marketing exam 3

price

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

the five Cs of pricing

company objectives, customers, costs, competition, channel members

types of company objectives

price-oriented, sales-oriented, competitor-oriented, customer-oriented

profit-oriented

focus on target profit pricing, maximizing profits, target return pricing

target profit pricing

implemented when firms have a particular profit goal as their main concern, uses price to stimulate a certain level of sales at a certain profit per unit

maximizing profits

economic theory, if a first can accurately specify a math model that captures all the factors required to explain and predict sales and profits, it should be able to identify the price at which its profits are maximized

target return pricing

implemented by firms less concerned with the absolute level of profits and more interested in the rate at which their profits are generated relative to their investment, designed to produce a specific return on investment, usually expressed as a percentage of sale

sales orientation

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

why may a firm set low prices

to discourage new firms from entering the market, encourage current firms to leave the market, or take market share away from competitors (all to gain overall market share)

premium pricing

competitor-based pricing method by which the firm deliberately prices a product above the prices set for competing products to capture those consumers who always shop for the best or for whom price does not matter

competitor orientation

a company objective based on the premise that the firm should measure itself primarily against its competition

competitive parity

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

customer orientation

based on the premise that the firm should measure itself primarily according to whether it meets its customers’ needs

demand curve

shows how many units of a product or service consumers will demand during a specific period at different prices, x axis is quantity demanded and y axis is price

prestige products or services

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

market for a product or service that is price sensitive, that is, relatively small changes in price will generate fairly large changes in the quantity demanded

income effect

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

percentage change in demand for product A that occurs in response to a percentage change in price of product B

substitute products

products for which changes in demand are negatively related, a percentage increase in the quantity demanded for product A results in a percentage decrease in the quantity demanded for product B

variable costs

costs, primarily labor and materials, that vary with production volume

fixed costs

costs that remain essentially at the same level, regardless of any changes in the volume of production, rent, utilities, insurance, administrative salaries

total cost

sum of the variable and fixed costs

break-even analysis

point at which the number of units sold generates just enough revenue to equal the total costs, at this point, profits are zero

monopoly

one firm provides the product or service in a particular industry

oligopolistic competition

occurs when only a few firms dominate a market

price war

situation [or competition] that occurs when two or more firms compete primarily by lowering their prices

predatory pricing

firm’s practice of setting a very low price for one or more of its products with the intent to drive its competition out of business, illegal under both the Sherman Antitrust Act and the Federal Trade Commission Ac

monopolistic competition

occurs when there are many firms that sell closely related but not homogeneous products, these products may be viewed as substitutes but are not perfect substitute

pure competition

occurs when different companies sell commodity products that consumers perceive as substitutable, price usually is set according to the laws of supply and demand

cost-based pricing method

approach that determines the final price to charge by starting with the cost, without recognizing the role that consumers or competitors’ prices play in the marketplace

competitor-based pricing method

approach that attempts to reflect how the firm wants consumers to interpret its products relative to the competitors’ offerings, for example, setting a price close to a competitor’s price signals to consumers that the product is similar, whereas setting the price much higher signals greater features, better quality, or some other valued benefit

value-based pricing method

approach that focuses on the overall value of the product offering as perceived by consumers, who determine value by comparing the benefits they expect the product to deliver with the sacrifice they will need to make to acquire the product

improvement value

represents 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

value-based method for setting prices that determines the total cost of owning the product over its useful life

pricing strategy

long-term approach to setting prices for the firms’ products

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

high/low pricing strategy

relies on the promotion of sales, during which prices are temporarily reduced to encourage purchases

reference price

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

penetration pricing strategy

new product or service pricing strategy in which the initial price is set relatively low with the objective of building sales, market share, and profits quickly and to deter competition from entering the market

experience curve effect

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

price skimming

strategy of selling a new product or service at a high price that innovators and early adopters are willing to pay in order to obtain it, after the high-price market segment becomes saturated and sales begin to slow down, the firm generally lowers the price to capture (or skim) the next most price-sensitive segment

pricing tactics

short-term methods used to focus on company objectives, costs, customers, competition, or channel members, can be responses to competitive threats

markdowns

reductions retailers take on the initial selling price of the product or service

size discount

most common implementation of a quantity discount at the consumer level; the larger the quantity bought, the less the cost per unit

coupon

provides a stated discount to consumers on the final selling price of a specific item; the retailer handles the discount

rebates

consumer discount in which a portion of the purchase price is returned to the buyer in cash; the manufacturer, not the retailer, issues the refund

leader pricing

consumer pricing tactic that attempts to build store traffic by aggressively pricing and advertising a regularly purchased item, often priced at or just above the store’s cost

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 points in between to represent distinct differences in quality

cash discount

offering a reduction in the invoice cost if the buyer pays the invoice prior to the end of the discount period

advertising allowance

offering a price reduction to channel members if they agree to feature the manufacturer’s product in their advertising and promotional efforts

slotting allowance

fees firms pay to retailers simply to get new products into stores or to gain more or better shelf space for their products

cumulative quantity discount

pricing tactic that offers a discount based on the amount purchased over a specified period and usually involves several transactions, encourages resellers to maintain their current supplier because the cost to switch must include the loss of the discount

noncumulative quantity discount

pricing tactic that offers a discount based on only the amount purchased in a single order, provides the buyer with an incentive to purchase more merchandise immediately

bait and switch

deceptive practice of luring customers into the store with a very low advertised price on an item (the bait), only to aggressively pressure them into purchasing a higher-priced model (the switch) by disparaging the lower-priced item, comparing it unfavorably with the higher-priced model, or professing an inadequate supply of the lower-priced item

price discrimination

selling the same product to different resellers (wholesalers, distributors, or retailers) or to the ultimate consumer at different prices; some, but not all, forms of price discrimination are illegal

gray 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

wholesaler

firm engaged in buying, taking title to, often storing, and physically handling goods in large quantities, then reselling the goods (usually in smaller quantities) to retailers or industrial or business users