Chapter 14 Price Setting Flashcards
(28 cards)
What is price?
Overall sacrifice a consumer is willing to make- money, time, energy- to acquire a specific product/service
Only one of 4ps that generates revenue instead of cost
What are the five Cs of pricing?
Company objectives
Customers
Costs
Competition
Channel Members
What is profit orientation?
A company objective that can be implemented by focusing on target profit pricing, maximizing profits or target return pricing.
What is competitor orientation?
When firms strategize according to the premise that they should measure themselves primarily against their competition.
Competitive parity: setting prices similar to those of their major competitors
Status quo pricing: setting prices to meet those of the competition
e.g. if delta raises avg fares, American and united will follow with similar increases
What is sales orientation?
Used when firm believes increasing sales will help the firm than increasing profits. e.g. charging less for more revenue
e.g. premium pricing, lower prices
Examples:
sell products in bulk volumes at discounted prices
high end jewelry store- might focus on dollar sales, maintain higher prices
some firms may be more concerned about their overall market share
What is customer orientation?
Setting a pricing strategy based on how the company can add value to its products/services
e.g. having an expensive option to increase prestigious image of the brand
What is target profit pricing?
Pricing strategy implemented by firms when they have a particular profit goal as their overriding concern; uses price to stimulate a certain of sales at a certain profit per unit.
What does maximizing profits mean?
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 maximized.
What is target return pricing?
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.
It is usually expressed as % of sales
What is premium pricing?
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.
(another way of adopting market share)
What is the price elasticity of demand?
Measures how changes in a price affect the quantity of the product demanded:
% change in quantity demanded/ % change in price
Elastic vs inelastic
Elastic: relatively small changes in price will generate fairly large changes in quantity demanded
e.g. if price changes a little bit, people will demand a lot more/less
e.g. Chanel handbags
= if price elasticity is < -1
e.g. price elasticity of -5 indicates that a 1% decrease in price results in a 5% increase in quantity sold
Inelastic:
relatively small changes in price will not generate large changes in the quantity demanded
e.g. necessities like food
= if absolute value greater than 0 but lower than 1
What is dynamic pricing?
Refers to the process of charging different prices for goods and services based on the type of customer; time of the day, week, or even season; and level of demand.
Factors affecting price elasticity of demand:
- Income effect: change in quantity of a product demanded by consumers due to a change in their income
- Substitution effect
The greater the availability of substitute products, the higher the price elasticity of demand
e.g. if price of tide increase, people will turn to other laundry detergent
Complementary products that % increase in demand for one results in a percentage increase in other
Substitute products: products that % increase in demand for one results in % decrease in other
What is cross price elasticity?
Measure of how much quantity demanded of one good responds to a change in the price of another good:
% change in quantity of product A demanded compared to % change in price in product B
What are variable costs?
Costs that vary with production volume
Total cost equation?
Variable + fixed costs
What are fixed costs?
Costs that remain at the same level, regardless of any changes in vol of production.
e.g. rent, utilities, salaries, depreciation of equipment
What is the break-even point?
The point at which the number of units sold generates just enough revenue to equal the total costs.
Formulas to calculate break even point
total variable costs = variable cost per unit * quantity
total costs = fixed costs + total variable costs
total revenue = price * quantity
contribution per unit = price - variable cost per unit
profit = contribution per unit * quantity) - fixed costs
breakeven point (units) = (fixed costs + target profit)/ contributions per unit
How to calculate target return price?
(Variable costs + (fixed costs/expected unit sales)) * (1+ target return %) (expressed as a decimal)
What are the 4 levels of competition?
Monopoly: one firm controls the market
Monopolistic: many firms sell differentiated products at different prices
Pure competition:
Many firms sell commodities for the same prices
Oligopolistic competition: a handful of firms control the market
can lead to price war: 2 or more firms compete by lowering their prices
can also lead to predatory pricing: occurs when a firm sets a very low price for one/more of its products with the intent of driving its competition out of business. (illegal in US under FTC act and Sherman Antitrust Act)
What are some key pricing strategies for existing products?
Every day low pricing: price between regular console price and deep-discount sale prices competitors might offer
High/low pricing: promotion of sales, when prices are temporarily reduced to encourage purchase
appealing bc attracts 2 distinct market segments (price sensitive and not price sensitive)
What is a retailers’ cooperative
A marketing channel intermediary that buys collectively for a group of retailers to achieve price and promotion economies of scale. Similar to a wholesaler, except that the retailer members have some control over, and sometimes ownership of, the cooperative’s operations
