11: Pricing Products and Services
What are the four general pricing approaches? Name some examples of each approach and explain them.
1. Demand oriented approaches. Skimming, penetration, and prestige. 2. Cost oriented approaches. Standard markup, cost plus, and experience curve. 3. Profit oriented approaches. Target profit, target return on sales, and target ROI. 4. Competition oriented approaches. Customary, above/at/below market, and loss leader.
Explain how demand affects pricing decisions. What does a demand curve show and what are the differences between moving along the demand curve and shifts in the demand curve?
A demand curve is a graph relating the quantity sold and the price, which shows how many units will be sold at a given price. Movement along the curve is a decrease in price and an increase in demand. Shift in the demand curve is a complete move with a decrease in price and increase in demand.
What are some basic objectives and constraints in pricing?
Objectives- Profit, sales, market share, unit volume, survival, social responsibility. Constraints- Demand, stage in the product life, costs, and competition pricing.
Explain price elasticity of demand and the factors that determine price elasticity.
Price elasticity of demand is the percentage change in the quantity demanded relative to a percentage change in price. It measures how sensitive consumer demand and the firm's revenues are to changes in the product's price. Factors that determine price elasticity are the more subsidies a product or service has the more likely it is to be price elastic. Also products and services considered to be non discretionary are price inelastic, so open heart surgery is price inelastic whereas airline tickets for a vacation are price elastic.
What are some legal and ethical considerations marketers face when pricing?
Price fixing- an agreement between two or more firms on the price they will charge for a product. Price discrimination- the practice of charging different prices to different buyers for goods of like grade and quality. Deceptive pricing (bait and switch)- occurs when a seller states prices or price savings that mislead consumers or are not actually available to consumers. Predatory pricing- is the practice of charging a very low price for a product with the intent of driving competitors out of business. Once competitors have been driven out, the firm raises its prices.
Why is price an important component of the marketing process?
Price is the money or other considerations exchanged for the ownership or use of a product or service. It is a important component because it is a value indicator, and it has a direct effect on firm profits.
Know the equations for Total Profit, Total Revenue and Total Costs, as well as Break-Even Pricing. Be able to explain each of these equations.
Total Profit- profit=total revenue- total costs Total Revenue- TR=unit price (p) x quantity sold (q) Total Costs TC= fixed cost (fc) + variable cost (vc) Break-Even Pricing BEP= fixed cost/unit price - unit variable cost= fc/p-uvc