Chapter 14 Pricing

Question 1

4 categories of Company Objectives

Answer 1

1. Profit oriented
2. Sales oriented
3. Competitor oriented
4. Customer oriented

Question 2

3 Components of Profit orientation

Answer 2

1. Target profit pricing - Used when a particular profit goal, met by using price to stimulate sales at a certain profit per unit.
2. Maximizing profits - Relies on economic theory to determine pricing
3. Target Return Pricing - interested in the rate at which profits are generated relative to investment. employ pricing strategy designed to produce specific ROI expressed as a % of sales.

Question 3

Premium Pricing

Answer 3

Deliberately high price to capture customers who buy the best without consideration for price.

Question 4

2 Components of competitor orientation

Answer 4

1. Competitive parity - copying pricing from competitors

2. Status quo pricing - When others change prices, so do you

Question 5

Customer Orientation

Answer 5

When a firm sets pricing strategy based on how it can add value to its products.

Question 6

Sales Orientation

Answer 6

increasing sales will help the firm more than will increasing profits

Question 7

Price elasticity of demand

Answer 7

measures how changes in price affect quantity of product demand.

PEoD= %change in quantity demanded/ %change in price

Question 8

Dynamic Pricing (individualized pricing)

Answer 8

the process of charging different prices based on

• type of customer,
• time of day, week or season,
• level of demand

Question 9

Factors influencing price elasticity of demand

Answer 9

1. Income effect -
2. Substitution effect
3. Cross price elasticity

Question 10

Costs

Answer 10

Variable costs - Primarily labor and materials, that vary with production volume

Fixed Costs - Rent/Utilities/Insurance etc

Total Cost - Variable cost+Fixed cost

Question 11

Break even analysis

Answer 11

A technique of examining relationships among cost, price, revenue, and profit over different levels of production and sales

Question 12

Break-even Point

Answer 12

point at which the number of units sold generates enough revenue to equal total costs.

Fixed costs / Contributions per Unit

Question 13

2 factors for determining break even point

Answer 13

1. Vertical axis - measures revenue or costs in dollars

2. Horizontal axis - measures quantity of units sold

Question 14

How to calculate total variable costs

Answer 14

Variable cost per unit x Quantity

Question 15

How to calculate total revenue

Answer 15

Price x Quantity

Question 16

Contribution per unit

Answer 16

the price - variable cost per unit

needed to determine break even point in units mathematically

Question 17

Target Return Pricing

Answer 17

(Variable + (Fixed / Expected Unit Sales)) x (1 + Target Return % (expressed as a decimal)

Question 18

4 Levels of Competition

Answer 18

1. Monopoly - less competition
2. Oligopoly - Handful of firms control market (More Price competition and Fewer Firms)
3. Monopolistic - most common form of competition. Differentiated in some way (Less price competition, Many Firms
4. Pure competition - More Price competition , Many firms