Pricing Concepts and Strategies: Establishing Value - Chapter 11 Flashcards
What sacrifice are consumers willing to make?
Money that must be paid to seller to acquire product/service
Profit Orientation
Company objective that can be implemented by focusing on target profit pricing, maximizing profits, or target return pricing
Target profit pricing
Pricing strategy implemented by firms when they have a particular profit goal as their overriding concern; uses price to stimulate a certain level of sales at a certain profit per unit
Maximizing profits strategy
Mathematical model that captures all the factors required to explain and predict sales and profits, which should be able to identify the price at which its profits are maximized
Target return pricing
Pricing strategy implemented by firms less concerned w the absolute level of profits and more interested in the rate at which their profits are generated relative to their investments; designed to produce a specific return on investment, usually expressed as a % of sales
Sales orientation
Company objective based on the belief that increasing sales will help the firm more than will increasing profits
Competitor orientation
Company objective based on the premise that the firm should measure itself primarily against its competition
Competitive parity
A firm’s strategy of setting pries that are similar to those of major competitors
Customer orientation
Pricing orientation that explicitly invokes the concept of customer value and setting prices to match consumer expectations
Demand curve
How many units of a product/service consumers will demand during a specific period of time at diff prices
Prestige products or services
Those that consumers purchase for status rather than functionality
Price elasticity of demand
Measures how changes in a price affect the quantity of the product demanded; specifically, the ratio of the percentage change in quantity demanded to the percentage change in price
Elastic
A market for a product/service that is price sensitive
Income effect
The change in the quantity of a product demanded by consumers bc of a change in their income
Substitution effect
Consumers’ ability to substitute other products for the focal brand, thus increasing the price elasticity of demand for the focal brand
Cross price elasticity
% change in demand for Product A that occurs in response to a % change in price of Product B
Complementary products
Products whose demand curves are positively related, such that they rise or fall together; a % increase in demand for 1 results in a % increase in demand for the other
Variable costs
Costs, primarily labour and materials, that vary w production volume. As a firm produces more or less of a good/service, the total variable costs increase or decrease at the same time
Fixed costs
Costs that remain essentially at the same level, regardless of any changes in the volume of production
Total cost
The sum of the variable and fixed costs
Break even pt
Pt at which the # of units sold generates just enough revenue to = the total costs
Contribution per unit
Equals the price less the variable cost per unit;
used to determine the break even pt in units
What is the Break Even point eqn?
Break even point (units) = Fixed Costs / Contribution per unit
What are the 4 levels of competition?
Monopoly
Oligopoly
Monopolistic competiton
Pure competition
Monopoly
1 firm provides the product/service in a particular industry, results in less price competition
Oligopoly
Only a few firms dominate
Price war
When 2 or more firms compete primarily by lowering their prices
Monopolistic competition
Occurs when many firms sell closely related but not homogeneous products; these products may be viewed as substitutes but are not perfect substitutes
Pure competition
Consumers perceive a large # of sellers of standardized products or commodities as substitutable, such as grains.
Grey market :
Employs irregular but not necessarily illegal methods; generally, it legally circumvents authorized channels of distribution to sell goods at prices lower than those intended by the manufacturer.
What are the 3 approaches to developing pricing strategies
- Cost based methods
- Competition based methods
- Value based methods
Cost based pricing method :
Determines the final price to charge by starting w the cost.
Competitor based pricing method :
Approach that attempts to reflect how the firm wants consumers to interpret its products relative to the competitors’ offerings
Value based pricing method :
Approach to setting prices that focuses on the overall value of the product offering as perceived by the consumer
Improvement value :
Rep an estimate of how much more or less consumers are willing to pay for a product relative to other comparable products.
Cost of ownership method :
A value based method for setting prices that determines the total cost of owning the product over its useful life
EDLP
Strategy companies use to emphasize the continuity of their retail prices at a level somewhere between the regular, console price and the deep discount sale prices their competitors may offer
High low pricing strategy :
Relies on the promotion of sales, during which prices are temp reduced to encourage purchases
Price skimming :
Appeals to these segments of consumers who r willing to pay the premium price to have the innovation first.
Market penetration pricing :
Sets the initial price low for the intro of the new product/service
Experience curve effect :
Refers to the drop in unit cost as the accumulated volume sold increases, as sales continue to grow, the costs continue to drop, allowing even further reductions in the price
Shrinkflation
Decrease food package sizes while leaving prices unchanged
Pricing strategy :
Long term approach to setting prices broadly in an integrative effort based on the 5 Cs of pricing.
Pricing tactics :
Offer short term methods to focus on select components of the 5 Cs.
Price lining :
Consumer market pricing tactic of establishing a price floor and a price ceiling for an entire line of similar products and then setting a few other price pts in between to rep distinct diff in quality
Price bundling :
Consumer pricing tactic of selling more than 1 product for a single, lower price than the items would cost sold separately
Leader pricing :
Tactic that attempts to build store traffic by aggressively pricing and advertising a regularly purchased item
Markdowns :
Reductions retailers take on the initial selling price of the product/service
Advertising allowance :
Offers a price reduction to channel members if they agree to feature the manufacturer’s product in their advertising and promotional efforts
Size discount :
The most common implementation of a quantity discount at the consumer level
Seasons discount :
Additional reduction offered as an incentive to retailers to order merchandise in advance of the normal buying season
Listing allowances :
Fees paid to retailer simply to get new products into stores or to gain more or better shelf space for their products.
Quantity discount :
Provides a reduced price according to the amt purchased
Cumulative quantity discount :
Uses the amt purchased over a specified time period and usually involves several transactions.
Noncumulative quantity discount :
Pricing tactic that offers a discount based on only the amt purchased in a single order
Uniform delivered pricing :
The shipper charges 1 rate, no matter where the buyer is located
Geographic pricing :
Setting of diff prices depending on a geographical division of the delivery areas
Predatory Pricing
When a firm sets a very low price for 1 or more of its products w the intent to drive its competition out of business
Price Fixing
Practice of colluding with other firms to control prices
