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BU325 Final > Chapter 11 - Pricing Concepts and Strategies: Establishing Value > Flashcards

Chapter 11 - Pricing Concepts and Strategies: Establishing Value Flashcards

1
Q

The Importance of Pricing

A

Price is the overall sacrifice a consumer is willing to make to acquire a specific product or service - sacrifice is usually money that must be paid to the seller to acquire the item but it may also involve other sacrifices, whether non momentary (the value of time necessary to acquire the product/service) or monetary (travel costs, taxes, and shipping costs)

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2
Q

Perception of price

A

is the only element in the marketing mix that generates revenue - consumers usually rank price as one of the most important factors in their purchase decision
- A low price might signal low quality, poor performance, or negative attributes about the product or service - consumers use price to judge its quality

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3
Q

The 5 C’s of Pricing
- strategies

A
  • company objectives
  • customers
  • costs
  • competition
  • channel members
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4
Q

Company Objectives

A

Different firms embrace different goals, each firm embraces an objective that fits with where management thinks the firm needs to go on and be successful

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5
Q

Profit orientation -

A

a company objective that can be implemented by focusing on target profit pricing, maximizing profits, or target return pricing

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6
Q

Target profit pricing -

A

a strategy implemented by firms when they have particular profit goals as their overriding concern; uses price to simulate a certian level of sales at a certain profit per unit

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7
Q

Maximizing profits strategy

A

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 profits are maximized

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8
Q

Target return pricing

A

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

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9
Q

Sales orientation -

A

a company objective based on the belief that increasing sales will help the firm more than will increasing profits
For sales to increase consumers must see greater value

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10
Q

Competitor orientation -

A

a company objective based on the premise that the firm should measure itself primarily against its competition

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11
Q

Competitive party

A

a firm’s strategy of setting prices that are similar to those of major competitors

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12
Q

Customer orientation

A

pricing orientation that explicitly invokes the concept of customer value and setting prices to match consumer expectations

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13
Q

Customers

A

most important because it is about understanding the consumers reactions to different price

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14
Q

Demand curves and pricing -

A

shows how many units of a product or service consumers will demand during a specific period of time at different prices
As the price increases, demand for the product/ service decreases

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15
Q

Prestige products or services

A

products consumers purchase for their status rather than their functionality - the higher the price the greater the exclusivity, because fewer people can afford to purchase it

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16
Q

Price elasticity of demand -

A

measures how changes in a price affect the quantity of the product demand

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17
Q

Elastic

A

price sensitive - elasticity is less than -1, 1 percent decrease in price produces more than 1 percent increase in the quantity sold

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18
Q

Inelastic

A

price insensitive - elasticity is greater than -1, when a 1 percent decrease in price results in less than 1 percent in quantity sold

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19
Q

Dynamic pricing

A

refers to the process of charging different prices for goods or services based on the type of customer, time of day, week, or even season; and level of demand

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20
Q

Factors influencing price elasticity of demand

A
  • income effect - refers to the change in the quantity of a product demanded by consumers because of a change in their income
  • Substitution effect - refers to the customers ability to substitute other products for the focal brand - greater availability of substitute products, the higher the price elasticity of demand
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21
Q

Price elasticity -

A
  • Cross-price elasticity - is the percentage change in the quantity of Product A demanded compared with the percentage change in Product B
  • Complementary products - products whose demands are positively related, such as they rise and fall together
  • Substitute products - changes in their demand are negatively related
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22
Q

Costs

A

to make effective pricing decisions, firms must understand their cost structure so they can determine the degree to which their products or services will be profitable at different prices

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23
Q

Variable costs

A

primarily labour and materials, that vary with production volume

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24
Q

Fixed costs -

A

costs that remain essentially at the same level, regardless of any changes in the volume of production

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25
Q

Total cost

A

the sum of the variable and fixed costs

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26
Q

Break-even analysis and decision making

A

help managers examine the relationship between cost, price, revenue and profit over different levels of production and sales

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27
Q

Break-even point

A

or the point at which the number of units sold generates just enough revenue to equal the total costs - at this point profits are 0

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28
Q

Contribution per unit

A

which is the price less the variable cost per unit

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29
Q

Competition

A

has an impact on pricing strategies, how competition can react to certain pricing strategies

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30
Q

Monopoly

A

only one firm that provides the product of service in a particular industry, and result in less price competition
Ex - utilities industry

31
Q

Oligopoly

A

only a few firms dominate, firms typically change their prices in reaction to competition to avoid upsetting an otherwise stable competitive market
Ex- banking, retail gasoline, commercial airline travel

  • Price war - can result in an oligopoly when two or more firms compete primarily by lowering their prices
32
Q

Monopolistic competition

A

occurs when many firms are competing for customers in a given market but their products are differentiated
Ex - sunglasses

33
Q

Pure competition

A

consumes perceive a large number of sellers of standardized products or commodities as substitutes
Grains, spices, gold, minerals
Price is set according to supply and demand

34
Q

Channel Members

A
  • manufactures, wholesalers, and retailers can have different perspectives when it comes to pricing strategies
35
Q

Grey market -

A

employes irregular but not necessarily illegal methods: generally, it legally circumvents authorized channels of distribution to sell goods at prices lower than those intended by the manufacturer

36
Q

Considerations for Setting Prices

A

The choice of pricing strategy is specific to the product/service and target market

37
Q

Cost based pricing methods

A

determines the final price to charge by starting with the cost

38
Q

Competitors based methods

A
  • setting prices to reflect the way they want consumers to interpret their own prices relative to the competitions offerings
39
Q

Value based methods

A

setting prices that focuses on the overall value of the product offering as perceived by the customer

40
Q

Improvement value method

A

represents an estimate of how much more (or less) consumes are willing to pay for a product relative to other comparable products

41
Q

Cost of ownership method

A

consumers may be willing to pay more for a particular product because over its entire lifetime, it will eventually cost less to own than a cheaper alternative

42
Q

Psychological Factors Affecting Value-Based Pricing Strategies

A
  • everyday low pricing
  • high/low pricing
  • new product pricing
  • emerging strategies and payment options
43
Q

Everyday low pricing (EDLP) -

A

companies stress 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
Adds value - consumers can spend less of their time comparing prices

44
Q

high/low pricing

A

relies on the promotion of sales, during which prices are temporarily reduced to encourage purchases

45
Q

New product pricing

A

to determine the consumers perception of its value and pricing it accordingly can be difficult for new products

46
Q

Price skimming

A

a strategy of 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

47
Q

Market penetration pricing -

A

a pricing strategy of setting the initial price low for the introduction of the new product or service, with the objective of building sales, market share, and profits quickly

48
Q

Experience curve effect

A

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

49
Q

Emerging Strategies and Payment Options -

A
  • Shrinkflation - decreasing food package sizes while leaving the prices unchanged
  • Buy Now Pay Later (BNPL) - allow consumers to spread the cost of even small purchases over weeks or months - mirror installment plan for small products
50
Q

Pricing Tactics

A

short-term methods, in contrast to long-term pricing strategies, used to focus on company objectives, customers, costs, competition, or channel members; can be responses to competitive threats (lowering price temporarily to meet a competitors price reduction) or broadly accepted methods of calculating a final price for the customer that is short-term in nature

51
Q

Consumer pricing tactics

A
  • price lining
  • price bundleing
  • leader price
52
Q

Price lining -

A

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

53
Q

Price Bundling

A

selling more than one product for a single, lower price - encourages customers to stock up so they won’t purchase other brands, try different products, incentive to purchase a less desirable product or service to obtain a more desirable one in the same bundle

54
Q

Leader price

A

attempts to build store traffic by aggressively pricing and advertising a regularly purchased item, often priced at or above the stores cost
Has a good deal on one item, get consumers in store to buy more

55
Q

Consumer Price Reductions

A
  • markdowns
  • quantity discounts for customers
  • coupon and rebates
56
Q

Markdowns

A

reductions retailers make on the initial selling price of the product
Enable retailers to get rid of slow-moving or obsolete merchandise

57
Q

Quantity discounts for customers

A

Size discount - the larger the quantity bought, the less the cost per unit

58
Q

Coupon and rebates

A

Coupon - provides a stated discount to consumers on the final selling price of a specific item; the retailer handles the discount

Rebate - the proportion of the purchase price returned to the buyer in the form of cash

59
Q

Business - to - Business Pricing Tactics

A
  • seasonal discount
  • cash discount
  • allowances
  • quantity discounts
  • uniform delivered versus geographic pricing
60
Q

Seasonal discount -

A
  • additional reduction offered as an incentive to retailers to order merchandise in advance of the normal buying season
61
Q

Cash discount

A

reduces the invoice cost if the buyer pays the invoice prior to the end of the discount period
3/10, n/30, 3% discount, 10 days, net 30

62
Q

Allowances -

A
  • Advertising allowance - offers a price reduction to channel members if they agree to feature the manufacturers product in their advertising and promotional efforts
  • Listing allowances - fees paid to retailers simply to get new products into stores or to gain more or better shelf space for their products
63
Q

Quantity Discounts

A
  • Cumulative quantity discount - uses the amount purchased over a specified period of time and usually involves several transactions - encourages resellers to maintain their current supplier because the cost to switch must include the loss of the discount
  • Noncumulative quantity discount - based only on the amount purchased in a single order - incentives the buyer to purchase more immediately
64
Q

Uniform Delivered Versus Geographic Pricing

A
  • Uniform delivered pricing - the shipper charges one rate, no matter where the buyer is located, which makes things very simple for both the seller and the buyer
  • Geographic pricing - sets different prices depending on a geographical division of the delivery areas
65
Q

Deceptive or Illegal Price Advertising

A

Should not deceive customers to the point of causing harm

66
Q

Deceptive reference prices

A

reference points create reference points for the buyer against which to compare the selling price
If reference point is inflated or fictitious it can cause harm to the consumer

67
Q

Loss Leader pricing

A
  • takes the tactic of leader pricing one step further by lowering the price below the stores cost
68
Q

Bait and switch -

A

store lures customers in with a very low price on an item (bait), only to aggressively pressure these customers into purchasing a higher-priced item (switch) by disparaging the lower priced item, comparing it unfavorably with the higher-priced model, or professing an inadequate supply of the lower priced item

69
Q

Predatory Pricing

A

A firm’s practice of setting a very low price for one of more of its products with the intent of driving its competition out of business; illegal under the competition act

70
Q

Price discrimination -

A

the practice of selling the same product to different resellers (wholesalers, distributors, or retailers) or to the ultimate consumer at different prices; some, but not all, forms of price discrimination are illegal

71
Q

Price fixing

A
  • colluding with other firms to control prices
72
Q

Horizontal price fixing -

A

occurs when competitors that produce and sell competing products collude, or work together, to control prices, effectively taking price out of the decision process for consumers

73
Q

Vertical price fixing -

A
  • parties at different levels of the same marketing channel collude to control the prices passed on to consumers
74
Q

Manufacturer’s suggested retail price

A

manufactures encourage retailers to sell their merchandise at a specific price

BU325 Final (18 decks)

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