MKTG 376 Test 4 Flashcards
Price Premium (formula)
= Brand Price-Benchmark Price / Benchmark Price
Benchmark
- The price of specified competitor’s
- Average price paid
- Average price charged
Weighted Benchmark (formula)
Total sum of price ($) x unit share (%) for each competitor
Unweighted Benchmark
If you do not know the unit share, use the average price charged.
When is Price premium negative?
when the brand in question is on low end of the market
Price-Volume Dynamics
When price increases, sales can decrease.
Linear Demand
the relationship between quantity and price is linear. Any identical change in price produces an identical change in unites demanded.
Shallow Demand Function
Large changes in price only cause a small change in quantity
Steep Demand Function
A small change in price leads a large change in quantity
Demand Slope
Change in quantity / Change in price
Maximum Reservation Price
maximum a customer is willing to pay for a product
Percent Good Value
proportion of customers who believe the product is a good value for a specified value
Maximum Reservation Price (MRP)
The lowest price at which quantity demanded equals zero (no one buys)
Maximum Willing to Buy (MWB)
Quantity that customers are willing to ‘buy’ when the price is zero.
MWB (formula)
= Q1 - ((Q2-Q1/p2-p1)*P1)
MRP (formula)
= P1 - ((P2-P1/Q2-Q1)*Q1)
Profit Maximizing Price
Always halfway between cost to make and MRP
Optimal Price
= 1/2 (unit variable cost + MRP)
Total contribution at optimal price
= (MWB/MRP)*(Optimal price-VC)^2
Price Elasticity
calculated in terms of percent change
(new quantity sold - old quantity sold) / old quantity sold / (new price-old price)/old price
Inelastic, target market is insensitive
Price elasticity between 0 and -1
Elastic, target market is price sensitive
Price elasticity is -1, -2
Product is price inelastic
consumer is price insensitive
Product is price elastic
if substitute for product exists, consumer is price sensitive.
Inelastic Prices
never lower price when a price is inelastic. A lower price will result in lower sales and lower profits
Elastic Prices
use caution when lowering prices when prices are elastic. If percent margins are low, a lower price will increase sales, but often result in lower profits
Elasticity (formula)
= quantity percent change / price percent change
