Chapter 19: Price Concepts

Break Even Analysis

The point at which the costs of producing a product equal the revenue made from selling the product. - The marketer should determine the break-even point for several alternative prices. - Formula

Price

The value paid for a product in a marketing exchange. - Barter

Factors that Affect Pricing Decisions: Legal and Regulatory Issues

To control inflation, the U.S. federal government may enact: - Price controls - Price freezes: to control rate of price increases The U.S. has many flaws affecting pricing. E.g. Sherman Antitrust Act.

Price competition exists when: a. consumers have difficulty distinguishing competitive offerings and marketers emphasize low prices. b. there is only one supplier for the entire industry in a monopoly situation. c. products in the industry are differentiated, with clear selling points projected by individual brands. d. two or more competitors collaborate and prices are fixed after mutual agreement. e. competitive offerings are easily distinguished and the economy is stuttering.

consumers have difficulty distinguishing competitive offerings and marketers emphasize low prices.

The monthly electricity cost for a cold storage facility is the same whether it is operated at full capacity or at lower capacities. What type of production cost does electricity represent? a. Variable cost b. Fixed cost c. Marginal cost d. Opportunity cost e. Transaction cost

fixed cost

The extra cost a firm incurs when it produces one more unit of a product is called the _____. a. total cost b. opportunity cost c. historical cost d. variable cost e. marginal cost

marginal cost

Terms used to describe price

tuition, fees, rent, taxes, commission, tips, fines

Know what the demand curve looks like

*downward sloping

Factors that Affect Pricing Decisions: Customer's Interpretation and Response

- Customer Interpretation: what price means or communicates to customers. - Customer Response: Whether the price moves the customer closer to purchase and the degree to which the price enhances satisfaction with the purchase experience and product. - Customers' interpretation and response are influenced by their assessment of value.

To determine the costs of production, it is necessary to distinguish among several types of costs:

- Fixed Costs: Do not vary with the # of units produced or sold. - Average Fixed Cost: The fixed costs per unit produced. - Variable Costs: Vary with changes in the number of units produced or sold. - Average Variable Cost: The variable cost per unit produced. - Total Costs: the sum of the average fixed cost and the average variable cost, times the quantity produced - Average Total Cost: The sum of the average fixed cost and the average variable cost. - Marginal Cost (MC): The extra cost a firm incurs when it produces one more unit of a product. - Marginal Revenue (MR): The change in total revenue that occurs when a firm sells an additional unit of a produced.

Factors that Affect Pricing Decisions: Reference Prices

- Internal Reference Price: A priced developed in the buyer's mind through experience with product. - External Reference Price: A comparison price provided by others - Categorization of Buyers

Factors that Affect Pricing Decisions: Organizational and Marketing Objectives

- Marketers should set prices that are consistent with the organization's goals and missions - Pricing decisions should be compatible with the firm's marketing objectives.

Factors that Affect Pricing Decisions: Competition

- Must know competitors' prices so it can adjust prices accordingly. - Price adjustments must be assessed in terms of competitor's response.

Categorization of Buyers

- Value-Conscious: Concerned about both prices and quality of a product. - Price-Conscious: Strive to always pay low prices. - Prestige-Sensitive: Focus on products that signify prominence and status. e.g. old car

Factors that Affect Pricing Decisions

1. Organizational and Marketing Objectives 2. Costs 3. Other Marketing Mix Variables 4. Channel Member Expectations 5. Customer's Interpretation and Response 6. Reference Prices 7. Competition 8. Legal and Regulatory Issues

Marginal Analysis

Examines what happens to a firm's cost and revenues when production or sales changes by one unit.

BE Formula

Fixed Costs / Per Unit Contribution to Fixed Costs (Price-Variable Costs)

The Demand Curve

For most products, their is an inverse relationship between price and demand. - A graph of the quantity of products expected to be sold at various prices, if other factors remain constant. - Not all types of demand conform to the classic demand curve. - Prestige products sell at high prices than low.

Which of the following statements best defines the demand curve? a. It is a graph that represents the marginal utility of demand for every additional unit of product produced. b. It is a graph that identifies the difference between demand and supply in an economy. c. It is a graph of the quantity of products expected to be sold at various prices, other factors being constant. d. It is a strategic tool used to increase demand for a product or service in monopolistic competition. e. It is a graph that estimates the supply for a product from a particular retailer when prices are increased by a fixed percentage.

It is a graph of the quantity of products expected to be sold at various prices, other factors being constant.

Transfer Pricing

Occurs when one unit in an organization sells a product to another unit. Price is determined by a number of methods: - Actual Full Cost: Dividing all fixed and variable expenses by the number of units produced. - Standard Full Cost: What it would cost to produce the goods at full plant capacity. - Cost Plus Investment: Full cost plus a portion of the selling unit's assets. - Market-Based Cost: The market price less a discount to reflect expenses.

Which of the following statements is true of the demand curve for prestige products? a. Prestige products tend to gain an appeal when their prices fall drastically. b. The demand for prestige products does not change with changes in price. c. The demand for prestige products is inversely related to their prices. d. The demand for prestige products can be indefinitely increased by gradually raising its prices. e. Prestige products tend to sell better at high prices than at low ones.

Prestige products tend to sell better at high prices than at low ones.

Barter

The oldest form of trade; money may not be involved.