Chapter 13: Setting the Right Price Flashcards
Define Price
Price is based on the satisfaction consumers expect to receive from a product and not necessarily the satisfaction actually received. Price can relate to anything with perceived value, not just money
- Aka Sacrifice consumers will make, such as time)
- Price, which is given up in exchange for a good or service
Define Internal Price
Determined by financial and accounting formulas
Define External Price
Determinants (determined by an understanding of marketing and the external environment) must be considered to ensure a price that satisfies the consumer and the bottom line
What is the Importance of Price to Marketing Managers?
Price creates a perception of quality to consumers
- “Price is what you pay, value is what you get”
What is the Importance of Price for the Consumer?
Price means one thing to the consumers, being the cost of something they want
What is the Importance of Price to the seller?
Price means making money (Revenue)
Define Establishing Pricing Objectives as the Four Step Pricing Process
Managers must consider the products demand, cost, profits, and its further process. This process usually means trade offs occur, being competitive, and having considerations for changing economic conditions, and meeting the company’s overall objectives
Define Profit Maximization as Profit-Orientated Pricing Objectives
Profits can be maximized by expanding revenue by increasing customer satisfaction, or reducing costs through efficiency
Define Satisfactory Profits as Profit-Orientated Pricing Objectives
Level of profit consistent with the level of risk
Define Target Return as Profit-Orientated Pricing Objectives
Target Return on Investments (ROI) is a percentage that puts a firm’s profits into perspective by showing profits relative to investment
Define Market Share as a Sales-Orientated Pricing Objective
A company’s product sales as a percent of total sales for that industry. Larger market shares have higher profits, and lower market shares often have lower profits.
Define Sales Maximization
If a company is strapped for funds or wants to sell excess inventory
Define Status-Quo Pricing Objectives
Often, firms competing in an industry with an established price leader, simply meet the competition prices.
- Fewer price wars
Define Cost Estimation and Demand Estimation
Cost Estimation: Variable and Fixed Costs
Demand Estimation: Historical Data in the industry, life cycle.
Define the Introductory Stage of the PLC
- High prices
- Recover Development Costs
- Demand relatively inelastic
- Price-sensitive market
Define the Growth Stage of the PLC
- Price stabilize
- Competition enters increasing supply
- Product appeal has widened
- Economics of scale lower costs so can pass savings on
- Demand rises
Define the Maturity Stage of the PLC
- Price decreases as competition increases
- Distribution channels are a cost factor as a need to intensify
- Prices across competitors stabilize and price reductions do little as competition just follows
- Demand is limited
Define Decline Stage of the PLC
- Further price reductions as the few remaining competitors try to recoup
- Prices could even go up if the remaining product becomes a speciality good
Define Price Sensitivity
The degree to which consumers’ behaviours are affected by the price of the product or service.
Define Price Elasticity of Demand
The degree of change in demand relative to changes in price
Define Elastic Demand
Demand changes a lot when price changes
- Non-essential
- Many essentials
- Smartphones, fashion, cars
Define Inelastic
Demand does not respond much to price change
- Essentials
- Few alternatives
- Home heating, electricity
- basic food
Define Break Even
The point at which cost and income are equal and there is neither profit nor loss
Break Even Price = Fixed Cost / (Variable Price Per Unit - Variable Cost Per Unit)
Define Choosing a Price Strategy (Stage 3 of PLC)
The price strategy sets a competitive price in a specific market segment that is based on a well-defined positioning strategy
- A company’s freedom in pricing a new product and devising a price strategy, depends on the market conditions and the other elements of the marketing mix
- Many companies make pricing decisions without a solid pricing strategy and pricing research, which can lead to serious consequences
Define Penetration Pricing
If the volume of sales does not materialize, then the company will face huge losses. Also, a penetration policy with a prestige product can prove disastrous
- Changing a relatively low price for a product initially
- To capture a large share of the market
- When price sensitive market, demand is elastic. Competitive market, relatively homogenous products potentially a large market, low fixed cost structure, each sale contributes large amount of fixed costs
Define Status Quo Pricing
Meeting the competition or going-rate pricing, changing a price identical or very close to competition
- Simple, but it ignores demand and costs
Define Stae Four: Use a Price Tactic
General Price level that the company plans to sell at.
- Using a variety of pricing tactics (this provides the opportunity to adjust for unforeseen events in the marketplace)
Define Markup
Profit-producing device of price, and a component of each pricing tactic
Define Quantity Discounts
When buyers are charged a lower unit-price when buying either in multiple units or at more than a specified dollar amount, they are receiving a quantity discount.
Define Cumulative Quantity Discount
Is a deduction from list price that applies to the buyer’s total purchases made during a specific period; it is intended to encourage customer loyalty.
Define Non-Cumulative Quantity Discount
Is a deduction from list price that applies to a single order rather than to the total volume of orders placed during a certain period. It is intended to encourage orders in large quantities
Define Cash Discount
Is a price reduction offered to a customer, an industrial user, or a marketing intermediary in return for prom payment of a bill
Define Functional Discounts
When distribution channel intermediaries, such as wholesales or retailers, perform a service or function for the manufacturer ( for example, setting up retail displays or extending credit), they must be compensated (generally a percentage discount off base)
Define Seasonal Discounts
A price reduction for buying merchandise out of season
Define Value-Based Pricing
Strategy that has gown out of the quality movement. Starts with the consumer, considers the competition, and then determines the price.
Define Consumer-Driven Organization
Seeks to determine the bundle of attributes the consumer wants and want value they place on them
Define Competition
Must also consider competition, as consumer assign value based on relative to alternatives
Define FOB Origin Pricing
The buyer absorbs freight costs from the shipping point
Define Uniform Delivered Pricing
The seller pays for the actual freight charges and bills every purchaser an identical, flat freight charge
Define Zone Pricing
A modification of uniform delivered pricing. Rather than using a uniform freight rate for its total market, the firm divides it into segments or zones and charges a flat rate per zone
Define Freight Absorption Pricing
Seller pays all the freight (used intensely competitive markets as a way to break in or be more competitive)
Define Basing-Point Pricing
Designate a location as a basing point and charges all buyers the freight cost from that point regardless of the city, in which the goods are shipped (this is not very popular)
Define Single Price
All goods and services are at the same price, and removes price comparison from the buying process
Define Flexible Price
Different customers pay different prices. This allows the seller flexibility with respect to competition. This is good when dealing with price-conscious consumers, but lacks consistency in profit.
Define Professional Services
This is used by people who have specialized training. Price sensitivity is limited so consumers will bear the price given. (Must be in ethical terms)
Define Price Lining
A line of products with prices set at several price points within. This reduces confusion for both the seller and buyer, but does limit flexibility as prices rise and fall for the seller
Define Loss Leader
Selling a product near or even below cost in the hope that shoppers will buy other items once in the store
Define Odd-Even
Using odd numbers in the price to connote a bargain
Define Pricing Bundling
Having two or more products in a single package for a special price. Many issues related to consumer behaviour to consider though
Define Two-Part Pricing
When charging two separate amounts to consume a single good or service (example: membership fee and then a flat fee for the use). This can attract consumers who will not pay a high upfront fee for limited use
Define Legality and Ethics
Companies and marketers need to be aware of the laws within the Competition Act before establishing any strategy. The Act covers legal and ethical issues relating to deceptive pricing, price fixing, predatory pricing, resale maintenance, and price discrimination. Both alleged and proven unethical pricing practices, can have serious consequences for the companies and the marketing manager involved
Define Bait Pricing
Luring customers in through false or misleading advertising, and/or the use of high pressure in-store to sell up
Define Deceptive Pricing
Promoting a product or price saving that is not actually available or a low price on a limited number of products, promoting a discount from regular price that has not been the regular price, selling a product above the advertised price, and/or double ticketing
Define Price Fixing
When two or more companies conspire to set a price - establishing a floor in bidding situation or setting the market price that consumer will pay
Define Predatory Pricing
Setting a price very low with the internet of driving competition out. This is difficult to prove as must show willful intent
Define Resale Price Maintenance
Cannot dictate the price that retailer sells at or the retailer’s price minimum, manufacturers can provide an MSR but cannot discriminate against retailers that do not adhere to the MSR
Define Price Discrimination
Charging different prices for different buyers of goods like quality and grade within the same time period to reduce competition, and/or promotional money being offered to channel members to stimulate support but it must be offered proportionally
