Price
The overall sacrifice that a consumer is willing to make to acquire a specific product or service. (pg 388) ie money, time,travel, taxes, shipping etc.
High price: Signals Quality especially if the consumer knows little about the product.
Low Price: Signa
Only part of the marketing mix that doesn't add costs
price
Keystoning
A pricing method of marking merchandise for resell to an amount that is double the wholesale price.
(price= wholesale cost x 2)
--mark-up equals the cost of the item you are selling. Essentially, you're selling the product for twice what you paid for it
5 c's of pricing
Competition, costs, Company objectives, customers, Channel members
Profit Orientation
Focuses on target profit pricing, maximizing profit, or target return pricing. (ROI)
Which of the following is a profit-oriented pricing objective
Earning return on investment
Which pricing policy is probably "best" for a profit-oriented, low-cost producer who is introducing a new product into a market with elastic demand and is expecting strong competition very soon after product introduction?
penetration pricing
with profit orientation approach the price setter can choose to balance both ?
cost and revenue
Target profit pricing
setting annual target of specific dollar volume profit
-critical assumption=
although it is simple and the target involves only a specific solar volume, there is no benchmark of sales or investment used to show how much of the firm's effort is needed to a
Target profit pricing critical assumption is?
higher avg. prices will not cause the demand for a product to fall
A _________________ strategy involves accurately measuring all the factors needed to predict sales and
profits at various price levels, so that the price level that produces the highest return can be chosen.
maximizing profits
---objective =seek to get as much profit as possible
Genetech Corp. has invested heavily to develop a patented new product. Genetech wants to achieve a rapid return on its investment. It probably should set a ______________ pricing objective.
maximizing profits
Charging "all the traffic will bear" is a ______________objective
maximizing profits
-company charges an amount that might seem excessive, yet is still within the range of what customers will pay for a product or service.
(push the limit)
Target Profit Return
pricing to produce a specific ROI (expressed as % of sales).
A pricing objective that seeks a specific level of profit is a:
target return
A toaster manufacturer who has invested $1 million in the business wants to set a price to earn a 20 percent return on investment, specifically $200,000. What pricing method should it choose?
The toaster manufacture should go for a target-return pricing. While using this pricing method, companies determine the price that yield its target rate of return on investment.
Sales Orientation
Rooted in the belief that more sales= more profit, market share, units sales, dollar per sale...
Doesn't always mean lower the price.
Health clubs often use a low, introductory offer price to get people to join their club. These low prices represent a ___pricing strategy.
sales orientation
Many years ago Honda's Accord and Ford's Taurus were the top two selling cars in the United States. As
the year was coming to an end, Ford cut the price of the Taurus, hoping to outsell the Accord and allow
Ford to claim that "Taurus is the best-selling c
sales orientated
If a firm is taking an aggressive pricing approach by setting prices very low to generate new sales and take sales away from the competition, the firm would be adopting a(n)_______ pricing objective.
sales orientated
Sales-oriented pricing objectives:
A. might be achieved and still result in losses.
B. are especially risky during times when a firm's costs are rising rapidly.
C. may include market share targets as well as dollar or unit sales targets.
The problem with sales-oriented pricing objectives is that:
larger sales don't necessarily lead to higher profits.
Premium pricing
The firm deliberately prices a product above the prices set for a competing products to capture those customers who want the best no matter the price. Gain more market share because of perceived value.
Sharon knew that her established customers liked her product much better than the competitors. She was
planning to expand into new markets, and she was considering pricing. She was leaning toward charging
a higher price than competitors to help demonstrat
premium pricing
Competitor Orientated
Strategize price according to what the competitors are doing. Pays very little attention to the value of the product.
Diane owns a bakery where she sells cupcakes. Two blocks down there is another bakery, CC's Bakery,
that sells cupcakes for $1 less than Diane. Diane decides to lower her price and match CC's Bakery prices. What type of pricing strategy is Diane implement
competitor-orientated
Competition Parity
Setting prices that are similar to competitors.
In many high-end resort markets, Westin hotels compete directly with Crown Plaza hotels. Each firm weighs the comparative advantages and disadvantages of their offerings to determine whether to price above, equal to, or below the other hotel. In these mar
competition parity
Status Quo Pricing
Changes prices only when the competition does. ex. airlines.
Ryan gave the manager of his convenience store a set of binoculars so she could see the gasoline prices
charged by the other convenience store at that intersection. Ryan told the manager to always match the
gasoline prices of the other store. Ryan is usin
status quo
Customer Orientation
pricing are set to add value to a product.
Doesn't always mean lower prices, Firms can offer "state of the art" to enhance value.
ex. Saturn's haggle free cars.
A "no haggle" pricing policy is a type of ______pricing strategy.
customer orientation
Julia's is an upscale women's clothing store. Prices are based on customers' beliefs about the value of the
clothing. The store focuses on a limited target market and provides excellent customer service. Julia's is using a ______pricing strategy
customer orientation
A strategy of setting prices based on how customers develop their perceptions of value can often be the
most effective pricing strategy, especially if the strategy:
is supported by consistent advertising and distribution strategies
Demand Curve
Shows how many units of a product or service consumers will demand at specific prices & quantities. Usually straight or curved & assumes everything else constant.
According to a typical demand curve, the higher the price:
the lower the quantity consumers will buy
A demand curve shows the relationship between ________in a period of time
price (vertical) and demand (horizontal)
A change in ______would probably cause a change in the demand curve for a product
A. advertising expenditures
B. the economy
C. competitors' prices
D. the price of related goods
Sales
# of units x price.
Ex. $10 a unit x 1,000,000 unites = $10,000,000.
Ex $15 a unit x 500,000 unites = 7,500,000
Prestige Products/ Services
Upward sloping- to a point.
Bought for status more than function. Higher price= greater status b/c of exclusivity. (pg 394)
Customers purchase prestige products or services for the status of owning the products, not just for the functionality. These products may not follow a typical demand curve if:
raising the price makes more people want to own one
There is an old saying, "If you have to ask the price of a yacht, you cannot afford it." Products like yachts
are most likely to be associated with:
prestige
In the case of prestige goods, the demand curve sometimes slopes upward.
true
Price Elasticity of Demand
How consumers react to changes in prices; varies on products.
--consumers are more sensitive to price increases than decreases
% in quantity demanded / % in price
a)(1,000,000-500,000) = 50%
b)(15-10) = -50%
c) 50%/ -50%= -1
inelastic
non sensitive
-Products that are necessities are inelastic ( less than -1%)
--a 1% decrease in price - less than a 1% increase in quantity sold
-if you must increase prices do it with these type of prod.
Lowering prices with inelastic product will not inc
The food and beverage manager at an upscale country club once offered a two-for-one happy hour price for all alcoholic beverages, only to see a very little response to the special. For these consumers, demand for alcoholic beverages is:
inelastic
Marketer of products and services associated with the wedding industry know that customers often do not
care what the price is. They just want the wedding to be perfect. For these customers demand, is likely to
be:
inelastic
elastic
price sensitive
Luxury products will be substituted for cheaper products & are Elastic. (greater than 1%)
--a 1% decrease in price produces more than a 1% increase in Q sold
Near the end of the summer season, Sergio still has a large inventory of bathing suits. He needs to sell them rather than holding them over till next season, because colors and styles often change. He plans to
offer them at 30 percent off the retail price
elastic
Factors that influence Price Elasticity of Demand
Income, Substitution, and Cross- price elasticity.
Income Effect
Spending behaviors change as income increases, higher priced substitutions. ex Steaks instead of hamburgers.
Rodi owns Hallman's auto repair service. He has observed over the years that customers keep their highmileage cars longer when the economy is doing poorly, creating demand for his maintenance and repair service. Rodi has observed the impact of __on demand
income effect
The more substitutes that exist in a market
the more sensitive consumers will be to changes in the price of a particular product
Substitution Effect
Refers to consumer's ability to substitute other products if another product isn't there or is too expensive. Brand loyalty offsets this effect to a certain point.
A major hotel chain found that if they were to reduce the cost of the ice cream they currently served they would be able to save over 400 employees jobs. Therefore, they switched from a high priced brand of ice
cream to a more moderate priced ice cream. T
substitution effect
Brad always buys and uses Nike brand golf balls. If he finds a Titlelist or Callaway ball in the rough, he gives it away. Brand loyal golfers like Brad allow Nike to charge a higher price and not lose many sales.
By building a strong brand, Nike has effec
reduced the price elasticity of demand for its products
Cross-Price Elasticity
the percentage change in the Qd of Product A compared with the percentage change in price in product B
Complimentary products
Products whose demand are positively related; rise and fall together. (hot dogs and hot dog buns)
Bill is a yacht broker in the southeastern United States. For years he has had difficulty selling large
yachts locally because there were few places to dock these boats. Yachts and spaces to dock them are an
example of:
complimentary
Internet comparison shopping sites like Shopping.com and Pricegrabber.com allow consumers to compare prices of substitute products much more easily than is possible without the Internet. These sites
have:
increased the cross-price elasticity for substitute products
Substitute products
Products that can be switched out for something similar. % increase for product A will lead to a % decrease for product B.
The internet has enabled consumers to become more savvy.
changes in demand are negatively related (price of Blu-Ray drops - demand f
Variable Costs
Costs that vary with production volume ex. Primary Labor and materials. Expressed on a cost per unit basis.
Variable cost per unit x # of items = total variable costs.
ex 10 a room x 10,000 rooms booked = $100,000
Products shouldn't be based on costs.
-mo
Labor, materials, and energy are typically __________ costs
variable
Variable costs change with
changes in the quantity being produced
Often, at the beginning of a semester, professors are encouraged or directed to allow students to be added to a class after the course has started. For the university, the variable cost of adding another student to a class:
next to nothing
Fixed Costs
Costs that remain the same, regardless of outside factors -or levels of production. ie rent, utilities, insurance, admin. salaries, depreciation of equipment, etc. Will always appear as a horizontal line straight across the graph (pg 400)
Total Cost
The sum of total variable costs and fixed costs.
ex. 100,000+ 100,000= 200,000 total cost; starts on the graph where fixed costs intersect the vertical axis.
Break-even Analysis
A method that helps managers to examine the relationships among cost, price, revenue, and profit over different levels of production and sales.
-- Clarifies the conditions at which each point is profitable. ; takes average of each thing sold, prices reduc
At the break-even point:
profits are zero
Mark-up Price
The # of units/ 1- desired rate of return
ex. ((20 + (500,000/100,000))/ 1-15%
Break-even analysis is useful because it allows managers to:
estimate the quantity they will need to sell at a given price to break even
One of the limitations associated with break-even analysis is that:
assume only one price
-needs to be done for diff quantities
Break- even point
The point where the # of units generates just enough revenue to cover total costs.
Fixed Costs/ Contribution Margin
100,000/40= 2,500 rooms
or...
(units)
(Fixed costs + Target Profit)/Contributions per unit
ex. (100,000 + 200,000 <--- profit) /40 = 7,500
Total Revenue
Selling price per unit x # of units sold.
Total Variable cost
Variable cost per unit x Quantity
Contribution per unit
the price - variable cost per unit
ex. 50-10= $40
Monopoly
One firm operates the entire industry, monopolies are illegal unless they are regulated by the government. Ex. Utility companies operate more efficiently if they are unified.
-- there is often only one provider of power in each region of the country: Flor
Oligopolistic Competition
Industry in which only a few firms dominate. Change prices in reaction to competition. ex Coke & Pepsi, the Airline Industry (soft drinks)
(more price competition/ fewer firms)
In oligopolistic industries, all firms normally charge the same price. What kind of a pricing method are they said to be following?
going-rate pricing, base their prices largely on competitors' prices.
Because there are only a few firms in markets with oligopolistic competition
price wars may occure
Price War
When one firm tries to gain market share by lowering the price, and the other follows, and so on.
Predatory pricing
When a firm sets a price so low for one or more of its products with the intent to drive out competition. Hard to prove in court, especially when one has to prove not only the company's wrongdoings but also prove the intent. (pg. 403)
illegal under both the Sherman Antitrust Act and the Federal Trade Commission Act.
predatory pricing
Monopolistic Competition
Occurs when there are many firms competing for customers with *
differentiated products
*. By differenting they can appeal to customers; most common type of market.
(less price competition/ many firms)
--restaurants/ hotels and pubs
Pure Competition
Large number of sellers of commodities. prices set according to supply and demand, branding improves chances of selling one commodity over another one.. price is set based on laws of supply and demand. Ex. Dole bananas. (grains, gold, meat, spices, or min
In __, many firms provide similar products that are considered substitutes for each other.
pure competition
Which of the following is most likely to be characterized by pure competition in the United States?
soy beans
Differentiating a product in pure competition
even with a sticker (bananas) - opportunity for customers to identify it as distinct from the rest
Channel members
Manufacturers, wholesalers, retailers. Can have different perspectives on pricing strategies.
Manufacturer - higher prices to increase the image. Retailer - lower prices to increase sales.
Gray Market
Employs irregular but not necessarily illegal methods to sell goods at lower prices. To become an authorized dealer - required to abide by certain rules. But can sell the overstock merchandize to an unauthorized dealer for just about cost. To stop this -
Macro Influences on Pricing
The internet, the economy, etc.
show rooming
customers visit a store to check a product out, then buy online.
Reserve Price
A minimum acceptable selling price in an auction. If the bidding does not exceed the price, the sale will not go through.
cross-shopping
the pattern of buying both premium and low-priced merchandise
A _________________ strategy involves accurately measuring all the factors needed to predict sales and profits at various price levels, so that the price level that produces the highest return can be chosen.
maximizing