Chapter 19: Pricing Concepts Flashcards
What is the purpose of creating a pricing infrastructure in a company?
- Defining pricing goals
- Creating customer value
- Assigning responsibility for pricing
- Improving pricing tools and systems
Why is price setting a significant challenge for marketing managers?
Because it impacts the firm’s bottom line and involves setting the right price to balance revenue and customer satisfaction
What is the ‘value’ in terms of price?
It’s based on perceived satisfaction, where consumers seek reasonable value at purchase
How is ‘price’ defined in marketing?
As the amount given up in exchange for acquiring a good or service
How does the ‘information effect’ influence consumer perception of price?
Consumers may infer quality from price; higher prices can imply higher quality, prestige, or status
What is the ‘sacrifice effect’ of price?
It reflects the consumers’ trade-offs, usually money, time, or other products foregone
How is revenue calculated?
Revenue equals the price charged multiplied by the number of units sold
What are the characteristics of effective pricing objectives?
Objectives should be specific, attainable, and measurable
What must managers consider to achieve profitability?
They must select a price that aligns with perceived value without being too high or low
What is ‘profit maximization’?
Setting prices to maximize revenue relative to costs while staying competitive
What are ‘satisfactory profits’?
Profits that are adequate for stockholders and management, based on industry risk
How is ‘target return on investment’ (ROI) used in pricing?
By setting prices to achieve a desired ROI, often compared to industry standards
What is ‘market share’ in sales-oriented objectives?
The percentage of a company’s sales relative to total industry sales
What is ‘status quo pricing’?
A strategy that maintains existing prices or matches competitors’ prices
What is ‘sales maximization’?
Focusing on maximizing sales volume, often ignoring profit or competition factors
What is ‘demand’ in pricing?
The quantity of a product that will be sold at various prices over a set period
What is dynamic pricing?
The ability to adjust prices quickly, often in real-time, in response to market demand
How does ‘elasticity of deman’ impact pricing?
It measures consumer sensitivity to price changes, affecting demand based on price shifts
What are variable and fixed costs?
Variable costs change with output
Fixed costs remain constant regardless of output
How does AI improve dynamic pricing?
By using large amounts of data to personalize pricing based on consumer behavior and market trends
What is markup pricing?
Setting prices by adding profit and expenses to the cost of purchasing the product
What is break-even pricing?
Determining the sales volume needed to cover total costs
How does the internet affect pricing strategies?
It increases price transparency, allowing consumers to compare prices easily and driving competitive pricing
How does the product life cycle affect pricing?
Prices often start high in the introductory stage and may decrease in maturity and decline stages
What role does competition play in pricing?
It influences prices through market dynamics, potentially leading to price matching and customer loyalty efforts
What are the steps in setting the right price on a product?
- Establish pricing goals
- Estimate demand, costs & profits
- Choose a price strategy to determine the base price
- Fine-tune the base price with pricing tactics
What is the relationship between price and quality perception?
High prices often lead consumers to assume better quality, particularly in uncertain purchasing situations
What are the 3 categories of pricing objectives?
- Profit-oriented
- Sales-oriented
- Status quo
What is common trade-off for the profit-maximization pricing objective?
It may require a larger initial investment than the firm can or wants to commit to
What is the trade-off of pursuing a market-share objective?
It often involves sacrificing short-term profit to meet long-term goals, which may not be achieved without careful management
What is a major advantage and disadvantage of the status quo pricing goal?
- Advantage: easiest to implement
- Disadvantage: it may ignore demand and costs
What factors influence total revenue in relation to pricing?
Total revenue is a function of price and quantity demanded, which depends on demand elasticity
After establishing pricing goals, what should managers estimate next?
- Total revenue at various prices
- Determine costs for each price
- Estimate possible profit and market share for each price
What is price skimming?
A pricing policy where a high introductory price is charged, often with heavy promotion, usually for new products with unique advantages
What is a price strategy?
A long-term pricing framework that sets the initial price and direction for price changes over the product’s life cycle
Under what conditions is price skimming most effective?
- When there’s strong demand
- The product has legal protections
- Represents a technological breakthrough
- Blocks competitor entry
What is penetration pricing?
A policy where a firm charges a relatively low price initiallyy to reach a mass market?
What is status quo pricing?
Setting a price identical or very close tot he competitions’ price, which is simple but may overlook demand and costs
What are the pros and cons of penetration pricing?
- Pros: effective in price-sensitive markets, discourages competitions
- Cons: lower profit per unit, requires higher sales volume to reach break-even
What is a cumulative quantity discount?
A price reduction that applies to a buyer’s total purchases over a specific period to encourage customer loyalty
What is a base price?
The general price level at which a company expects to sell its product or service
Name some fine-tuning techniques for base pricing
- Discounts
- Allowances
- Rebates
- Value-based pricing
What is a cash discount?
A price reduction offered to customers for promt payment of a bill
What is value-based pricing?
Pricing at a level that customers perceive as a good price based on the value compared to other options
What is uniform delivered pricing?
The seller pays the actual freight charges but bills every purchaser a flat rate for shipping
What is FOB origin pricing?
A pricing tactic where the buyer absorbs the freight costs from the shipping point
What is the single-price tactic?
Offering all goods/services at the same price, or sometimes at one of two or three set prices
What is flexible pricing?
Different customers pay different prices for the same merchandise in equal quantities, allowing price adjustments for competition
What is price lining?
Offering a product line with several items at specific price points to reduce consumer confusion and simplify purchasing
What is leader pricing?
Selling a product near or below cost to attract shoppers, hoping they’ll buy other items
What is odd-even pricing?
Setting prices at odd numbers to suggest bargains and even numbers to imply quality
What is price bundling?
Marketing 2 or more products in a single package for a special price to stimulate demand
What is predatory pricing?
Setting very low prices with the intent of driving competitors out of the market, then raising prices
