chapter 10 (unit 2) Flashcards
QUIZ: _____ are the costs associated with the operating and marketing expenses of a company ____ are the per-unit costs associated with the product.
* market expense ; variable costs
* operating expense ; product costs
* fixed costs ; variable costs
* fixed costs ; product costs
- fixed costs ; variable costs
QUIZ: the formula, percent change in quantity sold divided by percent change in price, is used to calculate which pricing concept?
* break-even price
* break-even quantity
* price elasticity
* markup percentage
price elasticity
QUIZ: what is an added percentage or dollar amount added to the cost to determine its selling price?
* markup
* price increase
* sales tax
* overhead
markup
QUIZ: with __ pricing, a variable rate is used for each customer, often based on a product’s or a service’s demand
* dynamic
* a la carte
* value-based
* market-based
dynamic
QUIZ: true or false - price skimming is when a marketer introduces a product into the market at an initially low price then incrementally raises the price over time
false
QUIZ: __ is packaging two or more goods or services together to sell them for a single packaged price
* prestige pricing
* bundle pricing
* multiple-unit pricing
* loss leader
bundle pricing
QUIZ: true or false - dan ariely describes the phenomenon he discovered called the third “decoy” option, which says adding an interior option will make the original product more attractive
true
QUIZ: true or false - with prestige pricing, elasticity in demand can be a positive number. this means when the price goes up, instead of demand decreasing, demand actually increases.
true
QUIZ: a company uses the __ pricing strategy when it sells a popular item at an artificially low price
* bundle
* loss leader
* anchor
* odd-even
loss leader
QUIZ: which one of these companies would be an example of using the price skimming strategy?
* mcdonalds
* apple
* walmart
* chick-fil-a
apple
what did warren buffet say
“Price is what you pay. Value is what you get.”
why is pricing so important?
Pricing is a key issue in marketing and can have a significant impact on a company’s bottom line.
price
A price is simply what is being charged or exchanged for a product or service.
This is not to be confused with value, which is what a product or service is worth to a consumer, or the maximum amount they would pay.
value
what the product or service is worth to a consumer
fixed costs
are the costs associated with the operating and marketing expenses of a company. These costs do not change with the number of products sold, so they are considered fixed.
An example of fixed costs is the cost of renting a warehouse to store product. Fixed costs get spread out over the number of units sold.
variable costs
are the per-unit costs associated with the product. An example of variable costs is the cost of material to make the product. If it costs $1 in material to make a widget, then it costs the company $1 in variable costs each time it produces a widget.
breakeven quantity
is the quantity the company needs to sell at a certain price in order to cover fixed costs.
breakeven point
is the point at which revenues equal expenses, and the company has “broken even.”
breakeven price
which is the amount a marketer needs to price a product in order to cover expenses at a certain quantity sold.
dumb industry
Companies compete with prices
Low prices are the main differentiator
smart industry
Companies use more complex pricing structures and more pricing options
There is less head-to-head competition with price
Customers buying in a smart industry are usually less price sensitive as well.
price elasticity
The change in demand in a market in response to a product’s change in price.
A market is considered elastic if a change in price produces a substantial change in demand. A market is inelastic if a change in prices results in little to no change in demand.
(EQUATION/FORMULA) Price elasticity (PE)
Price elasticity (PE) = % change in quantity sold / % change in price
A price elasticity calculation of < -1 is considered elastic
A price elasticity calculation of > -1 is considered inelastic
price inelastic
If a marketer sells a product in a market that is price inelastic, then the marketer can adjust the price upward without it affecting demand as much. If prices increase and demand stays the same, this means the overall profits will increase.
cost-based pricing
Cost-based pricing is a method in which companies use the cost of a good or service as the basis for determining its final selling price. Cost-based pricing is calculated by taking the product cost and adding a markup to determine the final price.
direct-cost pricing vs. full-cost pricing
Direct-cost pricing calculates variable costs only, while full-cost pricing takes into account both variable costs and fixed costs.
(EQUATION/FORMULA) markup dollar amount calculation
Markup dollar amount calculation = selling price - cost
(EQUATION/FORMULA) markup percentage
Markup percentage = (selling price - cost)/cost
markup
imply an added percentage or dollar amount added to the cost to determine its selling price. Markup is therefore the difference between the selling price and the product cost.
(EQUATION/FORMULA) price
price = Cost + (Markup Percent * Cost)
(EQUATION/FORMULA) markup percentage calculation
Markup Percentage Calculation = (Price - Cost) / Cost
profit margin
The profit margin is the difference between the final selling price and the product’s cost as well, but it is shown as a ratio or percent of the selling price (and not the product cost).
Because of this, the profit margin can never exceed 100%, while the markup percentage can.
price floor
Cost-based pricing does give a good price floor for a product: the absolute minimum for which a company can sell a product and still break even. After all, if a company sets its prices below its costs, it will lose money and will not likely stay in business.
pros and cons of cost-based pricing
PROS
- Easy to calculate and implement
- Easy to understand
- Considered fair by customers
CONS
- Difficult to factor in fixed costs to the product’s price
- Not ideal for pricing many services
- May not be the most profitable method of pricing
market-based pricing
a company looks to its competitors as the main pricing factor to determine the price of its product or service.
After finding out how competitors are pricing, the company can then either price similarly or decide to strategically price higher or lower than competitors.
For this pricing model, the marketer researches the competitors in the market to determine the following:
- How competitive is this market?
- How many competitors are there?
- What are the competitors charging?
- How strong is the product offering from the competitors?
- How high is demand in the market? Is there too much supply (a buyer’s market), or is there high demand and not enough supply (a seller’s market)?
value-based pricing
Setting prices based on the perceived value that the consumer receives from the product or service
Value-based pricing starts with the customer: what value does the customer receive – or perceive – from the product?
In value-based pricing, what makes a product or service more valuable to a consumer?
The money, time or other resources that it saves or creates for the customer
The unique, competitive advantage it creates for a customer
The expertise with which the service is performed or the product is created
The credibility and dependability of the service provider
This decreases risk, which is valuable
The unique aspects of the product or the service provider
The importance of the situation for which the service is being hired
A situation where service failure would be risky or even catastrophic
pros and cons of value-based pricing
Pros
Can maximize profits
Cons
Difficult to calculate full value to consumer
Pricing may be seen as unfair if two customers receive different prices for a similar service
ethics in value based pricing
One debate around the value-based pricing system is that it could potentially charge some clients more than others when they receive similar services.
For instance, there is the phenomenon known as the “wedding tax,” in which services hired for weddings often cost more than that same service for other events. Although it does seem like taking advantage of a customer to charge more for a certain type of event, that service is more valuable to the customer because of the importance of the event.
dynamic pricing
A variable rate is used for each customer, often based on the product or service’s demand
As demand fluctuates, either because of seasons, holidays or other circumstances, the price changes as well
Chances are, any time you fly in a plane, you’re surrounded by people who have paid different prices to go to the exact same place
flat rate pricing
Flat-rate pricing charges one rate for unlimited use of a service during a specified timeframe. It’s also considered flat-rate pricing when a company charges one price, no matter the number of hours required to deliver the good or service.
Gym memberships and Netflix memberships are examples of flat-rate pricing. Many gyms offer unlimited use by paying one flat fee per month
a la carte pricing
the term means ordered by separate items. A La Carte pricing is very similar to choosing those food menu items. It means that consumers can choose to add and purchase product features individually, giving them a choice about the final price of the product.
For example, when purchasing a laptop computer from the Dell website, a consumer chooses features such as: the size of the hard drive, the amount of RAM, whether or not the laptop has a touchscreen, and whether or not the hard drive is solid state.
a la carte pricing
the term means ordered by separate items. A La Carte pricing is very similar to choosing those food menu items. It means that consumers can choose to add and purchase product features individually, giving them a choice about the final price of the product.
For example, when purchasing a laptop computer from the Dell website, a consumer chooses features such as: the size of the hard drive, the amount of RAM, whether or not the laptop has a touchscreen, and whether or not the hard drive is solid state.
Two pricing strategies are commonly used when introducing products to market:
price skimming and penetration pricing
price skimming - very important
When a marketer introduces a product into the market at an initial high price and then incrementally lowers the price over time
When a product is introduced, there are fewer competitors in the market, and the company can charge a higher price for the product. As time goes on, more competitors or substitutes enter the market and the company can no longer sustain those profit margins.
This method of price skimming is meant to maximize profits for the company by charging the maximum price that each segment is willing to pay.
EX: apple
market penetration
When a company introduces a product at a low price to gain market share
Aims to develop a loyal customer base that will continue to repurchase when the company raises prices
First of all, this strategy helps to provide proof of concept, or proof that a product can succeed in the market. Also, by gaining market share, a company hopes to develop a loyal customer base that will continue to repurchase when the company raises prices.
EX: Canva
(psychological strategies in pricing) odd-even pricing ($0.99 pricing)
when a marketer sets the price of a product a few cents or a few dollars (or sometimes just one cent) under an even number. So the product price is $99 instead of $100 or $0.99 instead of $1. You’ve probably noticed at the store that most products are priced at an amount ending in $0.99 or $0.95.
The psychology behind this strategy is that consumers perceive the item as costing less than it actually does. Customers perceive $499 as more closely related to $400 instead of $500 because of the number that the price starts with.
(psychological strategies in pricing) reference pricing (anchor pricing)
Reference pricing, also called anchor pricing, is using another price as a reference point to make a product’s price seem more appealing. There are several different ways this is used.
Original price as reference point
Industry reference point
Random incidental reference point
The third option
internal reference point for a price
A consumer often has an internal reference point for a price, which is a price or price range he or she believes is fair or standard based on his or her knowledge or experience. If a customer is familiar with a certain product, service, or industry, he or she probably has somewhat of an idea of what each is worth.
external reference point for a price
it is helpful and strategic for a marketer to provide an external reference point for the consumer. This is a marketer-supplied price to give consumers an idea of what the product is worth.
random incidental reference prices
To demonstrate how much of a psychological influence reference pricing can have, consider this situation: some websites show images of very high-priced, unrelated products when customers are shopping on the site or during checkout. Just by surrounding the product with higher-priced items makes it appear to be a better deal in comparison.
the third option
Dan Ariely, author of the book Predictably Irrational, describes a phenomenon that he discovered: the “decoy” option. According to Ariely’s research, adding an inferior option will make the original product more attractive. The decoy acts as a sort of reference point.
In his study, he offered three options for purchasing a newspaper subscription:
Web content for $59
The print edition for $125
Print and web editions for $125
extremity aversion theory
in price setting states that people tend to avoid extreme options, including in price, and they often choose a middle option. This relates to the reference pricing because customers are still using other prices as reference points in extremity aversion. And it also ties into the idea of the decoy option discussed by Ariely.
prestige pricing
Prestige pricing sets high prices for products to create the perception that they are elite so that status-seeking customers will want to buy them. Take the Graf Von Faber-Castell perfect pencil in white gold. Its $10,000 price and limited-edition status show that it is marketed as an elite item. It is a prime example of prestige pricing
ex: birkin bags
positive elasticity in demand can occur with prestige pricing
bundle pricing
Packaging two or more goods or services together to sell them for a single packaged price
Usually priced below what a customer would pay to buy each item individually
multiple unit pricing
A marketer offers a price break for purchasing multiple units of a product
Encourages customers to buy more products
loss leader
Selling a popular item at an artificially low price, often below the company’s product cost, to attract people to the store
It is hoped overall sales from the customer’s purchases will offset the loss in profit from that loss leader’s sale
creating a pricing strategy
The company (what is the product cost to the company?)
The customers (what do customers value?)
The competitors (what else is offered in the market?)
- Calculate the cost of the product for the company
- Research to see what value the customers place on the product offering
- Study the competition in the market and how the industry behaves
- Look at how customers view your product features.
- Decide on a base price for the product.
- Add any of the psychological pricing strategies
- Track customer response to prices
