Ch 11 - Pricing Products and Services Flashcards
Describe the nature and importance of pricing and the approaches used to select an approximate price level.
Price is the money or other considerations (such as barter) exchanged for the ownership or use of a product or service. Although price typically involves money, the amount exchanged is often different from the list or quoted price because of incentives (rebates, discounts, etc.), allowances (trade), and extra fees (finance charges, surcharges, etc.).
Demand, cost, profit, and competition influence the initial consideration of the approximate price level for a product or service. Demand-oriented pricing approaches stress consumer demand and revenue implications of pricing and include seven types: skimming, penetration, prestige, odd-even, target, bundle, and yield management. Cost-oriented pricing approaches emphasize the cost aspects of pricing and include two types: standard markup and cost-plus pricing. Profit-oriented pricing approaches focus on a balance between revenues and costs to set a price and include three types: target profit, target return-on-sales, and target return-on-investment pricing. And finally, competition-oriented pricing approaches stress what competitors or the marketplace are doing and include three types: customary; above-, at-, or below-market; and loss-leader pricing.
Explain what a demand curve is and the role of revenues in pricing decisions.
A demand curve is a graph relating the quantity sold and price, which shows the maximum number of units that will be sold at a given price. Three demand factors affect price: (a) consumer tastes, (b) price and availability of substitute products, and (c) consumer income. These demand factors determine consumers’ willingness and ability to pay for products and services. Assuming these demand factors remain unchanged, if the price of a product is lowered or raised, then the quantity demanded for it will increase or decrease, respectively. The demand curve relates to a firm’s total revenue, which is the total money received from the sale of a product, or the price of one unit times the quantity of units sold.
Explain the role of costs in pricing decisions and describe how combinations of price, fixed cost, and unit variable cost affect a firm’s break-even point.
Four important costs impact a firm’s pricing decisions: (a) total cost, or total expenses, the sum of the fixed costs and variable costs incurred by a firm in producing and marketing a product; (b) fixed cost, the sum of the expenses of the firm that are stable and do not change with the quantity of a product that is produced and sold; (c) variable cost, the sum of the expenses of the firm that vary directly with the quantity of a product that is produced and sold; and (d) unit variable cost, the variable cost expressed on a per unit basis.
Break-even analysis is a technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output. The break-even point is the quantity at which total revenue and total cost are equal. Assuming no change in price, if the costs of a firm’s product increase due to higher fixed costs (manufacturing or advertising) or variable costs (direct labor or materials), then its break-even point will be higher. And if total cost is unchanged, an increase in price will reduce the break-even point.
Recognize the objectives a firm has in setting prices and the constraints that restrict the range of prices a firm can charge.
Pricing objectives specify the role of price in a firm’s marketing strategy and may include profit, sales revenue, market share, unit volume, survival, or some socially responsible price level. Pricing constraints that restrict a firm’s pricing flexibility include demand, product newness, production and marketing costs, prices of competitive substitutes, and legal and ethical considerations.
Describe the steps taken in setting a final price.
Three common steps marketing managers often use in setting a final price are (1) select an approximate price level as a starting point; (2) set the list or quoted price, choosing between a one-price policy or a flexible-price policy; and (3) modify the list or quoted price by considering discounts and allowances.
break-even analysis
A technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output.
demand curve
A graph relating the quantity sold and price, which shows the maximum number of units that will be sold at a given price.
price (P)
The money or other considerations (including other products and services) exchanged for the ownership or use of a product or service.
price elasticity of demand
The percentage change in quantity demanded relative to a percentage change in price.
pricing constraints
Factors that limit the range of prices a firm may set.
pricing objectives
Specifying the role of price in an organization’s marketing and strategic plans.
profit equation
Profit = Total revenue − Total cost; or Profit = (Unit price × Quantity sold) − (Fixed cost + Variable cost).
total cost (TC)
The total expense incurred by a firm in producing and marketing a product. Total cost is the sum of fixed cost and variable cost. TC = FC + VC.
total revenue (TR)
The total money received from the sale of a product; or the unit price (P) times the quantity (Q) sold. TR = P × Q.
values
A society’s personally or socially preferable modes of conduct or states of existence that tend to persist over time.
