Chapter 11: Pricing Flashcards
What’s the definition of price
The amount of money charged for a product or service or the sum of all the values that consumers exchange for the benefits of having or using the product or service
Explain what is revenue
The price charge to customers multiplied by the number of units sold. Revenue can also be seen as what pays for expenses of the firm
What is profit
Profit is revenue minus expenses
What is perceived value
The worth that a product or service has in the mind of the customer
What are the steps involved in setting the price of a product or service
step 1: selecting the pricing objective
step 2: assessing demand
step 3: determining costs
step 4: analyzing competitors costs prices and office
step 5: selecting a pricing method
step 6: selecting the final price
Explain step 3: of setting the price of a product
The customers demand for a product sets the ceiling highest possible price the Firm can charge for its product operating. There are several aspects to consider when determining costs and setting prices such as fixed costs, variable costs, total costs and average costs.
Explain floor price
The price that is equal to the costs to manufacture the product
Explain the several aspects to consider when determining costs (pg 340)
> fixed costs: also referred to as overheads, these costs do not change with the product’s production volume or how many units are sold, these costs include rent, interest on loans and salaries
> variable cost: vary differently regarding how many units/products are produced, they typically include the materials involved in manufacturing a product
> total costs: are the sum of all the fixed and variable costs for any production level, the production level is how many units/products are produced per day depending on the size of the factory
> average cost: is the cost per product/unit at that production level
> marginal costs: when output rises there is a change in total cost, the change in total cost is referred to as marginal cost
What are the four key issues that are crucial in formulating a pricing strategy
- cost (production cost or selling cost)
- consumer demand
- customer value
- competitors prices
What are the several pricing methods that exist
- customer value based pricing
- markup pricing/ cost-based pricing
- going rate pricing
- market introduction pricing
- prestige pricing
- non price strategies
The three C’s model outlines _____
Three significant considerations in price setting namely, the cost, competitors prices, the price of substitute products and the customers assessment of unique features of the product (differentiation).
Explain customer value-based pricing
Uses buyers perceptions of value not the sellers cost of production as the basis of pricing decision. There are two types of value-based pricing namely, good value pricing and value added pricing.
- with good value pricing offer the right combination of quality at a fair price, such as introducing less expensive versions of an established (often more expensive) brand
- with the value added pricing instead of cutting the price more product features are added
Explain cost-based pricing (pg 344)
It involves setting prices based on the cost for producing, distributing and selling the products, plus a fair rate of return for the firm’s efforts and risks. Examples of cost-based pricing methods are cost-plus pricing and break even pricing
Explain going rate pricing
It is also referred to as competition-based pricing, the firm bases its price mainly on competitors price, it is used where it is difficult to measure costs or where the response from competitors is uncertain, when prices are changed. It is typically in an oligopoly market
Explain the market introduction pricing
It is used when introducing a new product to the world, the two most common introduction approaches to market introduction pricing are price skimming and penetration pricing.
- price giving is a strategy used to intentionally set a high initial price relative to the competitor price
- penetration is a strategy to maximize sales as soon as possible, this strategy works best when consumers are price sensitive
