Chapter 10: Pricing Flashcards
Which has the greater impact on profit?
a. 1% increase in unit sales
b. 1% increase in price
c. 1% decrease in variable costs
d. 1% decrease in fixed costs
b. increase in price
Why is pricing so important?
The impact of pricing on profitability is massive. If you can adjust one thing to make more money, you would want to adjust price.
If you want to increase profitability, you should adjust price above all else. This is because by adjusting price, you aren’t increasing ______, like you would be doing if you increased sales.
costs
(as long as your price starts above costs to begin with)
the reflection of everything you do (everything about the product, your promotion, your people, etc.) as a business.
pricing
The single most important decision in evaluating a business is ______ _______.
pricing power
(if you have the ability to raise prices, then you have a powerful business)
The “what you get - what you give” marketing equation essentially represents the concept of “_______ _______ _______,” where the value a customer receives from a product or service is calculated by subtracting the perceived cost from the perceived benefits they gain
customer perceived value
What are the 4 influences on pricing?
- Customer perceptions (high priced vs. low priced)
- Internal costs (variable and fixed costs)
- Market characteristics (price sensitivity)
- Competition
if you think a bottle of Dasani water out of a vending machine should cost $1.25, but the price is $3.25, you are likely to decide not to purchase. This is an example of which of the influences on pricing?
Customer perceptions
a cost that changes with the quantity of the product sold; costs that vary directly with the production of one additional unit.
variable costs
(ex: the production cost of a television is directly related to how many are produced and sold)
(marketing-related variable cost examples: commissions, price discounts, coupons, and other costs tied directly to quantity)
If cost is assigned per unit, it is almost always a (variable/fixed) cost.
variable
a cost that does not change based on sales; the sum of all costs required to produce the first unit of a product.
fixed costs
(ex: general company costs like rent, utilities, insurance, salaries)
Marketing costs that are considered to be (fixed/variable) costs include sales salaries, advertising, sponsorships, and research and development costs (such as product research)
fixed
(bc these costs don’t change based on sales/the quantity sold)
the product of expected unit sales and unit price.
total revenue
(formula: expected unit sales x unit price)
The monetary gain resulting from revenues after subtracting all associated costs.
profit
(formula: total revenue - total costs)
ratio that expresses how much the sale of a unit contributes to fixed costs or profit relative to the variable cost per unit.
markup
(formula: (unit price - unit variable cost) / unit variable cost)
Setting an initially high price for a new product and using gradual, timed price drops to make as much profit as possible over time by maximizing how much you make from each sale.
skimming strategy
Introducing a new product at a relatively low price with the intention of establishing a large market share before competitors can establish themselves.
Penetration pricing
a pricing strategy promising consumers a low price without the need to wait for sale price events or comparison shopping; when a store offers consistently stable prices tied to small markups on items throughout the store
Everyday Low Prices (or EDLP)
A form of dynamic pricing in which a store offers low prices temporarily and then raises prices significantly.
high-low pricing
A pricing strategy in which the retailer discounts certain items significantly to lure customers to the store in hopes of those customers buying other merchandise at higher margins.
loss-leader pricing
(ex: Kroger might offer Kraft Real Mayo at $4.79 rather than the regular price of $5.29 to lure customers to the store who then buy their weekly groceries at regular prices)
Price-match guarantees make price (more/less) sensitive.
less (decreases price sensitivity)
(bc it acts like a guarantee; it’s like a promise which makes it more stable)
T or F: Your pricing is going to be reflective of what your goal is.
True
(so like if if your goal is to maintain cash flow, you may lower the price)
_______ _______ measures the responsiveness of demand to changes in price (that is, price sensitivity)
Price elasticity
How do you calculate price elasticity?
Price Elasticity of Demand = Percentage Change in Quantity Demand / Percentage Change in Price
(To calculate Percentage Change: (X2 - X1) / X1)
a curve that shows the inverse relationship between price and quantity demanded
demand curve
According to the demand curve, as price increases, quantity demanded (increases/decreases).
decreases
(and vice versa)
What does the demand curve tell us?
There are different people in the same market willing to pay different prices for the exact same thing.
