Chapter 14 - Pricing Concepts for Establishing Value

< -1

is elastic and therefore very responsive to price change

target profit pricing

is implemented when firms they have a particular profit goal as their overriding concern; to meet this targeted profit objective, firms use price to stimulate a certain level of sales at a certain profit per unit

loss-leader pricing

lowering the price below the store's cost

channel members

manufacturers, wholesalers, and retailers (have different perspectives when it comes to pricing strategies);

four levels of competition

monopoly, oligopolistic competition, monopolistic competition, and pure competition (each has its own set of pricing challenges and opportunities);

price war

occurs when two or more firms compete primarily by lowering their prices; Firm A lowers its prices, Firm B responds by meeting or beating Firm A's new price; Firm A then responds with another new price, and so on;

a penetration pricing strategy has its drawbacks

1. the firm must have the capacity to satisfy a rapid rise in demand, 2. low price does not signal high quality, 3. firms should avoid a penetration pricing strategy if some segments of the market are willing to to pay more for the product: otherwise, the firm is just "leaving money on the table" and missing an opportunity to make more money

target return pricing

A pricing strategy 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 investments; employ pricing strategies designed to produce a specific return on investment, usually expressed as a percentage of sales.

in an elastic scenario, relatively small changes in price will generate fairly large changes in the quantity demanded, so if a firm is trying to increase its sales, it can do so by lowering prices; however, raising prices can be problematic in this context because doing so will lower sales

ELASTIC IS DEMAND VERY RESPONSIVE TO PRICE CHANGES; so cheaper price, more people will demand; higher price, less people will demand; (for example, the T-bone steak)

deceptive reference prices

If the reference price has been inflated or is just plain fictitious, the advertisement is deceptive and may cause harm to consumers (but how can you tell?) - may claim it is 70% off original price but may actually not be; in general, if a seller is going to label a price as a regular price, the Better Business Bureau suggests that at least 50 percent of the sales have occurred at that price;

price elasticity of demand

Measures how changes in a price affect the quantity of the product demanded; specifically, it is the ratio of the percentage change in quantity demanded to the percentage change in price. (formula on page 302) - demand curve provides the information we need to calculate the price elasticity of demand

monopoly

ONE FIRM provides the product or service in a particular industry, which results in less price competition;

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; manufacturers often encourage retailers to sell their merchandise at a specific price, known as the manufacturer's suggested retail price (MSRP);

substitute products

Products for which changes in demand are negatively related; that is, a percentage increase in the quantity demanded for product A results in a percentage decrease in the quantity demanded for product B. (an example of this are DVD players and Blu-ray players - they are substitutes for each other)

sales orientation

a company objective to set prices based on the belief that INCREASING SALES will help the firm more than will increasing profits (selling more is the most important. factor here); (example: a new health club might focus on unit sales, dollar sales, or market share and therefore be willing to set a lower membership and accept less profit at first to focus on and generate more unit sales - so they want to sell more, get more customers instead of focusing on profit, so they might lower their prices here just to attract more customers and produce more sales over profit)(a high-end jewelry store might also use this approach by focusing on dollar SALES and maintaining higher prices; it might sell fewer units, but it can still generate high dollar sales levels)

competitive parity

a firm's strategy of setting prices that are similar to those of their major competitors (SIMILAR PRICE TO COMPETITION)

leader pricing

a legitimate 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;

total cost

the sum of fixed and variable costs (add them both together)

gray market

(distribution outside normal channels); 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; many manufacturers of consumer electronics therefore require retailers to sign an agreement that demands certain activities (and prohibits others) before the retailers may become authorized dealers. But if the retailer has too many in stock, it may sell just above its own cost to an unauthorized discount dealer. This move places the merchandise in the market at prices far below what authorized dealers can charge and in the long term may tarnish the image of the manufacturer if the discount dealer fails to provide sufficient return policies, support, service, and so forth. To discourage this type of. gray market distribution, many manufacturers have resorted to large disclaimers on their websites, packaging, and other communications to warn consumers that the manufacturer's product warranty becomes null and void unless the item has been purchased from an authorized dealer; another method is to equalize worldwide prices so the gray market advantage evaporates; "buying in the gray market"; can diminish reputation because their products are being bought and sold at lower prices through nontraditional channels (service + warranties are also nonexistent in these channels which could further tarnish the brands image)

break-even analysis

A useful technique that enables managers to examine the relationships among cost, price, revenue, and profit over different levels of production and sales; central to this analysis is the determination of the break-even point, or the point at which the number of units sold generates just enough revenue to equal the total costs (where it breaks even: where the revenue pays off the costs)

pure competition

a large number of sellers offer STANDARDIZED PRODUCTS or COMMODITIES that consumers perceive as substitutable, such as grains, gold, meat, spices, or minerals; in such markets, price is usually set according to the laws of supply and demand; (for example, wheat is wheat, so does not matter where it is bought from); the secret to pricing success in a pure competition market is not necessarily to offer the lowest price, because doing so might create a price war and erode profits; instead, some firms have brilliantly decommoditized their products (for example, most people feel that all salt purchased in a grocery store is the same, but companies like Morton have branded their salt to move into a monopolistically competitive market; when a commodity can be differentiated somehow, even if simply by a sticker or logo, there is an opportunity for consumers to identify it as distinct from the rest, and in this case, firms can at least partially extricate their product from a pure competitive market;

status quo pricing

changes pricing only to meet those of the competition (for example, when a firm raises its prices, a competing firm will follow this pattern and raise their prices as well - same with dropping prices)(FOLLOW COMPETITORS FIRMS PRICING STRATEGIES "copying what they do, moving prices up or down")

price fixing

colluding with other firms to control prices; price fixing might be horizontal or vertical

everyday low pricing (EDLP)

companies stress the continuity of their retail prices at a level somewhere between the regular, nonsale price and the deep-discount sale prices their competitors may offer; by reducing consumers' search costs, EDLP adds value; consumers can spend less of their valuable time comparing prices, including sales prices, at different stores (because is somewhere between normal price and really cheap discount prices); Walmart uses this pricing strategy (for any given group of often-purchased items, its prices will tend to be lower than those of any other company in that market; this claim does NOT mean that EVERY item consumers purchase at Walmart will be priced lower than anywhere else; it just means that for an AVERAGE purchase, Walmart's prices tend to be lower OVERALL;

fixed costs

costs that remain essentially at the same level, regardless of any changes in the volume of production (COSTS STAY THE SAME IN RESPONSE TO CHANGES IN VOLUME - ARE FIXED)

variable costs

costs, primarily labor (employees) and materials, that vary with production volume (can cut or increase these costs: example, can fire workers etc.); as a firm produces more or less of a good or service, the total variable costs increase or decrease at the same time; THESE COSTS WILL CHANGE with how much is being produced!!! (variable); because each unit of the product produced incurs the same cost, marketers generally express variable costs on a per-unit basis (example: cost of ingredients that goes into product, these prices may change every time making new batch of product); they will also change depending on the quantity produced (if purchase more ingredients at once, the less expensive they become)(can get cheaper prices for larger volume); though not always the case, variable costs per unit may go up or down (for all units) with significant changes in volume; (COSTS CHANGE IN RESPONSE TO CHANGES IN VOLUME - ARE VARIABLE)

company objectives

different firms embrace very different goals and these goals should spill down to the pricing strategy, such that the pricing of a company's products and services should SUPPORT and ALLOW the firm to reach its overall goals; for example, a firm with a primary goal of very high sales growth will likely have a different pricing strategy than will a firm with the goal of being a quality leader; these specific objectives usually reflect how the firm intends to grow (do managers want it to grow by increasing profits, increasing sales, decreasing competition, or building customer satisfaction?); a firm may embrace two or more noncompeting objectives at a time (not always mutually exclusive)

a pricing strategy

is a long-term approach to setting prices broadly in an integrative effort (across all the firm's products) based on the five C's of pricing;

horizontal price fixing (illegal)

occurs when competitors who produce and sell competing products or services collude, or work together, to control prices, effectively taking price out of the decision process for consumers (reduces competition and is illegal). As a general rule of thumb, competing firms should refrain from discussing prices or terms and conditions of sale with competitors (they can look at competitors prices in stores, etc.)

typically, fixed costs include

rent, utilities, insurance, administrative salaries (for executives and higher-level managers), and the depreciation of the physical plant and equipment; across reasonable fluctuations in production volume, these costs remain stable; whether the firm makes 100,000 or a million of the product, the rent it pays for its factory remains unchanged (IS FIXED)

when they believe it will work, firms use price skimming for many different reasons

some may start by pricing relatively high to signal high quality to the market; others may decide to price high at first to limit demand, which gives them time to build their production capacities; some firms employ a skimming strategy to try to quickly earn back some of the high research and development investments they made for the new product; may employ skimming pricing strategies to also test consumers' price sensitivity (a firm that prices too high can always lower the price, but if the price is initially set too low, it is almost impossible to raise it without significant customer resistance).

manufacturer's suggested retail price (MSRP)

the specific price that manufacturers suggest retailers use to sell their merchandise; they do this to reduce retail price competition among retailers, stimulate retailers to provide complementary services, and support manufacturer's merchandise (manufacturers reinforce MSRPs by withholding benefits such as cooperative advertising or even refusing to deliver merchandise to noncomplying retailers (Supreme Court looks at this on a case-by-case basis)(example: making agreements with publishers of books that they won't sell to other firms for less than a certain price);

competitors might be prevented from entering the market through patent protections, their inability to copy the innovation, or the high costs of entry

true

horizontal price fixing is clearly ILLEGAL, vertical price fixing falls into a gray area

true

in determining pricing methods, marketers must always balance their goal of inducing customers, through price, to find value and the need to deal honestly and fairly with those same customers

true

prices tend to fluctuate naturally and respond to varying market conditions

true

skimming strategies also face a drawback in the relatively high unit costs associated with producing small volumes of products (must consider trade-off between earning a higher price and suffering higher production costs - because they aren't producing as much - don't need to - since the price they are asking for is high - so they pay more to produce to small volumes at a time); another drawback is that the costs of the product will eventually go down and might make the customer, who bought it at its full price, angry;

true

price advertisements should never deceive consumers to the point of causing harm

true "certain puffery is allowed - like best deals in town - but not exact deceiving claims

for a skimming pricing strategy to be successful, competitors cannot be able to enter the market easily; otherwise, price competition will likely force lower prices and undermine the whole strategy;

true (this is why is works with Black Ops, because no one can recreate Black Ops, it's in its own lane)

predation is difficult to prove (predatory pricing)

true; because one must first demonstrate intent, that the firm intended to drive out its competition or prevent competitors from entering the market; second, the complainant must prove that the firm charged prices lower than its average cost, an equally difficult task;

forms of price discrimination are allowed to occur to the end consumers (for example, students and seniors receive discounts on food and movie tickets)

true; this is okay. online auctions are also considered okay because are selling the same item to different buyers at various prices

selling in gray markets consists of unauthorized channels buying an item for lower and selling it at a lower price to make a profit

true; this may tarnish a company's reputation for many reasons (this probably happens a lot with expensive products such as Prada, Chanel, etc.) - they also buy an item from a country that has it cheaper and sell it in the country that it is more expensive in

price discrimination

when firms sell the same product to different resellers (wholesalers, distributors, or retailers) at different prices (usually larger firms receive lower prices)(quantity discounts are ok but must be available to all customers and not be structured in such a way that they consistently and obviously favor one or a few buyers over others);

bait and switch pricing

when sellers advertise items for a very low price without the intent to really sell any; the store lures customers in with a very low price on an item (the bait), only to aggressively pressure these customers into purchasing a higher-priced model (the switch) by disparaging the low-priced item, comparing it unfavorably with the the higher-priced model, or professing an inadequate supply of the lower-priced item (the laws against bait and switch are difficult to reinforce because salespeople do this - bump up people to higher models - naturally

price skimming

A 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, which is willing to pay a somewhat lower price; this appeals to segments of consumers who are willing to pay the premium price to have the innovation first; this tactic is particularly common in technology markets, where sellers know that customers will be desperate to be the first to own the newest version - used for high-demand video games like Black Ops when they come out with a new version - notice how these games get cheaper a little bit after their release, this is skimming);

the five C's of pricing (successful pricing strategies are built around these five critical components)

company objectives, costs, competition, customers, and channel members

In general, prices should NOT be based on costs!! because

consumers make purchase decisions based on their perceived value; they care little about the firm's costs to produce and sell a product or deliver a service

prestige products or services

consumers purchase for these products or services for their status rather than their functionality

inelastic

describes demand that is NOT very sensitive to price changes, PRICE INSENSITIVE! (these are things like necessities and things that don't have a lot of substitutes)

commonly used price strategies

everyday low pricing, high/low pricing, and new product strategies

profit orientation

focusing on target profit pricing, maximizing profits, or target return pricing

retailers cooperative

helps its members achieve economies of scale by buying as a group (in a sense is similar to a wholesaler, except that in this case, the retailers have some control over, and sometimes ownership in, the operation of the cooperative (page 310)

factors influencing price elasticity of demand

income effect, substitution effect, cross-price elasticity

> than -1

is INELASTIC; price INSENSITIVE: customers will probably pay almost any price (to a certain extent) for these specific products because they are either necessities or not easily substituted

oligopolistic competition

only a FEW FIRMS dominate; firms typically change their prices in reaction to competition to avoid upsetting an otherwise stable competitive environment; sometimes reactions to prices in oligopolistic markets can result in a price war

contribution per unit

price less the variable cost per unit (used to determine the break-even point in units mathematically)(I think this is the profit made per each product sold)

complementary products

products whose demand curves are positively related, such that they rise or fall together; a percentage increase in demand for one (Product A) results in a percentage increase in demand for the other (Product B) (these products are related, for example, Blu-ray discs and Blu-ray players)

different types of company objectives (the four pricing orientations - based on company objectives)

profit-oriented, sales-oriented, competitor-oriented, customer-oriented

elastic

refers to a 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 (THE MORE ELASTIC, THE MORE A CONSUMER RESPONDS TO PRICE CHANGE - these are non-necessity products and products with a lot of substitutes)

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, because it can be substituted, so its demand is sensitive to price change)

income effect

refers to the change in the quantity of a product demanded by consumers due to a change in their income; generally, as people's incomes increase, their spending behavior changes: they tend to shift their demand from lower-priced products to higher priced alternatives (example: will buy hamburger when don't have a lot of money but will buy steak when are making more money); when incomes drop, consumers turn to less expensive alternatives or purchase less;

experience curve effect

refers to the 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;

dynamic pricing (also called individualized pricing)

refers to 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. (based on the individual customer)

high-low pricing strategy

relies on the promotion of sales, during which prices are temporarily reduced to encourage purchases; this strategy is appealing because it attracts two distinct market segments: those who are not price sensitive and are willing to pay the "high" price and more price-sensitive customers who can wait for the "low" sale price. High/low sellers can also create excitement and attract customers through the "get them while they last" atmosphere that occurs during a sale (THIS STRATEGY USES SALES AND DISCOUNTS TO PROMOTE PURCHASES!); sellers using a high/low pricing strategy often communicate their strategy through the creative use of a "reference price"

the maximizing profits strategy

relies primarily on economic theory. If a firm can accurately specify a mathematical 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; the problem with this approach is that actually gathering the data on all these relevant factors and somehow coming up with accurate mathematical model

penetration pricing strategy

set the initial price low for the introduction of the new product or service (their objective is to build sales, market share, and profits quickly and deter competition from entering the market); this low penetration price is an incentive to purchase the product IMMEDIATELY; firms using a penetration pricing strategy expect the unit cost to drop significantly as the accumulated volume sold increases, an effect known as the experience curve effect. With this effect, as sales continue to grow, the costs continue to drop.

customer orientation

sets pricing strategy based on how it can ADD VALUE to its products or services (for example: When CarMax promises a "no-haggle" pricing structure, it exhibits a customer orientation because it provides additional value to potential used car buyers by making the process simple and easy "this kind of strategy is based on customers and the value they perceive the product as, how they can add value to the product with the price";

demand curve

shows how many units of a product or service consumers will demand during a specific period of time at different prices; demand curves can be either straight or curved; (exhibit 14.3 on page 299); any demand curve relating to price assumes that everything else remains unchanged; marketers creating a demand curve assume that the firm will not increase its expenditures on advertising and that the economy will not change in any significant way (this curve will show where quantity demanded decreases as a price increases - shows at what price and what prices customers will buy more etc.)(class downward sloping demand curve - as price increases, quantity demanded for a product or service decreases; in this case, consumers will buy more as the price decreases - we can expect this kind of curve for many, if not most, products and services)(this kind of curve helps firms determine the BEST price for their product by the highest price customers are willing to pay and sell the most and where the firm will also make the most profit); the different price points offer different values (greater value at that price point, lesser value at that price point, etc.)

competitor orientation

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

premium pricing

the firm deliberately prices a product above the prices set for competing products so as to capture those customers who always shop for the best or for whom price does not matter (thus, these companies can gain market share by offering a high-quality product at a price that is perceived to be fair by its target market as long as they use effective communication and distribution methods to generate high-value perceptions among consumers (consumers will pay this if they see the brand as high value and the firm can gain their market share this way)

price

the overall sacrifice a consumer is willing to make - money, time, energy - to acquire a specific product or service (for example, may pay a little more for something because a store is closer than a store that sells it cheaper); this sacrifice includes the money that must be paid to the seller to acquire the item, but it also may involve other sacrifices, whether non-monetary, such as the value of the time necessary to acquire the product or service, or monetary, such as travel costs, taxes, shipping costs, and so forth, all of which the buyer must give up to take possession of the product (so price is not just money, but is EVERYTHING, even involving time and energy, that the customer gives up for the product)(overall price vs. purchase price, this is overall price)

cross price elasticity

the percentage change in the quantity of Product A demanded compared with the percentage change in price in Product B. If Product A's price increases, Product B's price could either increase or decrease, depending on the situation and whether the products are complementary or substitutes

break-even point

the point at which the number of units sold generates just enough revenue to equal the total costs; at this point, profits are zero; at this point, profits are zero; although profit, which represents the difference between the total cost and the total revenue, can indicate how much money the firm is making or losing in a single period of time, it cannot tell managers how many units a firm must produce and sell before it stops losing money and at least breaks even, which is what the break-even point does; (graph on page 306)

reference price

the price against which buyers compare the actual selling price of the product and that facilitates their evaluation process (like when you see a coat that says originally $500 but that specific store is selling it for $300 - TJMaxx does this a lot); the seller labels the reference price as the "regular price" or an "original price"; when consumers view the the "sale price" and compare it with the provided reference price, their perceptions of the value of the deal increase; (provide potential customers with an idea of the "regular price" before it was put on sale) - crucial that retailers and manufacturers provide genuine advertised reference prices in their ads and signage;

channel members have to carefully communicate their pricing goals and select channel partners that agree with them (or conflict will surely arise)

true

companies must be creative in finding ways to balance profits and consumers

true

consumers generally believe that price is one of the most important factors in their purchase decisions

true

developing a price that allows all channel members to earn their requisite profits requires careful planning

true

even if a price strategy is is implemented well, consumers, economic conditions, markets, competitors, government regulations, and even a firm's own products change constantly - and that means that a good pricing strategy today may not remain an effective pricing strategy tomorrow

true

firms need to pay special attention to elastic products because they are the ones that are very reactive to price changes

true

first, identify company objectives, then, look toward consumer demand to lay the foundation for its pricing strategy

true

for price skimming to work, the product or service must be perceived as breaking new ground in some way, offering consumers new benefits currently unavailable in alternative products (which makes sense because they're gonna be paying a high price to receive these products);

true

for sales to increase, customers must see greater value

true

ideally, firms could maximize their profits if they charged each customer as much as the customer was willing to pay

true

knowing the demand curve for a product or service enables a firm to examine different prices in terms of the resulting demand and relative to its overall company objective

true

marketers should view pricing decisions as a strategic opportunity to create value rather than as an afterthought to the rest of the marketing mix

true

price is a particularly powerful indicator of quality when consumers are less knowledgeable about the product category

true

price is often used to judge quality

true

price is the most challenging of the four P's to manage, partly because it is often the least understood

true

setting prices with a close eye to how consumers develop their perceptions of value can often be the most effective pricing strategy, especially if it is supported by consistent advertising and distribution strategies

true

the greater the availability of substitute products, the higher the price elasticity of demand for any given product will be (because it can be easily replaced by lower priced substitutes, so is more responsive to price changes)

true

the market for a product is generally viewed as inelastic (price insensitive) when its price elasticity is greater than -1.

true

the market for a product or service is elastic (price sensitive) when the price elasticity is less than -1.

true

the way a product or service is marketed to customers can have a profound effect on its price elasticity

true

to make effective pricing decisions, firms must also understand their cost structures so they can determine the degree to which their products or services will be profitable at different prices (how much they are putting in - costs - to how much they will be getting from these products, have to be able to make a profit)

true

when a new product is truly innovative, or what we call "new to the world", determining consumers' perceptions of its value and pricing it accordingly becomes far too difficult

true

when crossing the break-even point, the firm will start earning profit at the same rate of the contribution per unit (profit per each unit); if under the break-even point, the firm is experiencing a loss and is losing money

true

marketing plays a critical role in making customers brand loyal

true (because of this brand loyalty and the lack of what consumers judge to be adequate substitutes, the price elasticity of demand for some brands is very low - because they consumers are loyal to these companies and will tend to pay whatever price it is up until a certain point because they don't think they can find adequate substitutes - making the brand seem less substitutable)

a firm may set low prices to discourage new firms from entering the market, encourage current firms to leave the market, and/or take market share away from competitors - all to gain overall market share

true (competing firms would have to develop similar fares to widen the range of prices that their consumers can assess + keep up with competition that is selling at a lower price) - airlines might combat dropping their prices to do this by increasing number of seats on plane to increase revenue per flight, soda companies might make their bottles smaller

firms may offer very high-priced, state-of-the-art products or services in full anticipation of limited sales; these offerings are designed to enhance the company's reputation and image and thereby increase the company's value in the minds of customers "might make them look more luxurious and more valuable"

true (having a heavy priced product communicates what the company is capable of and can increase the image of the firm and rest of its products - even the cheaper versions )

instead of a flat fee, by predicting demand for a particular flight, airline could price different tickets at different rates and ensure that it sells as many tickets as possible

true (put a discount on seats that might not sell and increase price of tickets that are certain to sell)

other firms are less concerned with the absolute level of profits and more interested in the RATE at which their profits are generated relative to their investments, these firms typically turn to target return pricing

true (return on their investments, how quick they flip that return)

price is the only element of the marketing mix that does NOT generate costs but instead generates revenue

true (so even if every other element in the marketing mix is perfect, with the wrong price, sales and revenue will not occur)

if the products are inelastic, lowering prices will not appreciably increase demand

true, because customers just don't notice or care about the lower price (for example, people will buy water regardless of its price)

some firms may be more concerned about their overall market share than about dollars per se (though these often go hand and hand) because they believe that market share reflects their success relative to the market conditions than do sales alone

true, market share shows where the firms place in the market is and not just on their sales alone

adopting a market share objective does not always imply setting low prices

true, rarely is the lowest-price offering the dominant brand in a given market (may even be premium priced brands)

after a company has a good grasp on its overall objectives, it must implement pricing strategies that enable it to achieve those objectives

true;

penetration pricing discourages competitors from entering the market because the profit margin is relatively low; competitors who enter the market later will face higher unit costs, at least until their volume catches up with the early entrant (whose costs to produce the product have dropped because of the accumulated volume - buying a lot at once)

true;

a break-even analysis cannot help managers set prices, but it does help them assess their pricing strategies (because it clarifies the conditions in which different prices may make a product or service profitable); it becomes an even more powerful tool when performed on a range of possible prices for comparative purposes

true; (naturally, however, there are limitations to a break-even analysis - example: prices in in break-even analysis may represent an "average" price, prices often get reduced as quantity increases, because the costs decrease, so firms must perform several break-even analyses at different quantities; break-even analysis also cannot indicate how many units will sell at a given price, it only tells the firm what its costs, revenues, and profitability will be, given a set price and an assumed quantity; to determine how many units the firm actually will sell, it must bring in the demand estimates discussed previously);

the lowest point the total costs can ever reach is equal to the total fixed costs (because these costs will always be there and will always be the same)

true; beyond this point, the total cost curve increases by the amount of variable costs for each additional unit, which we calculate by multiplying the variable cost per unit by the number of units, or quantity; (formulas on page 307)

consumers are generally less sensitive to price increases for necessary items, such as milk, because they have to purchase the items even if the price climbs (they are necessities and basically will pay whatever they have to for these goods)

true; in contrast, if the price of T-bone steak rises beyond a certain point, people will buy fewer of them because they can turn to the many substitutes for this cut of meat

consumers are generally most sensitive to price increases than to price decreases

true; it is easier to lose customers with a price increase than it is to gain new customers with a price decrease

marketers need to know how consumers will respond to a price increase or decrease for a specific product or brand so they can determine whether it makes sense for them to raise or lower prices

true; price elasticity of demand can help with this because it signifies the response a customer will have to buying the product based on its price change

a demand curve for a prestige product or service can be curved

true; such as exhibit 14.4 on page 301 (because with prestige products, price increases do not affect sales significantly up to a CERTAIN point, however, after that point, sales DECREASE because consumers believe it is no longer a good value); all about value with customers, how the customer values the product!

not ALL products or services follow the downward sloping demand curve for all levels of price; (consider prestige products or services, which customers purchase for status)

true; the higher the price, the greater the status associated with it and the greater exclusivity, because fewer people can afford to purchase it; with prestige products or services, a higher price may lead to greater quantity sold (therefore not following the typical downward sloping demand curve), but only up to a certain point; the price demonstrates just how rare, exclusive, and prestigious the product is; when customers value the increase in prestige more than the price differential between the prestige product and other products, the prestige product attains the greater value overall; HOWEVER, prestige products can also run into pricing difficulties (a firm will release products under a different name that are practically the same but for a lower price so as to not ruin the prestige of the main brand - example fender putting out another line of guitars under another name and seeing those for cheaper - to the people who can't afford a fender)

pricing is a key part of the value proposition for any purchase

true; value reflects the relationship between between benefits and costs

two primary cost categories

variable and fixed

predatory pricing

when a firm sets a very low price for one or more of its products with the intent to drive its competition out of business (predatory pricing is illegal in the United States under both the Sherman Antitrust Act and the Federal Trade Commission Act);

customers (the second c of the five c's)

when firms have developed their company objectives, they turn to understanding consumers' reactions to different prices; customers want value, and price is half of the value equation; prices are related to DEMAND (consumers' desire for products)

monopolistic competition

when there are many firms competing for customers in a given market but their products are differentiated; when so many firms compete, product differentiation rather than strict price competition tends to appeal to consumers; THIS IS THE MOST COMMON FORM OF COMPETITION!!! - MONOPOLISTIC COMPETITION; (for example, sunglasses market - many different kinds of sunglasses)

developing a good price strategy is such a formidable challenge to all firms

yes, do it right, and the rewards to the firm will be substantial, but do it wrong, and failure will be swift and severe