Chapter 14 Flashcards
What are the 5 critical components of pricing (5 Cs)
- Competition
Look at different types of competition (pure competition, monopolistic competition, oligopolistic competition, pure monopoly) - Costs
Fixed + variable costs equal total costs
Fixed: do not vary with production or sales level (rent, interest)
Variable: vary with the level of production (packaging, raw materials) - Company objectives
Pricing orientations (profit, sales, customer, and competitor orientations) - Customers
Use demand curve that shows the number of units the market will buy (demand) in a given period at different prices
Normally demand/price are inversely related
Higher price = lower demand
For prestige or luxury goods, higher price can equal higher demand, to a certain extent - Channel members
Your price must work for members of your channel (wholesalers, retailers), who each have their own
What are the 4 pricing orientations that firms might implement
- Profit orientation
Focus is on maximizing profits, make a target profit, or make a specific return on investment - Sales orientation
Focus is to increase sales or market share - Customer orientation
Focus is on matching prices to customer expectations or adding customer perceived value - Competitor orientation
Focus is on staying similar to competition or keeping relative prices the same
What are the 3 factors that influence price elasticity
- Substitution effect
Increase in possible solutions = increase elasticity of demand
Rubber duckies have more substitutes while jet fuel does not - Income effect
Increased income = decrease elasticity of demand - Cross-price elasticity
Increase demand for complementary products = demand for focal product
Takeout containers are complementary to food
Need more takeout containers during the pandemic to put food in
Increase in demand for substitute products = decreased demand for focal product
What is elasticity
Elastic
Refers to a market for a product or service that is price sensitive; that is, relatively small changes in price will generate fairly large changes in the quantity demanded.
Inelastic
Refers to a market for a product or service that is price insensitive; that is, relatively small changes in price will not generate large changes in the quantity demanded.
What is a break even point and how do you calculate it
Break even point: The point at which the number of units sold generates just enough revenue to equal the total costs; at this point, profits are zero.
fixed costs / price - unit variable costs
What are the 4 types of competitive environments
- Pure competition
Many buyers and sellers trade a uniform commodity
All sellers sell at the market price
Gas, wheat, oil - Monopolistic competition
Many buyers trade differentiated products (clothing)
Prices vary, sellers not very sensitive to competitors’ price changes - Oligopolistic competition
Few sellers sell uniform or non-uniform products
Ex. airlines and steel
Sellers highly sensitive to competitors’ price changes - Pure monopoly
One seller (ex. electricity)
Regulated monopolies held to a “fair return” non regulated monopolies charge slightly less than what market will bear
What is the difference between an “everyday low pricing” (EDLP) strategy and a “high/low” strategy
EDLP: charging a constant low price with temporary discounts
Saves search costs of finding lowest overall price
High/low pricing: charge higher prices on a n everyday basis but run frequent promotions
Provides the thrill of the chase for lowest price
Damn I got a good deal
What are 2 price strategies for new products
Market skimming pricing
Charge high prices initially to “skim” revenue layers from the market
Use diffusion of innovations
Happens overtime
Must have:
Product quality and image must support high price
Demand must exist at the price
Costs of producing small volume should be less than benefits gained from high price
Market penetration pricing
Firms charges low initial price to attract a large number of buyers quickly to gain market share
Happens quickly
Must have:
A price sensitive market (elastic demand)
Cost of production and distribution must fall as sales volume increases
Low prices must keep competition out of the market
What are 2 forms of price discrimination that are illegal
Price fixing
Sellers collude with competitors to set (high) prices
Predatory pricing
Selling below costs with the intention of punishing a competitor or gaining higher long-term products by putting competitors out of business
What is the demand curve
Shows how many units of a product or service consumers will demand during a specific period at different prices.
What is the difference between variable and fixed costs
Variable costs
Those costs, primarily labor and materials, vary with production volume.
Fixed costs
Those costs that remain essentially at the same level, regardless of any changes in the volume of production.
What is the experience curve effect
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.
What is a reference price
The price against which buyers compare the actual selling price of the product and that facilitates their evaluation process.
What is the bait in switch when it comes to pricing
A deceptive practice of luring customers into the store with a very low advertised price on an item (the bait), only to aggressively pressure them into purchasing a higher-priced model (the 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.
