MGKT 2080 Chapter 14 McGraw Hill Connect

price

the overall sacrifice a consumer is willing to make to acquire a specific product or service

instead of generating costs, price generates _____

revenue

____ is the most challenging of the four P's

price

What are the 5 C's of pricing?

company objectives

customers

costs

competition

channel members

profit orientation

a company objective that can be implemented by focusing on target profit pricing, maximizing profits, or target return pricing

target profit pricing

- pricing strat

- profit goal is overriding concern

- uses price to stimulate certain level of sales at a certain profit per unit

maximizing profits

- profit strat

- relies primarily on economic theory

- analyze mathematical model that predicts sales and profits

target return pricing

- pricing strat

- more concerned with rate of generated profit

- designed to produce a specific return or investment

sales orientation

based on the belief that increasing sales will help the firm more than will increasing profits

premium pricing

- a competitor-based pricing method

- firm deliberately prices a product above other to capture consumers who always shop for the best and price doesn't matter

competitor orientation

firm strategizes according to the premise that they should measure themselves primarily against their competition

competitive parity

a firm's strategy of setting prices that are similar to those of major competitors

status quo pricing

charging a price identical to or very close to the competition's price

customer orientation

based on the premise that firm should measure itself primarily according to whether it meets its customer's need

customers

- the second C

- lays the foundation of economic theory

- explain how prices are related to demand

a ______ ______ shows how many units of a product or service consumers will demand during a specific time at different prices

demand curve

a demand curve can be either curved or...

straight

the horizontal axis

measures quantity demanded and plots it against the vertical axis

the vertical axis

measures the various price possibilities

point

represents quantity demanded at specific price

prestige product and service

consumers purchase for their status rather than their functionality

price elasticity of demand

measures how changes in a price affect the quantity of the product demanded

elastic

describes demand that is very sensitive to a change in price (less than -1)

inelastic

Describes demand that is not very sensitive to a change in price (greater than 1)

dynamic pricing/individualized pricing

the process of charging different prices for goods or services based on the type of customer, time of the day, week, or even season, and level of demand

what are the factors influencing price elasticity of demand?

- income effect

- substitution effect

- cross-price elasticity

income effect

the change in the quantity of a product demanded by consumers due to changes in their incomes

substitution effect

refers to consumers' ability to substitute other products for the focal brand, thus increasing the price elasticity of demand for the focal brand

cross-price elasticity

the percentage change in the quantity of Product A demanded compared with the percentage change in price in Product B

complementary products

products whose demand curves are positively related, such that they rise or fall together

substitute products

changes in their demand are negatively related

costs

- the third C

- prices should NOT be based on this

variable costs

- primarily labor and materials

- vary with production volue

- per-unit basis

- far mor e complex in service industry

- tend to change depending on the quantity produced

fixed costs

- remain essentially at the same level, regardless of changes in the volume of product

- ex. rent, utilities, insurance, etc.

total cost

the sum of fixed and variable costs

break-even analysis

technique that enables managers to examine the relationships among cost, price, revenue, and profit over different levels of production and sales

break-even point

the point at which the costs of producing a product equal the revenue made from selling the product

total revenue =

price x quantity sold

what are the 3 curves in the break-even analysis graph?

- fixed costs (horizontal straight line)

- total costs

- total revenue

total variable costs =

variable cost per unit x quantity

total costs =

fixed costs + total variable costs

contribution per unit

equals the price less the variable cost per unit

competition

- the fourth C

- focus on its affect

-four levels of this

what are the four levels of competition?

- monopoly

- oligopolistic competition - monopolistic competition

- pure competition

monopoly

- one firm controls the market

- less price competition

- fewer firms

oligopolistic competition

- a handful of firms control the market

- more price competition

- fewer firms

price war

two or more firms compete primarily by lowering their prices

predatory pricing

the practice of charging a very low price for a product with the intent of driving competitors out of business or out of a market (illegal in U.S.)

monopolistic competition

- many firms sell differentiated products at different prices

- less price competition

- many firms

- most common

pure competition

- many firms sell commodities for the same prices

- more price competition

- many firms

channel members

- the fifth C

- manufacturers, wholesalers, and retailers

- must carefully communicate their pricing goals and select channel partners that agree with them

Retailers cooperative (channel members)

- helps its members achieve economies of scale by buying as a group

- similar to wholesaler, except retailers have some control over the operation

pricing strategy

a long-term approach to setting prices broadly in an integrative effort (across all the firms product) based on the 5 C's of pricing

everyday low pricing (EDLP)

- strategy companies use to emphasize the continuity of their retail prices at a level somewhere between the regular, non-sale price and the deep-discount sale prices their competitors may offer

- reduces customer search cost

high/low pricing

- a pricing strategy that relies on the promotion of sales, during which prices are temporarily reduced to encourage purchases

- creates a "get them while they last" atmosphere

what two distinct markets does a high/low pricing strategy attract?

- non-price sensitive

- price sensitive

reference price

- the price against which buyers compare the actual selling price of the product and that facilitates their evaluation process

- regular price vs. sale price

- consumer perception of value of deal increase

what is one of the most challenging tasks for managers?

new product pricing strategies

what are the two distinct new product pricing strategies?

- penetration pricing

- price skimming

penetration pricing

- setting a low initial price on a new product to appeal immediately to the mass market

- incentive: build sales, market share, and profits quickly and deter competition from entering the market because the profit margin is low

experience curve effect

as sales continue to grow, the costs continue to drop

penetration pricing disadvantages

- must have the capacity to satisfy a rapid rise in demand

- low prices does not signal high quality

- avoid this strat if some segment of market are willing to pay more for the product (waste)

price skimming

- selling a new product at a high price

- appeals to innovators and early adopters willing to pay the big bucks

- common in tech. markets (ex. video games)

why use a price skimming strategy?

- signal high quality

- limit demand -> earn back $ investments made for new product development

- test consumers price sensitivity

price skimming disadvantages

- relatively high unit costs associated with producing small volumes of products

- having to eventually lower the price as demand wanes

price ads should ____ deceive consumers to the point of causing harm

NEVER

if a reference price is bona fide, that means that the ad is...

informative

loss-leader pricing

- takes the tactic of leader pricing one step further by lowering the price below the store's cost

- ex. buy on get one free

bait and switch

occurs when sellers advertise items for a very low price without the intent of really selling any

predatory pricing

selling a product below cost to drive competitors out of the market

predatory pricing is illegal under both...

the Sherman Antitrust Act and the Federal Trade Commission Act

price discrimination

- when firms sell the same product to different resellers at different prices ( usually larger firms receive lower prices)

- quantity discounts must be available to all customers and not favor one over others

price fixing

the practice of colluding with other firms to control prices

horizontal price fixing

occurs when competitors that produce and sell competing products collude, or work together, to control prices, effectively taking price out of the decision process for consumers

vertical price fixing

occurs when parties at different levels of the same marketing channel (e.g., manufacturers and retailers) collude to control the prices passed on to consumers

manufacturer's suggest retail price (MSRP)

set to reduce retail price competition among retailers, stimulate retailers to provide complementary service, and support the manufacturer's merchandise

gray market pricing

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