine its selling price. Markup can be calculated on cost (Markup % = (Price - Cost) / Cost × 100) or on selling price (Markup % = (Price - Cost) / Price × 100). Standard markups vary by industry, product category, and competitive intensity, providing a simple foundation for pricing decisions.
A pricing strategy that offers discounted prices when customers purchase multiple units of the same product (e.g., "3 for $10" or "Buy 2, Get 1 Free"). This approach increases transaction value, accelerates inventory turnover, and provides perceived savings to customers. Multiple unit pricing leverages psychological pricing principles, as customers often perceive greater value even when per-unit savings are modest.
A psychological pricing tactic based on the observation that prices ending in odd numbers (typically 9 or 5) are perceived as significantly lower than the next round number. Prices of $9.99 or $19.95 create a perception of better value than $10 or $20, despite minimal actual difference. Even-number pricing ($20, $100) conveys quality and simplicity, often used for luxury goods. The effectiveness varies by context, product category, and customer segment.
A market entry strategy involving setting initially low prices to rapidly attract customers, build market share, and establish a foothold in competitive markets. The approach sacrifices short-term profitability for long-term market position, relying on eventual price increases or volume-driven profitability. Effective when demand is price-elastic, economies of scale are significant, and low prices can deter competitive entry.
A pricing strategy that offers different prices to individual customers based on their specific characteristics, behaviors, purchase history, or predicted willingness to pay. Personalized pricing leverages customer data and predictive analytics to maximize revenue extraction while maintaining customer satisfaction. While potentially increasing profitability, personalized pricing raises ethical concerns about fairness and privacy, with some jurisdictions implementing regulatory restrictions.
An anticompetitive pricing strategy where a firm sets prices below cost with the intention of driving competitors out of the market, then raising prices once competition is eliminated. Predatory pricing is illegal under antitrust laws in most jurisdictions, though proving predatory intent can be challenging. Courts typically require evidence of below-cost pricing, intent to eliminate competition, and likelihood of recouping losses through subsequent price increases.
A strategy of setting prices higher than competitors to position products as superior in quality, exclusivity, or prestige. Premium pricing signals luxury, craftsmanship, or exceptional value, appealing to status-conscious consumers. Success requires genuine differentiation, strong brand equity, and consistent delivery of premium experiences. The higher margins offset typically lower sales volumes.
A psychological pricing strategy that sets prices at premium levels to create perceptions of superior quality, exclusivity, and status. Unlike cost-based approaches, prestige pricing uses high prices as a signal of value. Typically employs round numbers ($100, $500) rather than charm pricing to reinforce luxury positioning. Effective for brands with strong equity, unique products, and target customers for whom price signals quality.
The monetary value assigned to a product or service in exchange for ownership or use. Price represents the amount a buyer pays and a seller receives in a transaction, determined by factors including production costs, market demand, competition, perceived value, and strategic objectives. It serves as a fundamental signal in market economies, coordinating supply and demand decisions.
A cognitive bias leveraged in pricing where an initial price point (the anchor) serves as a reference for subsequent judgments. When customers see a higher original price before a sale price, they perceive greater value in the discount. Effective anchoring techniques include displaying "was/now" pricing, showing premium options first, and presenting competitor prices. The first price encountered heavily influences perceived fairness and value.
The systematic process of comparing a company's prices against competitors, industry standards, or best practices to evaluate competitive positioning and identify optimization opportunities. Effective benchmarking considers product comparability, geographic variations, customer segments, and promotional activity. Insights inform pricing strategy adjustments, highlight competitive gaps, and support pricing governance.
The reduction in sales revenue of an existing product caused by the introduction of a new product by the same company. Cannibalization occurs when new offerings compete with rather than complement existing products, shifting demand rather than creating new demand. While sometimes intentional (planned obsolescence, market defense), uncontrolled cannibalization erodes overall profitability and complicates portfolio management.
Tools, platforms, and practices that enable consumers or businesses to evaluate and compare prices for similar products across multiple sellers. Consumer-facing comparison sites (Google Shopping, PriceGrabber, Shopzilla) aggregate prices to facilitate informed purchasing. Business-to-business price comparison supports procurement decisions and competitive intelligence. Increased price transparency through comparison tools intensifies price competition and puts pressure on retailer margins.
The process by which markets determine the price of a good or service through the interaction of buyers and sellers. Price discovery mechanisms include auctions, negotiations, exchanges, and market-making activities. In efficient markets, price discovery rapidly incorporates all available information into prices. The process is central to market function, resource allocation, and economic coordination.
The practice of charging different prices to different customers or customer groups for the same or similar products. Three degrees exist: First-degree (perfect) charges each customer their maximum willingness to pay; Second-degree varies price by quantity or version purchased; Third-degree charges different prices to identifiable market segments (students, seniors, geographic regions). While potentially increasing total welfare by serving more customers, price discrimination raises fairness concerns.
A measure of how sensitive consumer demand for a product is to changes in its price. Calculated as the percentage change in quantity demanded divided by the percentage change in price. Elastic demand (elasticity > 1) means demand changes more than proportionally to price; inelastic demand (elasticity < 1) means demand is relatively unresponsive to price changes. Understanding elasticity is fundamental to pricing optimization, as it determines revenue impact of price changes.
The practice of raising prices on essential goods or services to unfairly high levels, typically during emergencies, disasters, or supply shortages. While often conflated with dynamic pricing, price gouging specifically exploits consumer desperation when alternatives are unavailable. Many jurisdictions have laws prohibiting price gouging during declared emergencies, with penalties including fines and criminal charges. The practice severely damages brand reputation and customer trust.
A statistical measure tracking the relative change in prices of a basket of goods and services over time. Price indices enable inflation measurement, purchasing power analysis, and cross-period price comparisons. Common indices include the Consumer Price Index (CPI), Producer Price Index (PPI), and industry-specific indices. Retailers use internal price indices to monitor their pricing trends relative to market movements and competitive positioning.
A company whose pricing decisions significantly influence competitors' pricing behavior in a market. Price leaders typically have dominant market share, cost advantages, or strong brand position. Two meanings: (1) A firm that initiates price changes that others follow (price leadership), or (2) A company known for offering the lowest prices in a category (low-price leader). Both roles shape market pricing dynamics and competitive strategies.
A retail policy guaranteeing to match or beat competitor prices on identical products. Price matching demonstrates commitment to competitive pricing, reduces customer price shopping, and builds trust. Policies typically include specific competitor lists, time windows, and verification requirements. While reducing margin on matched items, price matching can increase store traffic and prevent customer defection while collecting competitive intelligence.
The application of analytical techniques, including machine learning, statistical modeling, and optimization algorithms, to determine prices that maximize specific business objectives such as revenue, profit, market share, or customer lifetime value. Price optimization considers demand elasticity, competitive positioning, inventory constraints, and customer willingness to pay to identify optimal price points across products, channels, and customer segments.
A specific price level at which a product or service is offered, strategically positioned to appeal to target market segments and achieve specific business objectives. Price points are carefully selected based on consumer psychology, competitive positioning, and brand strategy. Common price points (e.g., $9.99, $49, $199) often reflect psychological pricing principles and market conventions.
The automated extraction of pricing data from websites, typically competitors' e-commerce sites, using web scraping tools, bots, or APIs. Price scraping enables real-time competitive price monitoring, market intelligence gathering, and pricing strategy optimization. While scraping publicly available data is generally legal, it may violate website terms of service, and aggressive scraping can strain target servers. Ethical scraping respects robots.txt files and avoids accessing protected data.
The degree to which consumers' purchasing behavior changes in response to price changes. High price sensitivity (elastic demand) means small price changes significantly impact demand; low sensitivity (inelastic demand) means demand remains relatively stable despite price changes. Price sensitivity varies by product category, customer segment, competitive availability, and economic conditions. Understanding sensitivity is essential for effective pricing strategy.
Analytical modeling techniques that predict the impact of pricing changes on key business metrics before implementation. Price simulations use historical data, demand models, competitive response assumptions, and scenario analysis to forecast revenue, volume, and margin outcomes of proposed pricing actions. Simulations enable risk assessment and strategy refinement, reducing the uncertainty of pricing decisions.
A pricing strategy where products are initially launched at high prices, targeting customers with high willingness to pay, then systematically reduced over time to capture additional market segments. Common with innovative products, technology, and fashion items where early adopters value novelty. Skimming maximizes revenue across customer segments with different price sensitivities while recouping R&D investments quickly.
Controlled experiments that evaluate consumer response to different price points in real market conditions. Methods include A/B testing (randomly assigning different prices to customer groups), geographic testing (varying prices by region), and temporal testing (changing prices over time). Price testing provides empirical evidence of demand elasticity and optimal price points, though implementation requires careful experimental design to ensure valid results.
The difference between an expected, standard, or budgeted price and the actual price paid or charged. Price variance analysis helps businesses understand deviations from pricing plans, identify market trends, evaluate purchasing efficiency, and assess the effectiveness of pricing strategies. Positive variance indicates paying less than expected; negative variance indicates paying more.
A visual analysis tool that displays the step-by-step transformation of price from list price through various deductions to the final pocket price or margin. The waterfall shows how discounts, rebates, allowances, promotions, payment terms, and other adjustments erode the starting price. Price waterfall analysis identifies margin leakage, reveals hidden costs, enables transaction-level profitability analysis, and guides pricing policy optimization to protect margins.
Structured tests designed to measure the causal impact of pricing variables on business outcomes. Well-designed experiments isolate the effect of price changes from other factors, providing reliable data for pricing decisions. Experiment types include randomized controlled trials, conjoint analysis, Van Westendorp price sensitivity analysis, and Gabor-Granger techniques. Results inform price optimization, willingness-to-pay estimation, and pricing strategy development.
The overarching approach and methodology a company uses to set prices for its products and services, aligned with business objectives, market positioning, and competitive dynamics. Pricing strategy encompasses target market identification, value proposition definition, pricing model selection (cost-plus, value-based, competitive), and tactical execution. Effective strategies balance short-term revenue with long-term brand value and customer relationships.
The practice of selling multiple distinct products or services together as a combined package, typically at a price lower than the sum of individual prices. Pure bundling offers items only as a package; mixed bundling allows separate or bundled purchases. Bundling can increase revenue, reduce customer acquisition costs, simplify purchasing decisions, and move less popular products alongside popular ones.
Temporary price reductions or special offers used to stimulate short-term sales, attract new customers, or drive specific consumer behaviors. Promotional pricing includes discounts, coupons, rebates, flash sales, and limited-time offers. While effective for generating immediate revenue and clearing inventory, excessive promotional pricing can erode brand value, train customers to wait for sales, and compress margins.
Pricing strategies that leverage cognitive biases and emotional responses to influence purchasing decisions. Techniques include charm pricing ($9.99), anchoring, decoy pricing, prestige pricing, and artificial scarcity. Psychological pricing recognizes that consumers don't always make rational price-based decisions and that perception of value often matters more than objective price comparisons.
Price adjustments aligned with predictable seasonal demand patterns throughout the year. Seasonal pricing increases prices during peak demand periods (holidays, summer travel) and reduces them during off-peak times. The strategy manages demand distribution, maximizes revenue during high-demand windows, and maintains sales velocity during slow periods. Effective seasonal pricing requires accurate demand forecasting and clear customer communication.
The final price at which a product or service is sold to the end consumer. The selling price encompasses all costs, markups, and profit margins, representing the actual transaction value. It may differ from the list price due to discounts, negotiations, or promotional offers applied at the point of sale.
The practice of assigning an estimated monetary value to goods, services, or resources that lack a market price or whose market price does not reflect true economic value. Shadow prices account for externalities, opportunity costs, and social impacts that standard market prices fail to capture. Commonly used in cost-benefit analysis, environmental economics, and public policy evaluation to assess the true value of non-market goods such as environmental quality, public infrastructure, and social welfare programs.
An umbrella term for technology-enabled pricing approaches that use data, analytics, and algorithms to make more informed, responsive, and optimized pricing decisions. Smart pricing combines elements of dynamic pricing, competitive intelligence, demand forecasting, and price optimization to move beyond static, intuition-based pricing. Implementation typically involves pricing software, data integration, and organizational capability building.
A dynamic pricing mechanism that temporarily increases prices when demand significantly exceeds available supply. Popularized by Uber, surge pricing uses price multipliers (e.g., 1.5x, 2x, 3x normal rates) triggered algorithmically when real-time demand analysis detects supply-demand imbalances. The strategy balances demand, incentivizes additional supply, and ensures service availability. While economically efficient, surge pricing faces criticism for perceived unfairness during emergencies or events.
A pricing strategy that sets prices based primarily on the perceived or estimated value to the customer rather than on production costs or competitor prices. Value-based pricing requires deep understanding of customer needs, willingness to pay, and the specific benefits delivered. It typically yields higher margins than cost-based approaches and aligns price with customer outcomes rather than input costs.
The price at which goods are sold in large quantities to retailers, distributors, or other intermediaries rather than to end consumers. Wholesale prices are typically lower than retail prices, allowing intermediaries to add their markup while still offering competitive consumer pricing. The difference between wholesale and retail prices represents the distribution channel's value-added margin.