Chapter 16: Pricing Concepts

Question 1

What is price?

Answer 1

Price is that which is given up in an exchange to acquire a good or service

Question 2

The importance of price

1. to the seller
2. to the consumer

Answer 2

• To the seller
	• Price is revenue and profit source
• To the consumer
	• Price is the cost of something 
Perceived reasonable value at the time of the transaction

Question 3

prices are key to revenues

and profit

Answer 3

• Revenues–> is the price charged to customers multiplied by the number of units sold.

Profit–> revenue is what pay for every activity or cost (production, finance, sales, distribution.) what is left over is the profit.

Question 4

Profit-oriented pricing objectives

Answer 4

• profit maximization
• satisfactory profits
• target return on investment

Question 5

• Profit maximization

Answer 5

• Setting prices so that total revenue is as large as possible relative to total costs
○ Increasing customer satisfaction
○ Reduce operating costs
○ both

Question 6

• Satisfactory profits

Answer 6

• Strive for profits that are satisfactory to the stockholders and management. –> a level of profits consistent with the level of risk an organization faces.

Question 7

• Target return on investment

Answer 7

• Measures management’s overall effectiveness in generating profits with the available assets.

Question 8

Sales-oriented pricing objectives

Answer 8

• Market Share
• Sales maximization
• Status quo priceing

Question 9

• Market share

Answer 9

• A company’s product sales as a percentage of total sales for that industry
○ Market share may be expressed in terms of revenue or units.
○ Believe that marketing share is an indicator of successfulness of marketing mix.

Question 10

• Sales maximization

Answer 10

• Short-term
• Ignores profits, competition, and the marketing environment
• May be used to sell off excess inventory.
• Rather than striving for market share- strive to maximize sales. A firm with the object of maximizing sales ignores profits, competition and the marketing environment as long as sales are rising.
○ Should not be long term because cash maximization may mean little or no profitability (company cannot survive without profit)/

Question 11

Status Quo Pricing Objectives

Answer 11

Companies seek to Maintain existing prices or to Meet competition’s prices

Question 12

The cost Determinant of Price
• Price set depends mostly on two factors:

•

		○ Factors that affect elasticity
			§ Availability of substitutes
			§ Price relative to purchasing power. 
			§ Product durability
			§ Rate of inflation
A products other uses.

Answer 12

1. The demand for the good or service

2. The cost to the seller for that good or service.

Question 13

The nature of demand

Answer 13

• Demand–> is the quality of a product that will be sold in the market at a various prices for a specified period.
  
  • Supply–> is the quality of a product that will be offered to the market by a supplier or suppliers at various prices for a specified period.

Question 14

• Elasticity of demand–>

○

Answer 14

refers to consumers responsiveness or sensitivity to changes in price

Question 15

Elastic demand–

Answer 15

occurs when consumers buy significantly more or less of a product when the prices change

Question 16

○ Inelastic demand-

Answer 16

means that an increase or a decrease in price will not significantly affect demand for the product.

Question 17

Methods to set prices

Answer 17

• marking up
• keystoning
• profit maximization
• break even pricing

Question 18

• Markup pricing

Answer 18

○ Used by wholesalers and retailers

○ The cost of buying the product from the producer plus amounts for profit expenses not otherwise accounted for

Question 19

• Keystoning

Answer 19

○ The practice of marking up prices by 100%, or doubling the cost

Question 20

• Profit maximization pricing

•

Answer 20

○ Used produced use this.
○ The method of setting prices that occurs when marginal revenue equals marginal cost
○ Marginal revenue–> the extra revenue associated with selling an extra unit of output, or the change in total revenue with a one-unit change in output.

Question 21

Break-even pricing

Answer 21

Sales volume is enough for the company to break even.

Question 22

Determinants of Pricing

Answer 22

• product life cycle
• competition
• distribution strategy
• internet
• promotion
• price matching
• large customers
• price to quality

Question 23

• Stages of the product life cycle

Answer 23

• Introductory state
○ Management usually sets prices high during the introductory state. Hoping to cover development cost quickly, however if the demand is for a product of low cost , the price is kept lower
○ Product usually only appeals to those who are segmented at first
• Growth stage
○ Prices begin to stabilizes
§ Competitors have entered the market
§ Product has begun to appeal to a broader market
• Maturity stage
○ Further price decreases as competition increases and inefficient, high cost firms are eliminated.
○ Distribution channels are a cost factor
• Decline stage
○ Further price decreases
○ Try to get last bits of demand.
Usually only one firm left in market, prices stabilize.

Question 24

The Competition

Answer 24

• High prices may induce firms to enter the market
• Competition can lead to price wars
Sometimes companies choose to price above the competition

Question 25

• Distribution strategy

Answer 25

An effective distribution network can often overcome minor flaws in the marketing mix.

Question 26

• Promotion strategy

Answer 26

Price is often used as a promotional tool to increase consumer interest .

Question 27

• Perceived quality

Answer 27

Uncertain consumers tend to rely on price to indicate quality.

Question 28

• Demands of large customers

Answer 28

• Larger customers pressure suppliers for price reductions and guaranteed margins.

Question 29

Internet

Answer 29

``` • Production selling • JIT • Shopping bots • A program that searches the web for th best price for a particular item that you wish to purchase. • Internet auctions Ebay ```