03 - Pricing Concepts

Question 1

Pricing Characteristics (2)

Answer 1

1) Pricing Decisions determine the types of customers and competitors a firm attracts
2) A single pricing error can effectively nullify all other marketing mix activities

Question 2

Equation: Profit

Answer 2

(Unit Price * Quantity Sold) - [Fixed Costs + (Unit Variable Costs * Quantity Sold)]

Question 3

Pricing Objectives (5)

Answer 3

1) Be consistent with a firm’s overall marketing objectives
2) Enhancing brand image
3) Providing customer value
4) Obtaining an adequate ROI or cash flow
5) Maintaining price stability in an industry or market

Question 4

Factors affecting Pricing (8)

Answer 4

1) Demand for an offering
2) Costs, particularly variable costs
3) Consumer value perceptions and price sensitivity determines the max price charged
4) The price must at least cover unit variable costs; otherwise, a loss will result for each offering sold
5) Government regulations
6) Life-cycle stage of the offering
7) Profit margins of marketing channel members
8) Price differentials of a firm’s offerings to maintain perceived value differences among buyers

Question 5

Equation: Value

Answer 5

Perceived Benefits/Price

Question 6

Steps in Setting the Price Policy (6)

Answer 6

1) Selecting the Pricing Objective
2) Determining Demand
3) Estimating Costs
4) Analyzing Competitors’ Costs, Prices and Offers
5) Selecting a Pricing Method
6) Selecting the Final Price

Question 7

Price Objectives (5)

Answer 7

1) Survival
2) Maximum current profit
3) Maximum market share
4) Maximum market skimming
5) Product-quality leadership

Question 8

Methods to Determine Demand (3)

Answer 8

1) Evaluating price sensitivity of potential customers
2) Estimating demand curves (through surveys or statistical analysis)
3) Price elasticity of demand

Question 9

Equation: Price Elasticity of Demand

Answer 9

% change in quantity demanded/% change in price

Question 10

Definition: Price Elasticity of Demand

Answer 10

Measures how responsive consumer demand is to changes in an offerings price.

Question 11

Definition: Elastic Demand

Answer 11

When the percentage change in quantity demanded is greater than the percentage change in price (E > 1). This means that a small price reduction results in a large increase in the quantity purchased.

Question 12

Definition: Inelastic Demand

Answer 12

When the percentage change in quantity demanded is less than the percentage change in price (E < 1). This means that a small price reduction will result in a small increase in the quantity purchased.

Question 13

Factors affecting price elasticity (3)

Answer 13

1) The more substitutes an offering has, the greater it’s price elasticity
2) The more uses an offering has, the greater its price elasticity
3) The higher the ratio of the price of the offering to the income of the buyer, the greater the price elasticity

Question 14

Factors reducing price sensitivity

Answer 14

1) Distinctive product
2) Buyers are less aware of substitutes
3) Buyers cannot easily compare the quality of substitutes
4) The expenditure is a smaller part of the buyer’s total income
5) Small expenditure compared to the total cost of the end product
6) Part of the cost is borne by another party
7) Product is used in conjunction with assets previously bought
8) The product is assumed to have more quality, prestige or exclusiveness
9) Buyers cannot store the product

Question 15

Types of costs (4)

Answer 15

1) Fixed costs
2) Variable costs
3) Total costs
4) Average cost

Question 16

Major considerations in price (3)

Answer 16

1) Costs = Price floor
2) Competitors’ prices = orienting point
3) Customers’ assessment of unique features = price ceiling

Question 17

Definition: Markup pricing

Answer 17

Adding a standard markup to the product’s cost

Question 18

Equation: Markup Price

Answer 18

Unit Cost/(1-desired return on sales)

Question 19

Definition: Target-Return pricing

Answer 19

Price that yields its target rate of return on investment

Question 20

Equation Target-return price

Answer 20

unit cost + (desired return * invested capital)/unit sales

Question 21

Definition: Percieved-value pricing

Answer 21

Based on a buyers’ image of product, channel deliverables, warranty quality, customer support, and softer attributes

Question 22

Factors to select final price (4)

Answer 22

1) Impact of other marketing activities
2) Company pricing policies
3) Gain-and-risk-sharing pricing
4) Impact of price on other parties