Chapter 9 - Pricing Flashcards
Equation for pricing
profit = total revenue - total cost profit = (unit price x quantity sold) - total coast
what is price?
total value exchanged for benefits of having/using the product
4 approaches to pricing
demand oriented
cost oriented
profit oriented
competition oriented
demand oriented pricing
market skimming penetration prestige odd even target bundle yield management loss leaders dynamic pricing
market skimming
high initial price to skim revenue from those willing to pay
market penetration
low initial price to penetrate market and gain market share due to price sensitivity
(works with price sensitive customers)
product line pricing aka price lining
setting prices across an entire product line
optional product pricing
pricing optional products sold with main product
captive product pricing
pricing products which must be used with main product
by product pricing
pricing by products to maximize revenues
product bundle pricing
pricing a bundle of individual products at a price lower than if purchased separately
prestige pricing
high prices attract quality or status
odd even pricing
setting prices a dollar or cent under an even number
over used and has less effect
target pricing (customer value)
offering just the right combination of quality and service at the price consumers are willing to pay
yield management pricing
charging different prices to maximize revenue
ex) airlines
loss leaders
deliberately offering some high demand products at very low prices
price adjustment strategy talked about in class
dynamic pricing
dynamic pricing
allows price to change as customer and situational forces change
what is the main goal of cost oriented approaches?
to cover direct expenses.
% of markup is relative to …
% of margin is relative to…
% markup relative to cost
% margin relative to price
formula for total cost
total cost = fixed cost + variable cost
fixed cost
sum of expenses of the firm that are stable and do not change with the quantity of product that is produced and sold
ex) rent, salaries, insurance
variable cost
sum of the expenses of the firm that vary directly with the quantity of product that is produced and sold
ex) direct labor and materials used
total cost
fixed cost + variable cost
break even analysis
analyzes relationship between total revenue and total cost to determine profitability at various levels of output
profit oriented approaches
target pricing
target return on sales
target return on investments
formula for return on investment
(gain attributed to investment - cost of invesment) divided by cost of investment
demand curve
shows number of products that are sold at given price
price elasticity
how sensitive consumer demand and the firm’s revenues are to changes in the product’s price
high elasticity means small change, high change in demand
3 different pricing objectives
maximizing profit
managing long run profits
target return
limiting factors of price
demand for the product class, product, and brand
newness of the product: stage in the PLC
cost of producing and marketing the product
competitors prices
pricing within channel levels
price fixing (price collusion) predatory pricing: forcing rivals to exit
pricing across channel levels
price discrimination: different prices to different consumers
retail price maintenance: MSRP only
deceptive pricing: not honouring advertised price
bait and switch pricing
baited with low and switched with high price product
uses technique like not having it in stock
bargains conditional on other purchases
advertisement at buy one get one free
if price of first item is marked up that’s deceptive
price comparisons
things like saying it’s below retail value but really the region isn’t at retail value
advertising “below manufacturer’s suggested list price”
with reduced prices, this is deceptive if the item was not offered for sale at the regularly high price for a substantial previous period of time
double ticketing
when more than one price tag, the lower price is charged
dumping
foreign firm sells things below domestic price because receiving loans from government
grey market (parallel importing)
situations where products are sold through unauthorized channels of distribution
steps of setting final price
- select approx price
- set the list or quoted price (through one price policy or flexible price policy)
- make adjustments to list or quoted price
- monitor
allowances
are reductions for rewarding particular activity
trade in allowances
promotional allowances
standard mark up
the difference between selling price and cost, expressed as percentage
loss leader pricing
deliberately sell commonly used products such as paper towels soft drinks and facial tissues at a low price to attract consumers
3 other key factors in demand curve
consumer tastes
price and availability of similar products
consumer income
what is the break even point?
quantity at which total revenue and total cost are equal
profit happens after BEP.
BEP = fixed cost over (unit price - unit variable cost)
