Chapter 6: Price Flashcards
Who determines price?
Manufacturer
What is price?
Money exchanged
For ownership of product
Use of service
What is value?
The quantitive measure of worth
Of a product in exchange for something else
What is the equation for value?
Cost
How is the firm affected with pricing?
Profits
What is profit?
Sales- Cost
What is sales?
Quantity x price
What is cost?
Payment for
Materials/services
To produce final goods and services
To generate revenues
What are the components of total cost?
Fixed
Variable
What is fixed cost?
Constant Amount firm must pay
Regardless of output
What is variable cost?
Incurred in relation to production
Usually direct relation
What are the categories for product cost?
Direct
Indirect
What are examples of direct product cost?
Raw materials
Components/manufactured parts
R and D
Production workers labor costs
What are examples of indirect product costs?
Factory overheads
Finance expenses
Administration expenses
Marketing and selling cost
What is the goal of marketing in value?
To increase value
So that product becomes more inelastic
What is price elasticity of demand?
% change in quantity demanded relative to
% change in price
What are the factors affecting price elasticity?
Availability of substitutes
Necessities and frequency of use
Proportion of disposable income
How elastic are convenience goods? Why?
Elastic
Available substitutes
The two strategies is setting initial prices for new products are
Skim pricing
Penetration pricing
What products skim pricing is used for?
Specialty
What does skim pricing start with ?
A high price
What are the characteristics of the first layer of customers in price skimming?
Really desire product
Not price elastic
In price skimming, when do we go to the next layer?
Demand of precious later met
In price skimming, when we go to the successive layers, price is lowered because
Customers are more price sensitive
Price skimming stops when
No other layers would pay a higher price
When is price skimming effective?
High quality image for product
Product genuinely distinctive
Enough customers willing to buy initial price
No competition (protection)
The product is in early stage of life cycle
Why do customers have a high quality image of product in skim pricing?
High price= high quality
The first layer of customers in skim pricing is important because they
Make sales profitable
How is a new product protected from competition?
Barrier to entry
Patent
Why are competitors avoided in skim pricing?
They can set lower prices
Why is skim pricing used in early stages of product?
Because a low price will not generate greater revenue
Not many aware of product
Those aware are price inelastic
What is penetration pricing?
Set a low initial price on the new product
Appeal immediately to the mass market
For what goods is penetration pricing used?
Convenience
Shopping
Penetration pricing is used for convenience and shopping goods because
It is easily copied
Imitative
When is penetration strategy effective?
Can reach the mass market easily
Discourage competitions from entering the market
Product highly elastic demand
Economies of scale
What happens when the mass market is quickly reached in penetration strategy?
Sales volumes substantial
Establish substantial market share
How can companies using penetration strategy reduce competition?
Reason that lower prices mean lower profit margin
Lower price means high sales volume
For existing companies
What does economies of scale achieve?
Substantial reductions in unit costs
Large scale operations
Volume make up for lower profit margin per unit of product
What are the price adjustment strategies?
Prestige pricing Status quo pricing Price lining Psychological pricing Bundle pricing Loss leader pricing
Why is price adjusted?
Stage in product life cycle
Market demand conditions
What is prestige pricing?
Setting a high price
Why do you set a high price in prestige pricing?
Customers conscious about
Status and quality will be attracted
What is status quo pricing?
Pricing in line with competitors who sell similar products
Why is status quo pricing used?
To avoid a price war
Maintain profits and market share
What is price lining?
Setting a range or price points for a line of product
Setting a limited number of prices to sell related products
What is psychological pricing also known as?
Odd pricing
What does psychological pricing involve?
Setting a price at uneven amounts
Few dollars/cents under an even number
How does psychological pricing affect?
consumers perceive it as a lower price
When should odd pricing be avoided?
On higher priced items
When will odd pricing lose its effect?
Overuse
What is bundle pricing?
Sale of two or more products in a single package price
What are the two products in a bundle?
First product: popular item
Second: less popular
How does bundle pricing benefit consumers?
A lower total cost
Do not have to make separate purchases
What is loss leader pricing?
Sale of a product at lower than usual price
Attract customers to purchase other items (normal profit margin)
What is the aim of loss leader pricing?
Increase sales of other goods
Not the product on loss leader
What is the difference between bundle pricing and sales promotion?
Bundle is permanent
