CH11: Pricing and Sales Promotions Flashcards
price
the value of a good or service, determined by negotiation between buyers and sellers
who gave rise to the idea of setting one price for all buyers? [in chapter quizzes]
large scale retailers at the end of the 19th century; e.g. Tiffany, Woolworth, etc.
reference prices
internal prices against which consumers compare the price of goods; can result in a perceived price that is different from the stated price of the good
image pricing
the use of higher prices as an indicator of quality; effective with ego-sensitive products such as luxury goods
price cues
any marketing tactic used to persuade customers that prices offer good value compared to competitors’ prices, past prices or future prices; e.g. prices ending in “9”, sale signs, etc.
the 6 main steps in setting price
- define pricing objective
- determine demand
- estimate costs
- analyze competitors
- select pricing method
- set final price
the 4 common pricing objectives
- short term profit
- market penetration
- market skimming
- quality leadership
short term profit pricing objective
choose a price that produces maximum current profit, cash flow, or ROI; may sacrifice long term viability
market penetration pricing objective
price to maximize market share (generally lower than the competition); count on future economies of scale to improve margins
market skimming pricing objective
set high prices to take advantage of early adopters, and slowly lower price over time; common when companies introduce new technologies
quality leadership pricing objective
price so that quality of the product can be maintained as high as possible
price elasticity of demand
the degree to which a change in price leads to a change in quantity sold; high fluctuations in demand = elastic; low fluctuation in demand = inelastic
fixed costs
overhead; costs that do not vary with production level or sales revenue (e.g. corporate headquarters rent)
variable costs
costs that vary directly with level of production (e.g. inventory storage)
total costs
sum of fixed and variable costs
average cost
cost per unit; total cost divided by units produced
experience curve
as a company gains experience producing a product, the cost of production per unit decreases; the “learning curve” of production
the 3 major considerations in price
- costs (price floor)
- competitor pricing (orientation point)
- customer assessment of unique features (price ceiling; e.g. what customers think the set of features is worth)
main pricing methods
- markup pricing
- target return pricing
- economic value to customer
- competitive pricing
- auction pricing
markup pricing
adding a standard markup to the product’s cost;
markup price = [unit cost] / (1 - [desired return])
unit cost equation
unit cost = variable cost + (fixed cost / unit sales)
target return pricing
price that yields the target rate of return on investment
main components of the break-even chart
- total revenue
- total cost
- fixed cost
- x-axis is sales volume
- y-axis is dollars
- breakeven point is where total revenue and total cost lines cross
economic value to customer pricing
based on buyer’s image of product, channel deliverables, warranty quality, customer support, service package, etc.
