Chapter 11 Flashcards
Five Cs of Pricing
Competition Costs Company Objectives Customers Channel Members
Profit Orientation
A company objective that can be implemented by focusing on target profit pricing, maximizing profits or target return pricing
Target Profit Pricing
A pricing strategy implemented by firms when they have a particular profit goal as their overriding concern; uses price to stimulate a certain level of sales at a certain profit per unit
Maximizing Profits Strategy
A mathematical model that captures all the factors required to explain and predict sales and profits, which should be able to identify the price at which its products are maximized
Target Return Pricing
A pricing strategy implemented by firms less concerned with the absolute level of profits and more interested in the rate at which their profits are generated relative to their investments; designed to produce a specific return on investment, usually expressed as a percentage of sales
Sales Orientation
A company objective based on the belied that increasing sales will help the firm more than will increasing profits
Competitor Orientation
A company objective based on the premise that the firm should measure itself primarily against its competition
Competitive Parity
A firm’s strategy of setting prices that are similar to those of major competitors
Customer Orientation
Pricing orientation that explicitly invokes the concept of customer value and setting prices to match consumer expectations
Demand Curve
Shows how many units consumers will demand during a specific time period at different prices
Prestige products/services
those that consumers purchase for status rather than functionality
Price elasticity of demand
Measures how changes in price affect the quantity demanded
Elastic
Refers to a market for a product/service that is price sensitive. Meaning small changes in price will generate fairly large changes in the quantity demanded
Inelastic
Refers to a market for a product/service that is price insensitive. Meaning small Meaning small changes in price will not generate fairly large changes in the quantity demanded
Income Effect
Refers to the change in the quantity demanded because of a change in their income
Substitution Effect
Refers to consumers’ ability to substitute other products for the focal brand, increasing the price elasticity of demand for the focal brand
Cross-price Elasticity
% Change in Demand for Product A that occurs in response to % Change in Price of Product B
Complementary Products
Products whose demand curves are positively related, they rise or fall together
Substitute Products
Products for which changes in demand are negatively related, Product A increases, Product B will decrease
Variable Costs
vary with product volume
Fixed Costs
costs that remain the same, regardless of product volume
Total cost
Variable Costs + Fixed Costs
Break-even point
Revenue = Total Costs Profits = 0
Contribution per unit formula
= Price - Variable cost per unit
Break-even point formula
= Fixed Costs / Contribution per unit
Monopoly
Only 1 firm provides the product/service in a particular industry
Oligopoly
A few firms dominate the market
Price War
2 or more firms compete by lowering prices
Monopolistic Competition
When many firms sell closely related but not homogeneous products; these products may be viewed as substitutes but are not perfect substitutes
Pure Competition
When different companies sell commodity products that consumers perceive as substitutable
Grey market
goods have been manufactured by or with the consent of the brand owner but are sold outside of the brand owner’s approved distribution channels
Cost-based pricing method
determines final price to charge by starting with the cost, without recognizing the role that consumers or competitors’ prices play in the marketplace
Competitor-based pricing method
how the firm wants consumers to interpret its products relative to the competitor’s offerings
Value-based pricing method
focuses on overall value of the product offering as perceived consumers. Value is determined by comparing benefits and sacrifices of the product
Improvement Value
Represents an estimate of how much more (or less) consumers are willing to pay for a product relative to other comparable products
Cost of Ownership Method
A value-based method for setting prices that determines the total cost of owning the product over its useful life
Everyday Low Pricing (EDLP)
A strategy companies use to emphasize the continuity of their retail prices at a level somewhere between the regular non-sale price and the deep-discount sale prices their competitors may offer
High/Low Pricing
A pricing strategy that relies on the promotion of sales, during which prices are temporarily reduced to encourage purchases
Price Skimming
A strategy o selling a new product or service at a high price that innovators and early adopters are willing to pay to obtain it; after the high price market segment becomes saturated and sales begin to slow down, the firm generally lowers the price to capture (or skim) the new most price-sensitive segment
Market Penetration Pricing
A pricing strategy of setting the initial price low for the introduction of the new product/service, with the objective of building sales, market share, and profits quickly
Experience Curve Effect
Refers to the drop in unit cost as the accumulated volume sold increases; as sales continue to grow, the costs continue to drop, allowing even further reductions in the price
Reference Price
The price against which buyers compare the actual selling price of the product and that facilitates their evaluation process
Pricing Tactics
Short-term methods, used to focus on company objectives, customers, costs, competition, or channel members; can be responses to competitive threats
Price Lining
Consumer market pricing tactic of establishing a price floor and a price ceiling for an entire line of similar products and then setting a few other price points in between to represent distinct differences in quality
Price Bundling
Consumer pricing tactic of selling more than 1 product for a single, lower price than the items would cost sold separately; can be used to sell slow-moving items, to encourage customers to stock up, to encourage trial of a new product or provide incentive to purchase a less desirable product/service
Leader Pricing
Consumer pricing tactic that attempts to build store traffic by aggressively pricing and advertising a regularly purchased item, often priced at or just above the store’s cost
Markdowns
Reductions retailers take on the initial selling price of the product/service
Size Discount
The most common implementation of a quantity discount at the consumer level (larger the quantity, the less the cost per unit)
Coupon
Provides a stated discount to consumers on the final selling price, the RETAILER handles the discount
Rebate
Provides a stated discount to consumers on the final selling price, the MANUFACTURER handles the discount
Seasonal Discount
Pricing tactic of offering an additional reduction as an incentive to retailers to order merchandise in advance of the normal buying season
Cash Discount
Tactic of offering a reduction in the invoice cost if the buyer pays the invoice prior to the end of the discount period
Advertising Allowance
Tactic of offering a price reduction to channel members if they agree to feature the manufacturer’s product in their advertising and promotional efforts
Listing Allowance
Fees paid to retailers simply to get new products into stores or to gain more/better shelf space for their products
Quantity Discount
Pricing tactic of offering a reduced price according to the amount purchased
Cumulative Quantity Discount
Pricing tactic of offering a reduced price based on the amount purchased over a specified period
Noncumulative Quantity Discount
Pricing tactic of offering a reduced price based on only the amount purchased in a single order
Uniform Delivered Pricing
The shipper charges one rate, no matter where the buyer is located
Geographic Pricing
The setting of different prices depending on a geographical division of the delivery areas
Loss Leader Pricing
Lowering price below the store’s cost
Bait and Switch
Luring customers into the store with a very low advertised price item (bait) only to pressure them to buy a higher-priced item (switch)
Predatory Pricing
Setting a very low price for 1 or more its products with the intent of driving its competition out of business (illegal)
Price Discrimination
Selling the same product to different resellers or the consumer at different prices
Price Fixing
Colluding with other firms to control prices
Horizontal Price Fixing
When competitors that produce/sell competing products work together to control prices, taking price out of the decision process for consumers
Vertical Price Fixing
Parties at different levels of the same marketing channel (manufacturers and retailers) collude to control prices passed on to consumers
Manufacturer’s Suggested Retail Price (MSRP)
Manufacturers encourage retailers to sell their merchandise at a specific price
