Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
80 Cards in this Set
- Front
- Back
|
Price |
money or other considerations exchanged for ownership of a good or use of a service |
|
|
Price as an indictor of value |
as perceived benefit increase, perceived value increases Ex. M pizza for $12.99 then goes for L pizza for $12.99 -> increased perceived value |
|
|
Value Pricing |
Increasing benefits while maintaining or decreasing price |
|
|
Intense competition in industries has led to ... |
Lower prices for consumers - attitudes have changed towards lower prices in this new Low-Cost World - lower price not always associated with poor quality anymore |
|
|
Profit Equation |
Profit = Total Revenue - Total Costs P = TR - TC Profit = (Quantity x Unit Price) - Total Costs |
|
|
What does Price affect |
1. Directly affects quantity sold (elasticity) 2. Indirectly affect costs, quantity sold affect firm's costs due to production efficiency |
|
|
Steps for Setting Price (6) |
1. Identify Price Constraints & Objectives 2. Estimate Demand & Revenue 3. Estimate Costs, Volume, Profit 4. Select Price Level 5. Set List or Quote Price 6. Adjust List or Quote Price |
|
|
STEP 1. Identify PRICE CONSTRAINTS AND OBJECTIVES |
Identify factors that limit the latitude of prices the firm may set |
|
|
PRICE CONSTRAINTS |
- restrictions to what you can price at |
|
|
Price Restricting Factors (7) |
1. Demand for Product Class, Form, Brand 2. Newness of Product, stage of PLC 3. Single product vs product line 4. Cost of producing and marktg product 5. Cost of price change & it's time period 6. Types of competitive markets 7. Competitor prices |
|
|
Types of competitive markets effect 3 things |
- latitude of price competition - nature of product differentiation - extent of advertising |
|
|
Pure Monopoly |
ONE SELLER, ONE PRODUCT - seller sets price of unique product - no price competition - no product differentiation - little advertising (only need to create demand for product class) |
|
|
Oligopoly |
FEW SELLERS - sellers are sensitive to each other's pricing - some price competition - some product differentiation - some advertising ( to inform but avoid head-to-head competition) |
|
|
Monopolistic Competition |
SUBSTITUTABLE PRODUCTS, MANY SELLERS - compete on price and non-price factors - some price competition - some product differentiation - LOTS OF ADVERTISING to differentiate firm's product from other firm's products |
|
|
Pure Competition |
EXACT SAME PRODUCT, MANY SELLERS - almost no price competition, market sets price - no product differentiation (all identical) - Little advertising, only to inform customer of product's availability |
|
|
Aluminum Companies - what type of competition - how do they price - what type of advertising |
OLIGOPOLY - try to avoid price competition due to price wars - firms do stay aware of competitor price cuts and increases, may follow it - INFORMATIVE advertising that avoids head-to-head competition |
|
|
Monopolistic Competition |
Peanut Butter Brands - price competition (national vs private brands) - nonprice competition : product features, adverts |
|
|
PRICE OBJECTIVES |
expectations that specify role of price |
|
|
3 Different Profit Pricing Objectives |
1. Managing for Long-Run Profits: forgo immediate profit to develop quality products that can penetrate competitive markets in future 2. Maximize Current Profit: max current profit in short term time period. Targets can be set and performance easily measured 3. Target Return: firm sets goal for ROI |
|
|
Sales Pricing Objectives (Profit Pricing ) |
Ex. Increase revenues - sales revenue objectives (unit sales) much easier to translate into targets vs ROI |
|
|
Market Share Pricing Objectives (Profit Pricing ) |
Ratio: Firm's Sales Revenues : Sales Revenues of the - usually only pursue if revenues are flat or declining |
|
|
Unit Volume Pricing Objectives (Profit Pricing ) |
Quantity produced or sold as pricing objective - match volume demanded with price and production capacity * ineffective if price is driven down so low to achieve volume sales that company isn't profitable |
|
|
Survival Pricing Objectives (Profit Pricing ) |
- mere survival of company is objective, profit, sales and marketshare are less important Ex. specialty toy stores competing with Walmart |
|
|
Social Responsibility Pricing Objectives (Profit Pricing ) |
- forgo higher profits in effort to recognizes obligations to customers and society in general Ex. Pacemaker by Medtronics made affordable for public |
|
|
STEP 2: Estimate DEMAND AND REVENUE |
1. Identify Price Constraints and Objectives 2. Estimate Demand and Revenue |
|
|
Demand Curve |
shows maximum sales at a certain price - max number of products a consumer will buy at a certain price - as price decreases, demand increases |
|
|
3 Factors for Estimating Demand - not including Price |
1) Consumer Tastes: demographics, culture, technology factors 2) Price & Availability of Substitutes: as price falls for substitutes and availability of substitutes increases ; demand for our product decreases 3. Consumer Income: as real consumer income increases, demand for product increase |
|
|
Price, Price and Availability of Substitutes and Consumer Tastes influence what consumers....... |
Influence what consumers WANT to buy |
|
|
Consumer income influences what a consumer.... |
Influences what a consumer CAN buy |
|
|
Movement along the Demand Curve |
CHANGES IN PRICE |
|
|
Shift of the Demand Curve |
CHANGE IN - Price and Availability of Subs - Consumer Tastes - Consumer Income |
|
|
Price Elasticity of Demand - equation and whats it an indicator of |
% change in Quantity Demanded relative to the % change in Price = % in Quantity Demanded/ % in Price - indicator of how sensitive consumer demand is to price |
|
|
Elastic Demand |
slight decrease in price = large increase in demand slight increase in price = large decrease in demand ** More product sub available the more likely it is to be price elastic |
|
|
Inelastic Demand |
Price does not effect demand Ex. Price of gas: price increase but no real difference in demand ** necessity product are price inelastic |
|
|
Total Revenue |
money received from product sales TR= Price X Quantity Sold |
|
|
STEP 3. Estimating COST, VOLUME & PROFIT RELATIONSHIPS |
1. Identify Price Constraints and Objectives 2. Estimate Demand and Revenue 3. Estimate Cost, Volume and Profit Relationships |
|
|
3 COST Concepts in Pricing Decision |
1) Total Cost = Fixed Costs + Variable Costs 2) Fixed Costs = do not change with change in production quantity Ex. Exec Salaries, Leases 3) Variable Costs = do change with changes in production quantity Ex. Labour costs, cost of materials |
|
|
Break Even Analysis |
relationship between total revenue and total cost which determines profitability at various levels of output |
|
|
Break Even Point (BEP) |
where Total Revenue= Total Costs - profits generated from any units sold past BEP |
|
|
Break Even Point in respect to Quantity |
BEP (Quantity) = |
|
|
STEP 4. Select Appropriate PRICE LEVEL |
1. Identify Price Constraints & Objectives 2. Estimate Demand & Revenue 3. Estimate Cost, Volume and Profit Relationships 4. Select Appropriate Price Level |
|
|
4 Approaches to Select a Price Level |
1. Demand Oriented Approach 2. Cost Oriented Approach 3. Profit Oriented Approach 4. Competition Oriented Approach |
|
|
Demand Oriented Approach (Select Price Level) |
Focus on expected customer taste and preference factors: - Skimming - Penetration - Prestige - Price Lining - Odd-Even Pricing - Target Pricing - Bundle Pricing - Yield Management Pricing
|
|
|
Demand Oriented Approach: SKIMMING PRICING - what is it - when is it effective |
Highest initial price to attract customers who desire the product and are willing to pay
(new or innovative products) Effective when - enough people willing to pay high price to make sales profitable - high price will not attract competitors - lowering price has small effect on increasing sale volume a& reducing unit cost - customers interpret high price = high quality |
|
|
Demand Oriented Approach: PENETRATION PRICING |
Low initial price to penetrate mass market Advantages: - many segments are price-sensitive - low price discourages competitor entry - unit costs fall dramatically as sales increase By using PP firms can - maintain initial price - lower price more to get new volume for necessary profit |
|
|
Why is Penetration Pricing sometimes used to follow Skimming? |
So that they can broaden the appeal to the price sensitive consumer segments |
|
|
Demand Oriented Approach: PRESTIGE PRICING |
high price to attract quality or status conscious consumers - products like these may actually sell worse at lower prices |
|
|
Demand Oriented Approach: PRICE LINNING |
Different products in price line are set at different price points - products may be purchased at same cost but marked up differently depending on colour, trend, popularity Ex. Clothes |
|
|
Demand Oriented Approach: ODD-EVEN PRICING |
Setting price a few dollars or cents under an even number Ex Saw - $499, priced over $400 instead of about $500 |
|
|
Demand Oriented Approach: TARGET PRICING Hint - working backwards |
Adjusting product composition and features to achieve target price for customers - start with price consumer would be willing to pay and work backward through markups to figure out what price to charge wholesalers - Cannon cameras |
|
|
Demand Oriented Approach: BUNDLE PRICING |
2 or more products in single package price - lower marketing costs for sellers, greater value perception for buyers |
|
|
Demand Oriented Approach: YIELD MANAGEMENT PRICING Hint - capacity |
Different prices set to manage revenue for a set capacity at a given time - complex approach that continually matches DEMAND and SUPPLY to customize price of service Ex Airfares |
|
|
Cost Oriented Approach (Select Price Level) - focus and 3 approaches |
Stress the SUPPLY or COST side of pricing problem - not the demand side Price set by: production and marketing costs plus enough to cover direct expenses, overhead and profit 1. Standard Mark-up Pricing 2. Cost-Plus Pricing 3. Experience Curve Pricing |
|
|
Cost Oriented Approach: STANDARD MARK-UP PRICING |
Add fixed & to all product cost in a specific product class - high volume have lower markups then low volume Ex Grocery Stores |
|
|
Cost Oriented Approach: COST-PLUS PRICING |
Sum total cost of providing product and add specific amount to get price = Cost (fee) + % of cost (profit) Ex. Law firms, advertising agencies |
|
|
Cost Oriented Approach: EXPERIENCE CURVE PRICING |
Learning effect of production experience which dictate how the product should be priced Ex. Unit cost decreases by 30% each time a firm's experience at producing & selling a product doubles |
|
|
Profit Oriented Approaches (Price Level) - Goal and 3 approaches |
Balance both revenues and costs to set prices 1. Target Profit Pricing 2. Target Return-on-Sales Pricing 3. Target Return on Investment Pricing |
|
|
Profit Oriented Approaches: TARGET PROFIT PRICING |
Based on specific annual target and dollar volume of profit Ex. VC= $22/unit FC= $26,000 Target Profit = $7,000 Volume of units = 1,000 Profit = (Price X Q) - (VC* 1,000 + FC) 7,000= Price X 1,000 - (22,000 + 26,000) Price = 55,000/ 1,000 Price = $55 |
|
|
Profit Oriented Approaches: TARGET RETURN-ON-SALES PRICING Hint = % ____ on sales volume , can;t see effort needed to achieve |
Setting prices to return a profit of a specific percentage Ex. Grocery Store - set price to return 1% profit on sales volume ** target is only a specific dollar volume but no benchmarks of sales or investment to show effort needed to achieve target |
|
|
Profit Oriented Approaches: TARGET RETURN- ON - INVESTMENT PRICING |
Setting price to achieve a target ROI Ex 20 ROI on sale of product |
|
|
Competition Oriented Approaches (Price Level) - focus and approaches? |
Emphasize what competitors are doing instead of focusing on demand, cost or profit factors 1. Customary Pricing 2. Above- At- or - Below Pricing 3. Loss Leader Pricing |
|
|
Competition Oriented Approaches: CUSTOMARY PRICING |
Set prices dictated by tradition, standardized distribution channels or other competitive factors Ex. Hershey changes cocoa content depending on price of raw cocoa so that they can keep price consistent for vending machines |
|
|
Competition Oriented Approaches: ABOVE - AT- or -BELOW PRICING |
Set price based on similar products in market - use competitors price or the market price as a benchmark Ex. Walmart = Below Pricing Hudson's Bay - Market Pricing Rolex - Above Pricing |
|
|
Competition Oriented Approaches: LOST LEADER PRICING |
Sell products below customary prices to attract attention so customers will buy other products as well - Special Promotions - Goal to have customer buy other products s well not increase sales of the lost leader product |
|
|
STEP 5. Set List or Quoted Price |
1. Identify Pricing Constraints & Objectives 2. Estimate Demand & Revenues 3. Estimate Costs, Volume and Profit Relationships 4. Select Price Level 5. Set List or Quoted Price - need to set specific list price |
|
|
One Price Policy (Fixed Pricing) (Set Price) |
One price for all buyers of the product Ex. Dollar stores |
|
|
Flexible Price Policy (Dynamic Pricing) (Set Price) |
Different prices for different products depending on individual buyers and purchase situations ( demand, cost, competitive factors) Ex. Yellow Page - ad space costs more in categories that produce more sales for client |
|
|
Price Customization hint- online buing behaviors |
Prevalent in online purchased products - online marketers use purchase history and post purchase behaviours to adjust prices - if customer compares many products they are probably a price sensitive consumer and will be offered a lower price |
|
|
STEP 6. Adjustment to List or Quoted Price -3 adjustments can be made |
1. Discounts 2. Allowance 3. Geographical adjustments |
|
|
List Price Adjustment: DISCOUNTS |
1. Quantity 2. Seasonal Discounts 3. Trade or Functional Discount 4. Cash Discounts |
|
|
Quantity Discounts (List Price Adjustment ) |
larger order get unit cost discounts |
|
|
Seasonal Discounts (List Price Adjustment ) |
encourage buyers to stock inventory earlier than demand requires, allows producer to smooth out manufacturing peaks in seasons Ex. lawn mowers in January |
|
|
Trade or Functional Discount (List Price Adjustment) hint: marktg activities |
Reward wholesalers/ retails for MARKETING FUNCTIONS PERFORMED IN FUTURE Reduction offered to resellers in distribution channel based on 1. Where they are in the channel 2. Marketing Activities expected to be performed |
|
|
Cash Discounts (List Price Adjustment) hint: paying sooner |
Encourage retailers to pay bills quickly (AR) Ex. Retailer receives 2% discount if they pay in 10 days |
|
|
List Price Adjustment: ALLOWANCES |
reductions from list price to buyers for performing some activity 1. Trade-In Allowances 2. Promotional Allowances |
|
|
Trade-in- Allowances (List Price Adjustment) |
Price Reduction by partly paying for new product with old product - effective way o lower price for buyer without formally reducing the list price |
|
|
Promotional Allowances (List Price Adjustment) |
Sellers in distribution channel can qualify for undertaking advertising activities to promote the product - cash or free goods ( 1 box of pizza free for every 12 purchased) - Portions of savings passed down to consumer - EDLP: replace promotional allowances by reducing manufacturing costs |
|
|
List Price Adjustment: GEOGRAPHICAL ADJUSTMENTS - goal and 2 methods |
Made to reflect transport costs of production from seller to buyer 1. FOB Origin Pricing (Free on Board) 2. Uniform Delivery Pricing |
|
|
Free on Board (FOB) Origin Pricing
(Geo List Price Adjustments) |
Seller pays cost of loading product onto vehicle - usually involves sellers name and location Ex. "FOB Toronto" - b, buyer responsible for picking mode of transport, all transport costs and for subsequent handling |
|
|
Uniform Delivery Pricing ( Geo List Price Adjustments) |
Seller quotes price that includes all transportation costs - " FOB Buyer's Location" in contract - Seller selects mode of transport, freight charges and responsible for any damage to goods because seller retains title of goods until delivered to buyer |
