Marketing Chapter 16 Pricing
The Importance of Price
Price - Price is that which is given up in an exchange to acquire a good or service
Price x Sales Unit = Revenue
Revenue - Costs = Profit
Profit drives growth, salary increases. and corporate investment
The Importance of Price
To the seller: o Price is revenue and
profit source To the consumer: o Price
is the cost of something
Pricing Objectives
Profit-Oriented Pricing Objectives
•Profit Maximization - Setting prices so that total revenue is as large as possible
relative to total costs
•Satisfactory Profits o What will satisfy stakeholders?
Trade off: time, effort
Corporate Social Responsibility (CSR)
Risk - higher risk needs higher profits
•Target Return on Investment - Net profit after taxes divided by total assets o ROI
= Net Profit after Taxes/Total Assets
Sales-Oriented Pricing Objectives
•Market Share - A company’s product sales as a percentage of total sales for that
industry
to the seller, price is ____
to the consumer, price is ____
____ allocates resources in a free market economy
what is given up in an exchange to acquire a good or service
consumers are interested in obtaining a ____ price which means a ____ at the time of the transaction
*reasonable *perceived reasonable value
the price paid is based on the ____ consumers expect to receive from a product not necessarily the ____ they actually receive
when goods or services are exchanged, the trade is called ____
sacrifice effect of price: what is sacrificed to get a good or service?
information effect of price: infer quality info based on price
*higher quality = higher price *convey status
the price charged to customers multiplied by the number of units sold
what pays for every activity of the company?
trends influencing price:
*flood of new products *increased availability of bargain priced private and generic brands *price cutting as a strategy to maintain or regain market share *internet used for comparison shopping *u.s. recession from late 2007 to 2009
1. profit oriented 2. sales oriented 3. status quo
pricing objectives must be ____, ____, and ____ to survive in todays competitive market
*specific *attainable *measurable
profit oriented pricing objectives:
1. profit maximization 2. satisfactory profits 3. target return on investment
setting prices so that total revenue is as large as possible relative to total costs
represents a reasonable level of profits that is consistent with the level of risk an organization faces
net profit after taxes divided by total assets
return on investment (ROI)
net profit after taxes divided by total assets
the most common profit objective is a target ____, or the return on total assets
what represents a firms effectiveness in generating profits with the available assets
ROI puts a firms profits into perspective by showing ____ relative to ____
ROI needs to be evaluated in terms of the ____ environment, ____ in the industry, and ____ conditions
*competitive *risks *economic
in general, firms seek ROIs in the ____ to ____ % range, depending on the industry
sales oriented pricing objectives:
*market share *sales maximization
a companys product sales as a percentage of total sales for that industry
market share can be reported in ____ or ____ of a product, and the results may be ____
*dollars, units *different
many companies believe that ____ or ____ market share is an indicator of the effectiveness of their marketing mix
larger market shares often means ____ profits, thanks to ____, ____, and ____
*higher *economies of scale, market power, ability to compensate top quality management
many companies with low market share survive if they are in a ____ growth industry and experience ____ product changes
sales maximization: ____ term objective to maximize sales; ignores ____, ____, and the ____; may be used to sell off ____
*short *profits, competition, marketing environment *excess inventory
maximization of cash should never be a ____ run objective because cash maximization may mean ____ or ____ profitability
status quo pricing objectives:
*maintain existing prices *meet competitions prices
status quo pricing requires ____ planning and is essentially a ____ policy
after pricing goals are established, ____ are set
the price set for products depends on 2 factors:
*the demand for the good and the cost to the seller for that good
the quantity of a product that will be sold in the market at various prices for a specified period
the quantity of a product that will be offered to the market by a supplier at various prices for a specific period
demand curve: the quantity of a product that people will buy depends on its ____; the higher the price, the ____ goods or services consumers will demand
supply curve: at higher prices, manufacturers obtain ____ resources and oriduce ____ products to sell
the price at which demand and supply are equal
consumers responsiveness or sensitivity to changes in price
a price below equilibrium results in a ____ because the demand is ____ than the available supply
a shortage puts ____ pressure on price
at a price above equilibrium, the demand is ____ than the available supply and a ____ is created
consumers buy more or less of a product when the price changes
an increase or a decrease in price will not significantly affect demand
an increase in sales exactly offsets a decrease in prices, so total revenue remains the same
% change in quantity demanded of good A / % change in price of good A
if E is greater than 1, demand is ____
if E is less than 1, demand is ____
if E is = to 1, demand is ____
elasticity of demand: price goes down, revenue goes up, demand is ____
elasticity of demand: price goes down, revenue goes down, demand is ____
elasticity of demand: price goes up, revenue goes up, demand is ____
elasticity of demand: price goes down, revenue goes down, demand is ____
elasticity of demand: price goes up/down, revenue stays the same, demand is ____
factors that affect elasticity of demand:
*availability of substitutes *price relative to purchase power *product durability *a products other uses *rate of inflation
availability of substitutes: when many substitutes are available, it is easy to switch products, making demand ____
price relative to purchasing power: if a price is so low that it is an inconsequential part of an individuals budget, demand will be ____
product durability: repairing durable products rather than replacing them prolongs their useful life. thus, people are sensitive to the price increase, and the demand is ____
a products other uses: the greater the number of uses for a product, the more ____ demand tends to be. if a product has only one use, the quantity purchased probably will not vary as price varies
rate of inflation: when inflation is high, demand becomes more ____--- rising price levels makes consumers more price ____
a technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity
when competitive pressures are high, a company must know when it can ____ prices to ____ its revenues
who first developed yield management systems
yield management systems employs techniques such as:
*discounting early purchases *limiting early sales at discounted prices *overbooking capacity
yield management systems make it possible for a company to:
1. stimulate demand when demand is low 2. maximize profits when demand is high
variable cost and fixed cost
type of cost that varies with changes in level of output
type of cost that does not change as level of output changes
average variable cost (AVC) =
total variable cost / quantity of output
average total cost (ATC) =
total costs / quantity of output
the change in total costs associated with a one unit change in output
methods used to set prices:
-markup pricing -keystoning -profit maximization pricing -break even pricing
the cost of buying the product from the producer plus amounts for profit and for expenses not otherwise accounted for
the practice of marking up prices by 100%, or doubling the cost
what is the most popular method to establish a selling price?
a method of setting prices that occurs when marginal revenue equals marginal cost
the extra revenue associated with selling an extra unit of output, or the change in total revenue with a one-unit change in output
the change in total costs associated with a one unit change in output
as long as revenue is ____ than cost, the firm should continue manufacturing and selling the product
determines what sales volume must be reached before the company breaks even and no profits are earned. (its total costs equal its total revenue)
total fixed costs / fixed cost contribution
price - avg. variable cost
the advantage of a break even analysis is that it provides a ____ of how much the firm must sell to break even and how much profit can be earned if a ____ sales volume is obtained
other determinants of price:
-stages of the PLC -competition -distribution strategy -promotion strategy -perceived quality
stages in the product life cycle
1. intro 2. growth 3. maturity 4. decline
in the intro stage of the PLC: prices are ____ to recover ____ costs; demand originates in the ____ of the market and is relatively ____
*high *development
*core *inelastic
in the growth stage of the PLC: prices ____ due to the ____ product supply from competitors; ____ product appeal to a ____ market; ____ costs from economies of scale
*stabilize *increased
*increased *broader *decreased
in the maturity stage of the PLC: prices ____ as competiton ____ and ____ firms are eliminated; ____ become a significant cost factor; usually only the most ____ manufacturers remain
- decrease -increase -high cost -distribution -efficient
in the decline stage of the PLC: prices ____ until ____ is left in the market; at that time, prices begin to ____ and may ____as the product moves into the specialty goods category
- decrease -only one firm -stabilize -increase
the competition: ____ may induce firms to enter the market
competition can lead to ____
distribution strategy for manufactures: offer a ____ or ____; use ____ distribution; ____; avoid businesses with ____; develop ____
-larger profit margin -trade allowance -exclusive -franchising -price cutting discounters -brand loyalty
distribution strategy for wholesalers/retailers: sell ____ the brand; buy ____ goods
stocking well-known branded items at high prices in order to sell store brands at discounted priced
selling against the brand
a program that searches the web for the best price for a particular item
business-to-business auctions are likely to be the dominant form of online auctions in the future
2 types of shopping bots:
broad-based and niche oriented
most shopping bots give ____ listings to ____ who pay for the privilege, and not necessarily the ____ retailer
-preferential -e-tailors -lowest priced
example of an internet auction
____ auctions are likely to be the dominant form in the future
price is often used a a ____ tool to ____ consumer interest
the pittsburgh zoo offering $5 admission for wearing a tie-dye shirt is an example of...
using price as a promotional tool
demands of large customers: requires suppliers to pay ____ if stores profit margins arent met; fines for violations of ____, ____, and ____
-cash rebates -ticketing, packing, shipping rules
charging a high price to help promote a high quality image
when a purchase decision involves uncertainty, consumers tend to rely on a ____ as a predictor of good quality; consumers assume that "you ____"
high price get what you pay for
-ease of use -versatility -durability -serviceability -performance -prestige