Cost and Economics In Pricing Strategy Flashcards
(115 cards)
1
Q
What is the formula for Margin %?
A
Margin % = (Selling Price - Cost) / Selling Price
2
Q
How can Margin % be expressed in terms of Selling Price?
A
Margin % = (SP - C) / SP
3
Q
What is the relationship between Margin %, Selling Price (SP), and Cost (C)?
A
Margin % * SP = SP - C
4
Q
Fill in the blank: SP(Margin% - 1) = _______.
A
-C
5
Q
What is the rearranged formula for Selling Price (SP) based on Margin %?
A
SP = C / (1 - Margin%)
6
Q
What does the term ‘markup’ refer to?
A
Markup refers to the difference between the selling price and the cost of an item, expressed as a percentage of the cost.
The formula for markup is: (selling price - cost) / cost.
7
Q
True or False: Markup and margin are the same when decimals are involved.
A
False
Markup and margin are not the same under these conditions.
8
Q
Fill in the blank: Markup and margin are the same if they are in absolute _____ and using the same currency.
A
total value
This condition applies when comparing markup and margin.
9
Q
What is the condition under which markup and margin are considered the same?
A
When they are in absolute total value and using the same currency
This is crucial for accurate comparisons.
10
Q
How is profit calculated?
A
Profit = quantity * (price - cost)
This formula shows the basic relationship of profit in terms of quantity, price, and cost.
11
Q
True or False: Profit = (15 - 3P) * (cost - price) is the correct way to write the profit function.
A
False
This formulation incorrectly positions cost and price in the profit equation.
12
Q
Fill in the blank: The relationship between price and quantity can be expressed as _______.
A
Q = f(p)
This signifies that quantity depends on the price level.
13
Q
Why are demand functions more important than supply functions for individual companies?
A
Demand analysis provides helpful information for competition in branded markets and reveals more about pricing options for individual firms
Individual firms have more flexibility in pricing within branded markets, which are not perfectly competitive.
14
Q
What do demand functions help individual firms analyze?
A
Pricing options
Demand functions provide insights that are particularly useful for firms in branded markets.
15
Q
What do supply functions typically reveal?
A
Information about the entire market
Supply functions are used to determine the market clearing price.
16
Q
Fill in the blank: In microeconomics, the graph typically has _____ on the X-axis and _____ on the Y-axis.
A
Q, P
17
Q
True or False: Supply functions are generally more useful for individual firms than demand functions.
A
False
Demand functions provide more relevant information for individual firms in branded markets.
18
Q
What is a key difference between branded markets and perfectly competitive markets?
A
Branded markets give individual firms more flexibility in setting prices.
19
Q
What is perfect competition?
A
A market in which prices are set at the point that the market will bear.
In perfect competition, the price where the quantity sold is what is demanded by the market.
20
Q
What type of products are found in a perfectly competitive market?
A
Identical products that must be priced the same.
This uniformity is essential for the definition of perfect competition.
21
Q
What is the supply function?
A
A mathematical relationship that shows the quantity of a good that producers are willing to sell at various prices.
It typically represents the relationship between price (P) and quantity (Q).
22
Q
True or False: In a commodity market, individual firms can set their own prices.
A
False.
In commodity markets, prices are influenced by what other vendors are charging.
23
Q
What are English auctions?
A
Open auctions where bidders publicly announce their successive higher bids until no higher bid is forthcoming.
24
Q
What is a minimum bid in an auction?
A
The price at which an auction begins.
25
What is a reserve price?
The minimum acceptable price for an item at auction.
26
What is one advantage of English auctions for sellers?
Buyers become emotionally caught up in the moment and make really high bids!!
27
What is one advantage of English auctions for buyers?
The winning bidder pays less than their private valuation if emotional bidding does not occur.
28
What is a disadvantage for sellers in English Auctions?
Winning bidders tend not to bid their full private valuations
## Footnote
This can lead to sellers receiving less than the optimal price for their items.
29
What emotional risk do buyers face in English Auctions?
The risk of getting caught up emotionally in the excitement of competitive bidding
## Footnote
This can lead to overbidding and potentially paying more than the item's value.
30
What is the 'winner's curse'?
The 'winner' most likely overvalued the item
## Footnote
This concept suggests that the winning bidder in an auction may end up paying more than the item's actual worth.
31
In what contexts is the 'winner's curse' applicable?
* Prospecting
* Buying companies
* Signing free agents
* Investing in artwork
## Footnote
These contexts highlight the relevance of the concept in various fields like business and investment.
32
What is another name for Dutch auctions?
Descending-price auctions
33
How does bidding start in a Dutch auction?
At a high price and drops until a bidder accepts the price
34
Why might Dutch auctions be better for sellers?
If buyers are risk averse to losing
35
What is a key characteristic of Dutch auctions?
They are fast
36
True or False: Dutch auctions start with low prices.
False
37
Fill in the blank: In Dutch auctions, the price _______ until a bidder accepts it.
drops
38
What is the main difference between Dutch auctions and English auctions?
Dutch auctions start high and decrease, while English auctions start low and increase
39
What is a sealed-bid auction?
Bidders submit their bids independently and are not privy to other bid values
## Footnote
Sealed-bid auctions maintain confidentiality among bidders.
40
What happens in a first-price sealed-bid auction?
Highest bidder wins
## Footnote
In this format, the winning bidder pays the amount they bid.
41
What is a second-price sealed-bid auction also known as?
Vickrey auctions
## Footnote
Named after economist William Vickrey, who introduced this auction format.
42
How is the winner determined in a second-price sealed-bid auction?
Highest bidder wins at the price bid by the second-highest bidder
## Footnote
This encourages bidders to bid their true value.
43
What is the first price auction?
An auction format where the highest bidder wins and pays the amount they bid
## Footnote
Works well when there is a lot of variance in private values
44
What is the second price auction?
An auction format where the highest bidder wins but pays the second-highest bid
## Footnote
Encourages buyers to bid their actual valuation, instead of shading their bid downward
45
When does the first price auction work best?
When there is a lot of variance in private values
46
When does the second price auction work best?
When there is less variance in private values
47
Who uses B2B (business-to-business) Reverse Auctions used for?
Used by many businesses and governmental organizations
48
What is the primary benefit of B2B Reverse Auctions?
Reduces costs for the supply of a particular product
49
What is required for a successful B2B Reverse Auction?
Careful specification of a supply contract and suppliers willing to bid
50
B2B Reverse Auctions are best used for items that are _______.
[commodities or that have easily specified engineering characteristics]
51
What is the role of users in B2B reverse auctions?
Make an offer and provide the service or goods
## Footnote
Users are typically sellers in the auction process.
52
What does the auctioneer do in B2B reverse auctions?
Chooses a seller and rates the seller according to service level
## Footnote
The auctioneer is usually the buyer in this scenario.
53
In a reverse auction, who are the users?
Sellers
## Footnote
Sellers participate by making offers to provide goods or services.
54
Fill in the blank: The auctioneer in a reverse auction rates the seller according to _______.
service level
55
True or False: In a reverse auction, the buyer chooses the seller based on the lowest bid.
False
## Footnote
The buyer chooses based on various criteria, including service level, not just the lowest bid.
56
What is the primary purpose of a B2B reverse auction?
To obtain goods or services at competitive prices
## Footnote
This process encourages sellers to offer their best prices.
57
What do sellers do in the context of B2B reverse auctions?
Make offers to provide goods or services
## Footnote
Sellers compete against each other to win the auction.
58
True or False: The auctioneer's main job is to sell goods.
False
## Footnote
The auctioneer's role is to facilitate the auction and select a seller.
59
What is a disadvantage of B2B reverse auctions regarding trust?
Focus on price can destroy trust in the supply relationship
## Footnote
Trust is essential for long-term supplier relationships and can be negatively impacted by price-centric strategies.
60
How can supplier customer service be affected by B2B reverse auctions?
Supplier customer service may be sacrificed to achieve cost savings
## Footnote
Cost-saving measures can lead to reduced attention to customer service, impacting overall satisfaction.
61
What impact can B2B reverse auctions have on supplier margins?
Can drive suppliers margins so low that it threatens future supply
## Footnote
Unsustainable pricing pressures can harm suppliers' viability and willingness to continue the relationship.
62
What is cost-plus pricing?
A pricing strategy where a fixed percentage or fixed amount is added to the total cost of producing a product to determine its selling price.
## Footnote
Cost-plus pricing ensures all costs are covered while providing a profit margin.
63
In cost-plus pricing, what does 'markup' refer to?
The amount added to the cost of a product to determine its selling price, usually expressed as a percentage.
## Footnote
Markup can vary based on industry standards and competition.
64
What is the formula for determining selling price in cost-plus pricing?
Selling price = Total cost + Markup
## Footnote
This formula ensures that the selling price covers all costs and includes a profit margin.
65
What does 'full cost per unit' mean?
The total cost of producing one unit of a product, including both fixed and variable costs.
## Footnote
Understanding full cost per unit is essential for accurate pricing strategies.
66
Fill in the blank: The selling price in cost-plus pricing is determined by adding a _______ to the total cost.
[markup]
67
True or False: Cost-plus pricing only considers variable costs.
False
## Footnote
Cost-plus pricing considers both fixed and variable costs to determine total cost.
68
When is cost-plus pricing useful?
In situations where sellers have sufficient pricing power, transactions with very custom specifications and outcomes, industries with regulated prices, and as a starting point to set the price for a new product.
## Footnote
Cost-plus pricing can provide a straightforward method for determining prices based on costs plus a markup.
69
What are the situations where cost-plus pricing is useful?
* Sellers have sufficient pricing power
* Transactions with very custom specifications and outcomes
* Industries with regulated prices
* Starting point to set the price for a new product
## Footnote
Each situation highlights unique aspects of pricing strategy that may benefit from a cost-plus approach.
70
What is a key advantage of cost-plus pricing?
Simple to execute
## Footnote
This pricing method is straightforward, making it easy for businesses to implement.
71
What does cost-plus pricing guarantee?
Guarantees targeted margin
## Footnote
This ensures that a specific profit margin is achieved on each product sold.
72
What is an additional advantage of cost-plus pricing?
Easy to defend
## Footnote
The rationale behind this pricing strategy can be easily explained to stakeholders.
73
What does cost-plus pricing ignore?
Opportunity cost
## Footnote
Opportunity cost refers to the potential benefits lost when choosing one alternative over another.
74
What type of cost does cost-plus pricing use?
Historical cost rather than current or future replacement value
## Footnote
This can lead to pricing that does not reflect the current market conditions.
75
List all disadvantages of cost-plus pricing (4):
1. Usually leads to sub-optimal pricing
2. Promotes cost inefficiency
3. Ignores opportunity costs
4. Uses historical cost rather than current or future replacement value
76
What is target-cost pricing?
A pricing strategy that starts with the market price and subtracts the target margin to determine the target cost.
## Footnote
Focuses on controlling costs to achieve desired profitability.
77
Fill in the blank: In cost-plus pricing, the markup is added to the _______.
Full cost per unit
78
True or False: In target-cost pricing, the focus is on how much to charge.
False
## Footnote
The focus is on how much the product can cost to maintain profitability.
79
Who is the price setter in target-cost pricing?
Buyer
## Footnote
In this pricing strategy, the buyer determines the price they are willing to pay.
80
Who is the price taker in target-cost pricing?
Seller
## Footnote
The seller must accept the price set by the buyer, making them a price taker.
81
In target-cost pricing, what is the formula to determine the target cost per unit?
Market price per unit - Target margin
## Footnote
This formula ensures that the seller can produce the product at a cost that allows for the desired profit margin.
82
Fill in the blank: In target-cost pricing, the target cost per unit is calculated by subtracting the _______ from the market price per unit.
Target margin
83
What role do buyers play in target-cost pricing?
They set the price
## Footnote
Buyers have significant influence over the pricing strategy by determining the maximum price they are willing to pay.
84
What role do sellers play in target-cost pricing?
They take the price
## Footnote
Sellers must adapt their cost structures to meet the price set by buyers.
85
True or False: In target-cost pricing, the seller has the ability to set the product price.
False
## Footnote
The seller must accept the price determined by the buyer, thus they do not have pricing power.
86
What is price discrimination?
The practice of selling an identical product to different buyers at different sales prices
## Footnote
Price discrimination allows sellers to maximize profits by charging different prices based on consumer willingness to pay.
87
What are synonyms for price discrimination?
* Price differentiation
* Differential pricing
## Footnote
These terms are often used interchangeably in economic discussions.
88
Why do sellers discriminate when setting prices?
To improve margins, incentivize buyers to buy differently or more, and sell to new customer segments
## Footnote
Sellers may employ price discrimination strategies to maximize their profits by targeting various buyer groups.
89
True or False: Sellers discriminate in pricing because they can.
True
## Footnote
Sellers often have the flexibility to set prices based on market conditions and buyer behavior.
90
Why do buyers accept price discrimination?
Because price can be less important than other factors, e.g. convenience
## Footnote
Buyers may prioritize convenience over price.
91
What is a reason buyers accept lower prices?
Buyers can't afford to pay more and enjoy a 'good deal'
## Footnote
Lower prices attract buyers who are looking for affordability.
92
What is product differentiation?
Product differentiation is the process of distinguishing a product from others to make it more attractive to a specific target market.
93
True or False: Product differentiation can only be based on physical attributes.
False
94
Fill in the blank: A common strategy for product differentiation is to emphasize ________ features, such as quality or design.
unique
95
How does product differentiation benefit a company?
It helps to create a competitive advantage, allowing the company to attract customers and potentially charge higher prices.
96
What is cost-based price discrimination?
A pricing strategy where the cost of doing business varies widely between different customers and transactions.
97
What influences a customer's willingness to pay in cost-based price discrimination?
* Higher willingness to pay
* Higher cost of next best alternative
98
What is a Price and Margin waterfall?
A tool to discuss margin leakage
## Footnote
It helps visualize the various factors affecting pricing and margins.
99
What is the initial price before VAT known as?
List price
## Footnote
The list price is the base price before any deductions or adjustments.
100
What adjustments are made to the global list price to determine the local list price?
FX rate & country adjustments
## Footnote
This includes exchange rate variations and country-specific economic factors.
101
What are some examples of on-invoice deductions?
* Discounts (volume, payment, etc.)
* Promotions
* Rebates
## Footnote
These deductions are applied directly on the invoice.
102
What is the term for the price after on-invoice deductions?
Invoice price
## Footnote
This is the price that reflects all deductions applied on the invoice.
103
What is included in off-invoice deductions?
* Cash discounts
* Coop advertising
* Buyback guarantee
## Footnote
These deductions are not reflected on the invoice but affect the net price.
104
What is the final price received by the seller after all deductions?
Net price
## Footnote
This is the amount after all on-invoice and off-invoice deductions have been applied.
105
What are country-specific adjustments based on?
GDP/capita
## Footnote
These adjustments account for the economic conditions of a specific country.
106
What is the purpose of cash discounts?
To encourage early payment or bulk purchases
## Footnote
Cash discounts provide an incentive for customers to pay sooner.
107
What does the price waterfall illustrate?
The flow of price adjustments from list price to net price
## Footnote
The price waterfall provides a visual representation of how various deductions impact pricing.
108
What does the term 'Margin waterfall' refer to?
A financial tool that outlines the various components contributing to the overall margin of a business.
## Footnote
It helps in visualizing how different costs impact profitability.
109
What are the components of the Margin waterfall?
* Net price
* Cost of goods sold
* Cost to serve
* Contribution Margin
* Direct SG&A
* Indirect SG&A
* Other costs
* Operating Margin
## Footnote
Each component plays a critical role in determining the overall profitability.
110
Fill in the blank: The 'Net price' is the revenue after _______.
[deductions or allowances]
111
What does 'Cost of goods sold' include?
* Cost of materials and components
* Factory conversion cost
## Footnote
This refers to the direct costs attributable to the production of goods sold by a company.
112
What are some examples of costs included in 'Cost to serve'?
* Freight
* Warehousing
* Warranty
* Goodwill
## Footnote
These costs are associated with delivering products to customers.
113
What is included in 'Direct SG&A'?
* Direct sales expense
* Salary
* Travel
## Footnote
Direct Selling, General, and Administrative expenses directly related to sales activities.
114
What does 'Indirect SG&A' encompass?
* Other selling costs
* General management
* Branding
* Other overhead
## Footnote
These costs are not directly tied to sales but are necessary for overall operations.
115
What is the purpose of calculating 'Operating Margin'?
To assess the efficiency of a company in managing its operating expenses relative to its revenue.
## Footnote
Operating Margin is a key profitability metric.
