Pricing Flashcards
What is price elasticity of demand?
Price elasticity of demand is a measure of the extent of change in market demand for a product in response to a change in its price
If demand is completely unresponsive to changes in price it is said to be completely inelastic
Demand is said to be elastic when it responds to increases or decreases in price
What factors effect pricing?
organisational goals
product mix
price/demand relationships
price elasticity of demand
competitors and markets
type of market
product life cycle
marketing strategy
cost
Calculation for elasticity of demand ?
% change in quantity demand / % change in price
What factors effect elasticity of demand ?
Scope of the market
Information within the market
Availability of substitutes
Complementary products
Disposable income
Necessities
Habit
What are the two market structures?
Perfect competition:
Every buyer or seller is a ‘price taker’
Zero entry/exit barriers
Perfect information
Profit maximisation
Homogeneous products
Imperfect competition:
Monopoly
Oligopoly
Monopolistic competition
What is the demand curve formula?
Deriving the demand curve
P = a – bQ
P = price
Q = quantity demanded
a = the price at which demand would be 0
b = the amount by which the price falls for each stepped change in demand – relative amount
i.e.(change in price/change in quantity)
A= current price + (current quantity at current price / change in quantity when price changed to b) * the amount by which the price falls for each stepped change in demand
B= change in price / change in quantity
Marginal cost is the same as?
Direct and variable costs
What is profit maximisation price?
Profit maximisation price
Profit maximised when marginal revenue (MR) = marginal cost (MC)
Marginal revenue = extra revenue from producing one extra unit
Marginal cost = extra cost of producing
one extra unit
What is cost-plus pricing?
Estimate direct costs, add % for overheads and add % for profit
What are the advantages of cost-plus pricing?
Simple and easy to use
Justification for price rises
Produces stable prices
What are the disadvantages of cost-plus pricing?
Ignores demand
Ignores competitors
Ignores distinction between incremental and fixed cost
Selling price depends on how fixed costs are apportioned to products
What is marginal cost-plus pricing?
Estimate direct costs and add % for profit
What are the advantages of marginal cost-plus pricing?
Simple and easy to use
Just as accurate as full cost as allocate a larger profit %
Gives option to price below total cost
Useful for pricing one-off contracts
What are the disadvantages of marginal cost-plus pricing?
Ignores demand
Ignores competitors
What is premium pricing?
Involves making a product appear different through product differentiation so as to justify a premium price
What is market skimming?
Involves setting a relatively high price for a new product stressing the attractions of new features
What is price differentiation?
The strategy to sell the same product to different customers at different prices
What is market penetration?
This relates to the attempt to break into a market and to establish that market share which will enable the firm to achieve its revenue and profit targets
Setting an initial low price to achieve a desired level of market acceptance is known as penetration pricing
What are loss leaders?
Products deliberately sold at below marginal cost in order to attract customers
What is the use of discounts in pricing?
Using discounts to adjust prices
What is controlled pricing?
Regulation sought through controlled pricing
What is product bundling?
Refers to the offer of further products provided free with the main product that is being bought
What are the phases of products lifecycle?
Introductory phase:
Demand low
Heavy advertising
Growth phase:
Demand shows a steady and rapid increase
Cost per unit falls
Attempt to gain market share
Maturity:
Increase in demand slows
Products may be differentiated
Profits lower
Decline:
Sales fall
Price wars start
Losses will be made
