Chapter 8 - Done Flashcards
What is price?
Value exchanged for a product in a marketing transaction (most flexible element of marketing mix)
What is pricing?
The management of price
What is the primary pricing objective?
- The key to successful marketing lies in the creation of a mutually beneficial exchange of value between one party and another
- For the buyer, the benefit is the satisfaction derived from the consumption or ownership of the product
- For the seller, the benefit is primarily the revenue derived from purchases
What is bartering?
The direct exchange of goods and services in payment for other goods and services
What are the pricing objectives?
Profitability Long-term Prosperity/On-going survival Market Share Positioning What the customer is prepared to pay
What is Profitability?
- Profits are generated when total revenues exceed total costs
- The profit required to justify the investment in a particular product or project is known as the target return on investment, or ROI, and it is a common basis for pricing decisions
What is Long-term Prosperity?
- Profitability over the long term leads to greater total wealth for business owners than does maximizing short‐term profits at the expense of the future of the business
- Profitability over the long term leads to greater total wealth for business owners than does maximizing short‐term profits at the expense of the future of the business
What is Market Share?
Many businesses use aggressive pricing in an effort to increase or defend market share
* Major car companies such as Toyota, Holden, Ford and Mazda use aggressive pricing to increase and defend market share in particular market categories, as well as overall market share
What is Positioning?
- Consumers often compare competing products based on price, and to some extent this assessment can occur relatively independently of other product attributes
- Customers interpret price differently
What is not-for-profit pricing?
While they do not seek to make a profit, they do generally seek a return on their activities and many charge for their products
* Their objective may be to make sufficient funds to cover their activities
What is comparison discounting?
The practice of explicitly quoting a discounted price and the regular higher price together
What is bait pricing?
Establishing an artificially low price for one item in a product line to attract potential buyers, then trying to sell them a higher‐priced item in the product line
What is bait-and-switch?
Occurs when the seller has no intention of selling the lower‐priced item and merely uses the ‘bait’ price as a pretext to lure shoppers into the store, then ‘switches’ to the normally priced items
What is price discrimination?
Occurs when price differentials between business customers give one business customer an unfair advantage over another, thus reducing competition
When are price differentials legal?
- When they do not adversely affect competition
- When they arise because of differences in the costs of selling or transportation to various customers
- When they arise because a supplier has to cut its price to a particular buyer to meet a competitor’s prices
- When they relate to volume discounts
What is secondary market pricing?
Involves setting different prices for different target markets
What should be considered when the pricing method is selected?
- The price should reflect the needs and the capacity of the consumers in the market
- Additionally, it should adhere to the customer’s perceptions of the product and should not exceed or be under it
What is demand-based pricing?
Setting prices according to the level of aggregate or individual customer demand in the market
What is a demand schedule?
A table that shows the actual or estimated quantity demanded for a particular product at particular prices
What is a demand curve?
The plotted version of a demand schedule is known as the demand curve
What does the demand curve for a prestige product look like?
NEED TO PUT IN THE IMAGE HERE
What is ceterus paribus?
“Holding everything else constant”
How are demand curve shifts shown?
- A shift in the demand curve to the right will mean that more of the product will be sold at every price than before
- A shift in the demand curve to the left will mean that less of the product will be sold at every price than before
What is price elasticity of demand?
The sensitivity of the quantity demanded to changes in price = (% change in demand)/(% change in price)
When is demand elastic and inelastic?
- Demand is said to be price elastic if ed is greater than 1 (i.e. if the percentage change in the quantity demanded exceeds the percentage change in the price)
- Demand is said to be price inelastic if ed is less than 1 (i.e. if the percentage change in the quantity demanded is less than the percentage change in price)
What does the slope of the curve show?
- When a price elastic demand curve is relatively horizontal, it illustrates that a small change in price leads to a proportionally larger change in volume
- When a price inelastic demand curve is relatively vertical, it illustrates that a large change in price leads to a proportionally smaller change in quantity
What are fixed costs?
Costs which do not vary with changes in output
What are variable costs?
Costs, which do vary with changes in output
What is a price floor?
A number below which prices are not sustainable for a for‐profit organisation
What are price and loss leaders?
If priced near cost, a product is called a price leader; if priced below cost, it is called a loss leader
What is a break-even analysis?
Determines the volume of unit sales at which total costs equals total revenue
What are the formulas needed for the exam?
- Total revenue = total sales volume x the unit price
- Total cost = fixed costs + variable costs
- Break even point = (fixed costs)/(Price per unit - variable cost per unit)
What is the contribution margin?
The amount per unit sold that contributes to offsetting the fixed costs and, once the break‐even point has been reached, contributes to profits
What is marginal analysis all about?
It is concerned with understanding the effect on costs and revenue when a company produces and sells one more unit of product
What is Average Cost?
It is the total cost divided by volume of production
What is the Marginal Cost?
It represents the cost to produce and sell one more unit of output
What is the average revenue?
It is the total revenue divided by unit sales volume
What is the marginal revenue?
It is the revenue obtained by selling one more unit of the product
When is profit maximised?
When marginal cost equals marginal revenue
- Before this point (i.e. where marginal cost is less than marginal revenue), the organisation can increase its profits by selling more units
- Beyond this point (i.e. where marginal cost exceeds marginal revenue), each additional unit sold actually incurs a loss for the business
What is cost-based pricing?
The selling organisation adds a percentage or dollar amount to the cost of the product
What is cost-plus pricing?
- Where the seller adds their required profit margin as a dollar amount or percentage to the costs once the project is complete
- Often used when it is difficult or impossible to determine the costs of the product until it has been made or completed
What is mark-up pricing?
- Used by wholesalers and retailers and involves adding a percentage of their purchase cost to determine the resale price
What are the two ways markup pricing can be expressed?
Markup can be expressed in two ways: percentage of cost and percentage of selling price (or ‘margin’). If a retailer buys a pair of jeans for $75 and sells them for $150, the markup ($75) expressed as a percentage of cost ($75) is 100 per cent. The markup ($75) expressed as a percentage of selling price ($150) is 50 per cent
When does price competition occur?
When there is often not enough differentiation in the price between competitors as occurs with many supermarkets, banks and retailers
When does a cost advantage arise?
Economies of Scale - Bunnings
Low Cost Production - Hyundai
What is competition based pricing?
Involves setting prices based on the prices charged by competitors or on the likely response of competitors to the organisation’s prices
Can lead to price wars
What are some of the other bases on which an organisation can differentiate itself, other than pricing?
- Product quality (e.g. Lexus)
- Innovation (e.g. Apple)
- Brand image (e.g. Mont Blanc)
- Styling (e.g. Bang & Olufsen)
- Customer service (e.g. Singapore Airlines)
- Distribution coverage (e.g. Commonwealth Bank)
- Local convenience (e.g. Bakers Delight)
What are functional discounts?
They are a percentage reduction off the list price and are provided by suppliers to marketing intermediaries or business customers in return for the various functions they perform such as retailing, transport and providing credit
What are quantity discounts?
They are provided to business customers that purchase large volumes
Quantity discounts are funded by the economies of scale that the seller achieves by supplying in bulk quantities
Quantity discounts can be based on single transactions (non‐cumulative discounts) or on the total purchase volume in a specified period (cumulative discounts)
What are seasonal discounts?
They are provided to buyers who purchase products outside the peak selling period of the year
What are cash discounts?
They are offered to customers who pay promptly and who thus save the supplier time and money in managing and collecting accounts receivable
What is the different shipping pricing options?
- A ‘free on board destination’ (FOB destination) price, which means the seller has built the transport costs into the price
- A ‘free on board origin’ (FOB origin) price, which means the price excludes the delivery costs, which must then be met by the buyer
What is vital in pricing?
How the customer perceives the price and what it means to them
What is price referencing?
When a customer uses a reference to evaluate whether a price of a good is good or not. These can either be internal (for common goods) or external (for larger and more unknown purchases)
What are the different methods of managing customer price evaluations?
NEED TO INSERT THE IMAGE HERE
What is product line pricing?
Setting prices for groups of products rather than to set a price for each individual product
What is penetration pricing?
Uses a low launch price in order to gain maximum sales volume, rapid market share and turnover of a new product
Usually for high volume, low-value consumer non-durable products
Chinese IKEA
What is price skimming?
Involves charging the highest price that customers who most desire the product are willing to pay
Usually for innovative, high-value durable products
Apple Watch
What is differential pricing?
The practice of charging different buyers different prices for the same (or equivalent) product
What are some other methods of pricing?
Periodic discounts
Special event pricing
Promotional pricing - Lowering the prices for promoting themselves
Random discounting - To stop consumers from only shopping during the low times, they may also use randomised discounting
What are trade-in-allowances?
Discounts based on a customer returning used products when buying new productsiscounts based on a customer returning used products when buying new products
What is a promotional allowance?
In business-to-business pricing a seller may offer a promotional allowance discount to customers and intermediaries in return for participating in marketing campaigns
What is resale price maintanence?
When manufacturers force their distributors and retailers from reselling the product at a particular price
What is Pricing Tactics?
NEED TO INSERT THE IMAGE FROM THE END OF THE CHAPTER
What is an Internal reference price?
Price based on past experience
What is an external reference price?
Comparison price provided by manufacturers, retailers, advertisers or salespersons
What is reference pricing?
Pricing a product at a moderate price and positioning it next to a more expensive model
What is psychological pricing?
Pricing that attempts to influence a customer’s perception of price to make a product more attractive
What is odd-even pricing?
The use of idiosyncratic prices to attract attention and create the perception that the price is discounted
Odd numbers are often rounded down to a lower number rather than the higher number
What is multiple unit pricing?
Where multiple units of a product are sold for a single price, usually significantly lower than the individual price (for the same products)
What is bundle pricing?
Setting a combination of complementary products for a single price which is less than the sum of the individual prices (for different products)
