Chapter 13: Setting the Right Price Flashcards
Price
That which is given up in an exchange to acquire a good or service.
Revenue
The price per unit charged to customers multiplied by the number of units sold. Price x quantity.
Costs
The combined financial value of all inputs that go into the production of a company’s products, both directly and indirectly.
Profit
Revenues minus expenses.
Return on investment (ROI)
Net profits divided by the investment.
Market share
A company’s product sales as a percentage of total sales for that industry.
Status quo pricing
A pricing objective that maintains existing prices or meets the competition’s prices.
Four steps in setting the right price on a product
1) Establish pricing objectives 2) estimate demand, costs, and profits 3) choose a price strategy to help determine a base price 4) fine-tune the base price with pricing tactics.
Different Pricing Objectives
Profit-oriented pricing objectives (pursuing profit maximization or satisfactory profits or target ROI); sales-oriented pricing objectives (pursuing market share or sales maximization); status quo pricing (pursuing the status quo price).
Price sensitivity
Consumer’s varying levels of desire to buy a given product at different price levels.
Price elasticity of demand
A measurement of change in consumer demand for a product relative to the changes in its price.
Break-even analysis
The calculation of number of units sold, or total revenue required, a firm must meet to cover its costs, beyond which profit will occur. Formula: Fixed costs / (Variable price per unit / Variable cost per unit)
Price strategy
A basic, long-term pricing framework that establishes the initial price for a product and the intended direction for price movements over the product life cycle. Price strategies are price skimming, penetration pricing, or status quo pricing.
Price skimming
A high introductory price, often coupled with heavy promotion to skim the cream off the top and people are willing to pay more for a perceived above-average product.
Penetration pricing
A relatively low price for a product initially as a way to reach the mass market.
Experience curves
Curves that show costs declining at a predictable rate s experience with a product increases.
Base price
The general price level at which the company expects to sell the good or service.
Quantity discount
A unit price reduction offered to buyers buying either in multiple units or at more than a specified dollar amount.
Cumulative quantity discount
A deduction from list price that applies to the buyer’s total purchases made during a specific period. (Spend more than $600 in this time period and get a discount).
Noncumulative quantity discount
A deduction from list price that applies to a single order rather than to the total volume of orders placed during a certain period. (Buy three or more of a product for a discount).
Cash discount
A price reduction offered to a consumer, an industrial user, or a marketing intermediary in return for prompt payment of a bill.
Functional discount (trade discount)
A discount to wholesalers and retailers for performing channel functions.
Seasonal discounts
A price reduction for buying merchandise out of season.
Value-based pricing
Setting the price at a level that seems to the customer to be a good price compared with the prices of other options.
