11 Pricing Analysis Flashcards by Eric D

Income Effect

As pricing falls, buyers have more Real Income. They can buy More product with the same amount of money.

How well did you know this?

Not at all

Perfectly

Substitution Effect

Consumers buy one good as its price relative to others drops.

How well did you know this?

Not at all

Perfectly

Change in Demand CURVE

A change in price changes demand ALONG the curve. A change in a determinant MOVES THE ACTUAL CURVE

How well did you know this?

Not at all

Perfectly

Prestige goods

A decline in price might cause a decrease in demand.

How well did you know this?

Not at all

Perfectly

Price Elasticity of Demand

definition and formula

Sensitivity of quantity demanded from changes in Price

Percentage change in Price

(P1-P2)/P1+P2

The absolute value is always used. No negatives

How well did you know this?

Not at all

Perfectly

Elasticity Types

Greater Than 1: Elastic. Small change in price = significant change Demand

Equal to 1: UNITARY elasticity: 1 unit change in P = 1 unit change in Demand

Less than 1: Inelastic. Large change in price = small change in Demand

Infinite: PERFECTLY ELASTIC. A horizontal line. A single seller can’t influence market.
Farmer can sell all at market price. none above market price. (happens in pure competition)

Equal to Zero: PERFECTLY INELASTIC. Vertical Line. customers will pay any price. Drug users.

How well did you know this?

Not at all

Perfectly

Table of TOTAL effects on REVENUE

depending on elasticity

Price + Decrease No Change Increase
Price - Increase No change Decrease

How well did you know this?

Not at all

Perfectly

5 Pricing Objectives

PT, VIS
Profit Maximization

Target MARGIN maximization. A target RATIO of Profit to Sales.

Volume Oriented: Sales Volume or Market Share

Image Oriented: Enhance perception of Merch Mix

Stabilization: Pricing set to maintain stable relationship of Firms price to Competitors

How well did you know this?

Not at all

Perfectly

Price Setting Factors

Supply and Demand is determined by:
C, C, C
Customer Demand
Competitor Actions
Costs

How well did you know this?

Not at all

Perfectly

INTERNAL PRICE SETTING FACTORS

MM, AOC
1. Marketing Objectives:SPMP, Survival, Profit Maximization, Market Share Leadership, Product Quality Leadership

2.MARKETING MIX STRATEGY

ALL RELEVANT COSTS: Variable,
Fixed, Total. R&D>Cust Svc. Lower costs to Price = more willing to supply.
ORGANIZATIONAL FOCUS of pricing decisions.
CAPACITY: example: Utilities use Peak-Load. Demand is low = low price, vice-versa

How well did you know this?

Not at all

Perfectly

EXTERNAL PRICE SETTING FACTORS

TC, P-D, C

TYPE OF MARKET: pure competition, monopolistic competition, Oligolpolistic, Monopoly> affects prices
Customer PERCEPTION of Value and Price: the VALUE the customer thinks he is getting and the price willing to pay. Higher PRICE = HIGHER PERCEIVED VALUE.
PRICE-DEMAND RELATIONSHIP: a.DEMAND CURVE is usually downward sloping (lower price = more demanded. BUT, PRESTIGE GOODS>
b. in the intermediate, curve my slope upwards.
c. Elastic pricing: Percentage change in price to quantity demanded is greater than 1.0…Price increase will reduce total revenue.
COMPETITORS: P CPA
Products, Costs, Prices, Amounts supplied.

How well did you know this?

Not at all

Perfectly

General Pricing Approaches

MARKET BASED (BUYER BASED)

Starts with Target Price based on Perceived Value and Competitor Actions
Also Market COMPARABLES
Typical when many COMPETITORS AND UNDIFFERENTIATED (Commodities)

How well did you know this?

Not at all

Perfectly

General Price Approaches

COMPETITION Based

GOING RATE: largely on Competitor Price

2. SEALED BID: in bidding, PERCEPTION of competitors pricing

How well did you know this?

Not at all

Perfectly

General Pricing Approaches

NEW PRODUCT PRICING

PRICE SKIMMING: High intro price to attract buyer’s not concerned about pricing. Recover R & D
PENETRATION PRICE: LOW INTRO price to penetrate market.

How well did you know this?

Not at all

Perfectly

General Pricing Approaches

PRICING BY INTERMEDIARIES

MARKUP based on price PAID for product

2. MARK DOWNS: reduction of original price

How well did you know this?

Not at all

Perfectly

General Pricing Approaches

PRICE ADJUSTMENTS

GIDD, PPV

GEOGRAPHICAL
INTERNATIONAL
DISCOUNTS AND ALLOWANCES
DISCRIMINATORY

PROMOTIONAL
PSYCHOLOGICAL
VALUE PRICING

General Pricing Approaches:
Pricing Adjustments

Geographical: (freight)

U-ZABA
-UNIFORM FREIGHT COSTS: same price to all customers regardless of location

ZONE PRICING: Not Actual, but a ZONE customer is in.
ACTUAL FREIGHT COSTS: FOB Origin
BASING POINT: Price FROM a SPECIFIC CITY. Regardless of actual shipping point.
ABSORPTION: seller absorbs all or part.

General Pricing Approaches
Price Adjustments

International

Price adjust to LOCAL conditions

General Pricing Approaches
Price Adjustments

Discounts and Allowances
Q-CATS

Quantity: encourage LARGE VOLUME

Cash: Encourage prompt payment, avoid bad debts, improve cash flows.

Allowances: trade in, Promotional

Trade (functional): discounts offered to members such as SELLING

Seasonal: by season to SMOOTH PRODUCTION

General Pricing Approaches
Price Adjustments

DISCRIMINATORY

Adjusts for differences in CUSTOMERS, LOCATIONS

General Pricing Approaches
Price Adjustments

PROMOTIONAL

TEMPORARY price adjustment. Below LIST OR COST to STIMULATE SALES

General Pricing Approaches
Price Adjustments

PSYCHOLOGICAL

based on CONSUMER PSYCHOLOGY.

ie raise prices to suggest quality

General Pricing Approaches
Price Adjustments

VALUE PRICING

Redesign for Quality without Price increase.

or SAME QUALITY for LOWER PRICE

General Pricing Approaches

PRODUCT MIX PRICING

PP,COB

PRODUCT LINE :sets price “Steps” in product line by Costs, Perceptions, Competitor Price

PRODUCT BUNDLE: Combinations at lower than INDIVIDUAL

CAPTIVE-PRODUCT: (RAZORS). Main product cheap, razors expensive

OPTIONAL-PRODUCT: Firm must choose which products are ACCESSORIES/which part of the STANDARD PRODUCT

BY-PRODUCT: Sets these prices above storing and delivering.

General Pricing Approaches ILLEGAL PRICING

PREDATORY PRICING: pricing below cost to destroy competitor. (Pricing below an appropriate cost AND will recover through higher PRICES or GREATER MARKET SHARE. PRICE DISCRIMINATION AMONG CUSTOMERS: ROBINSON PORTMAN ACT 1936: Illegal if LESSENS COMPETITION. applies to MANUFACTURERS. Applies to Buyers AND Sellers. COLLUSIVE PRICING: can't CONSPIRE to RESTRICT OUTPUT. set ARTIFICIALLY HIGH PRICES. DUMPING: sell BELOW COST in other countries. Triggers Tariffs.

General Pricing Approaches COST BASED PRICING

Process starts with COST DETERMINATION followed by Price that will RECOVER costs PLUS DESIRED RATE OF RETURN. Important to know Cost Behavior, Traceability, Drivers Most use ABSORPTION or TOTAL COST

General Pricing Approaches COST BASED PRICING FORMULAS

1. TOTAL COST + (TOTAL COST X MARKUP %) 2. ABSORPTION MFG COST + (ABSORB X MARKUP %) 3. VARIABLE MFG COST + (VMC X MARKUP %) 4. TOTAL VARIABLE COST + (TVC x Markup %)

General Pricing Approaches TARGET PRICING

Expected Price: based on CUSTOMER PERCEPTION OF VALUE, Competitor Responses Target Operating Income PER UNIT: Sales need to cover the VARIABLE, FIXED and NET INCOME company wants DIVIDED BY units FORECAST TO BE SOLD. Takes ENTIRE LIFE CYCLE into consideration. INTRO TO WITHDRAWAL. Value Engineering: reaching Targeted COST LEVELS. Assess ALL: R&D, design, >CUST SVC. MINIMIZE COSTS without sacrificing customer satisfaction. ..... Identify VALUE ADDED: Activities that CAN'T BE ELIMINATED without sacrificing Quality, responsiveness or Quantity of oUTPUT required by Customer or Org. Also: Distinguish between Cost Incurrence (Actual Use of Resources)and Locked In (Designed In) that will occur in future based on past decision:

General Pricing Approaches LIFE CYCLE COSTING

Emphasizes need to cover UPSTREAM AND DOWNSTREAM not just PRODUCTION COSTS RELATED: Whole Life Cost = Life Cycle Cost + After Purchase Costs (support, repair, disposal)

Market Structures PURE COMPETITION

Large number of BUYERS AND SELLERS acting Independently. Only Basis for competition is Price. Each seller produce an IMMATERIAL OUTPUT. Can't influence MARKET PRICE. Homogeneous or Standard product (commodities) Marginal Revenue EQUALS Price As long as the next unit adds more MR than MC, firm increase TOTAL PROFIT For max Total Profit: Must find the Quantity that Price = MR = MC For a purely competitive firm Units x Avg Price = Total Rev Marginal 1 x 960 = 960 960 2 x 960 = 1,920 960 3 x 960 = 2,880 960 See 11 page 13 for graph of Marginal Cost and Marginal Profit

Market Structures MONOPOLY

One Firm, No Close Substitutes Marginal Revenue is less than price To increase sales>>Must Lower Price Marginal revenue continuously decreases as output raised. Monopolist "Price Searches" where MR = MC to get Max Level of Total Profit Units Avg Rev (Price) = Tot Rev Marg Rev 1 x 960 = 960 960 2 x 910 = 1820 860

Monopolistic Competition

Large number of Firms, DIFFERENTIATED PRODUCTS. of Firms, Less than Pure Competition, but can't Collude (can't act together to restrict output) To Max Profit, MR = MC Products may be differentiated other than Price (Quality, Brand, Style). Advertising crucial

Oligopoly

Few Large firms in Industry. Mutually aware, Mutually INTERDEPENDENT Price, advertising dependent on ACTIONS of other firms. Each firm sets price and productions after considering mutual INTERDEPENDENCE. - Prices are STICKY because of Interdependence. If one lowers prices, no increase in sales because others lower. Profits will lower.

Value engineering

Systematic evaluation of the trade-offs between product functionality and product cost while still satisfying customer needs is the definition of value engineering