econ ch.8
Stages of Group Development
1. Forming(members lay down rules for acceptable beh.) 2. Storming(Hostilities/conflict arise, ppl fight for power) 3. Norming(Members agree on their shared goals/norms and relationships develop) 4. Performing(Group channels energies into performing)
Assume a retailer purchases a can of premium dog food at $2.25 and adds 75 cents to the cost, making the price $3. What is the markup as a percentage of selling price?
25%
Profit
= Revenue - Cost There MR - MC = profit Profit is highest when MC = MR
Which of the following product-line pricing strategies is NOT generally used for business products? a. price lining b. captive pricing c. psychological pricing d. premium pricing e. negotiated pricing
C, because most business purchases follow a systematic and rational approach.
Fixed Costs(FC)
Costs that do not vary with the quantity of output produced
bundle pricing
Packaging together two or more complementary products and selling them at a single price. To be attractive to customers, the single price usually is considerably less than the sum of the prices of the individual products. Being able to buy the bundled combination in a single transaction may be of value to the customer, increasing convenience and a sense of value. Bundle pricing is used commonly for banking and travel services, computers, and automobiles with option packages
multiple-unit pricing
Packaging together two or more identical products and selling them at a single price. such as two cans for 99 cents rather than 50 cents per can. Especially for frequently purchased products, this strategy can increase sales through encouraging consumers to purchase multiple units when they might otherwise have only purchased one at a time.
premium pricing
Pricing the highest-quality or most versatile products higher than other models in the product line. small kitchen appliances, beer, ice cream, and television cable service. Pet food is another example. Pet owners are becoming more willing to pay premium prices for grain-free dog food in the belief that it is healthier for their pets.
Price leaders
Sometimes a firm prices a few products below the usual markup, near cost, or even below cost, which results in what are known as price leaders. This type of pricing is used most often in supermarkets and restaurants to attract customers by offering especially low prices on a few items, with the expectation that they will purchase other items as well.
special-event pricing
To increase sales volume, many organizations coordinate price with advertising or sales promotions for seasonal or special situations. Special-event pricing involves advertised sales or price cutting linked to a holiday, season, or event. If the pricing objective is survival, then special sales events may be designed to generate necessary operating capital.
ACME Corp.'s widgets have elastic demand. If ACME raises the price of widgets, what will be the result? b. a decrease in market share e. a decrease in total revenue
a decrease in total revenue
price elasticity of demand
a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price %CHNG In quantity demanded ------------------------------------- %CHNG in price EX: For instance, if demand falls by 8 percent when a seller raises the price by 2 percent, the price elasticity of demand is -4 (the negative sign indicating the inverse relationship between price and demand). If demand falls by 2 percent when price is increased by 4 percent, elasticity is -1/2.
price skimming
a pricing policy whereby a firm charges a high introductory price, often coupled with heavy promotion. The seller essentially "skims the cream" off the market, which helps a firm to recover the high costs of R&D more quickly. In addition, a skimming policy may hold down demand for the product in instances where the firm's production capacity is limited during the introduction stage. A danger is that a price skimming strategy may make the product appear more lucrative than it actually is to potential competitors. A firm also risks misjudging demand and facing insufficient sales at the high price.
Which of the following price bases is mostly likely to be used for commercial construction projects or custom made equipment? a. cost-plus pricing b. markup pricing c. demand-based pricing d. competition-based pricing e. yield management
a. cost-plus pricing
Firefly Space Shuttles is using a strategy of maximizing revenues by making numerous price changes in response to demand, competitors' prices, or environmental conditions. This is best described as _____.
a. yield management
cost-based pricing
adding a dollar amount or percentage to the cost of the product. which means marketers apply a desired level of profit to the cost of the product. Cost-based pricing does not necessarily take into account the economic aspects of supply and demand, nor must it relate to just one pricing strategy or pricing objective. It is a straightforward and easy-to-implement method. Two common forms of cost-based pricing are cost-plus and markup pricing.
customary pricing
certain goods are priced on the basis of tradition. Examples of customary, or traditional, prices would be those set for candy bars and chewing gum. This is a less common pricing strategy now than it was in the past. An example would be the 25-cent gumballs sold in gumball machines—the price has remained at that level for probably as long as you can remember.
differential pricing
charging different prices to different buyers for the same quality and quantity of product. For example, many theaters offer discounted tickets for daytime matinee performances, and airlines have different pricing tiers for airline seats depending on whether customers paid extra to board early or other perks. For differential pricing to be effective, the market must consist of multiple segments with different price sensitivities.
markup pricing
commonly used by retailers, a product's price is derived by adding a predetermined percentage of the cost, called markup, to the cost of the product. For instance, most retailers mark up prices by 25 to 50 percent, whereas warehouse clubs, like Costco and Sam's Club, have a lower average markup of around 14 percent.
Variable Costs(VC)
costs that vary with the quantity of output produced
Which of the following is often used by producers of relatively homogeneous products, especially when the target market considers price to be an important purchase consideration? a. demand-based pricing b. cost-based pricing c. markup pricing d. competition-based pricing e. cost-plus pricing
d. competition-based pricing
Which pricing strategy provides the most flexible introductory base price? a. captive pricing b. periodic discounting c. premium pricing d. penetration pricing e. price skimming
e. price skimming, SINCE setting a low price in penetration makes it hard to bring it up after, people dont want you to ever raise the price
Calculating Breakeven point
f a product priced at $100 per unit has an average variable cost of $60 per unit, the contribution to fixed costs is $40. If total fixed costs are $120,000, the breakeven point in units is determined as follows:
average fixed cost(AFC)
fixed cost divided by the quantity of output Declines as output increases since more quantity produced to spread the costs upon.
total cost(TC)
fixed costs plus variable costs
Pricing Objectives
goals that describe what a firm wants to achieve through pricing. Ex: a firm may wish to increase market share by 18 percent over the next three years, achieve a 15 percent return on investment, and promote an image of quality in the marketplace.
price lining
is the strategy of selling goods only at certain predetermined prices that reflect explicit price breaks. For example, a shop may sell men's ties only at $22 and $37. This strategy is used widely in clothing and accessory stores. It eliminates minor price differences from the buying decision—both for customers and for managers who buy merchandise to sell in these stores.
everyday low pricing (EDLP)
marketer sets a low price for its products on a consistent basis, rather than setting higher prices and frequently discounting them
yield management pricing
maximizing revenues by making numerous price changes in response to demand, competitors' prices, or environmental conditions.
reference pricing
pricing a product at a moderate level and displaying it next to a more expensive model or brand in the hope that the customer will use the higher price as a reference point (i.e., a comparison price).
demand-based pricing
pricing based on the level of demand for the product. customers pay a higher price at times when demand for the product is strong and a lower price when demand is weak.
Comparison discounting
sets the price of a product at a specific level and simultaneously compares it with a higher price. The higher price may be the product's previous price, the price of a competing brand, the product's price at another retail outlet, or a manufacturer's suggested retail price. Customers may find comparison discounting informative, and it can have a significant impact on them. FCC established guidelines. If the higher price against which the comparison is made is the price formerly charged for the product, the seller must have made the previous price available to customers for a reasonable time period.
penetration pricing
setting a low initial price on a new product to appeal immediately to the mass market. The main purpose of setting a low price is to build market share quickly in order to encourage product trial by the target market and discourage competitors from entering the market. If the low price stimulates sales, the firm may be able to order longer production runs, increasing economies of scale and resulting in decreased production costs per unit. A disadvantage of penetration pricing is that it places a firm in a less-flexible pricing position. It is more difficult to raise prices significantly than it is to lower them.
secondary-market pricing
setting one price for the primary target market and a different price for another market. Often the price charged in the secondary market is lower. However, when the costs of serving a secondary market are higher than normal, secondary-market customers may have to pay a higher price. Examples of secondary markets include a geographically isolated domestic market, a market in a foreign country, or a segment willing to purchase a product during off-peak times (such as "early bird" dinners at restaurants and off-season vacation rentals).
competition-based pricing
setting prices based on competitors' strategies, prices, costs, and market offerings. an organization considers costs to be secondary to competitors' prices. This is a common method among producers of relatively homogeneous products, particularly when the target market considers price to be an important purchase consideration. A firm that uses competition-based pricing may choose to price below competitors' prices or at the same level. Competitors believe that Amazon's competition-based pricing model has been an attempt to gain monopoly control of many retail markets. Amazon uses highly sophisticated analytics to gauge consumer demand and compare its prices to competitors in order to gain an edge. To stay ahead of the competition, Amazon adjusts its prices millions of times each day to ensure that it undercuts competitors on the most popular items.
product line pricing
setting the price steps between various products in a product line based on cost differences between the products, customer evaluations of different features, and competitors' prices
psychological pricing
strategies encourage purchases based on consumers' emotional responses, rather than on economically rational ones. These strategies are used primarily for consumer products, rather than business products, because most business purchases follow a systematic and rational approach. In retail environments, how customers interpret price fairness, value, and feelings toward prices at a particular store affect their perceptions of the store's price image as well as their repurchase intentions.
periodic discounting
temporary reduction of prices on a patterned or systematic basis. For example, many retailers have annual holiday sales, and some apparel stores have regular seasonal sales. From the marketer's point of view, a major problem with periodic discounting is that customers can predict when the reductions will occur and may delay their purchases until they can take advantage of the lower prices.
captive pricing
the basic product in a product line is priced low, but the price on the items required to operate or enhance it are higher. A common example of captive pricing is printer ink. The printer is generally priced quite low, but the printer ink replacement cartridges are usually very expensive.
Marginal Cost (MC)
the change in total costs associated with a one-unit change in output. The marginal cost curve crosses the average total cost curve at its lowest point, which is the point where production is the most efficient in terms of costs. This is the point at which manufacturers should maintain their production. Average total cost decreases as long as marginal cost is less than average total cost and increases when marginal cost rises above average total cost.
marginal revenue(MR)
the change in total revenue from an additional unit sold Most firms face downward-sloping demand curves for their products. In other words, they must lower their prices to sell additional units. This situation means that each additional unit of product sold provides the firm with less revenue than the previous unit sold, which you can see illustrated in Figure 12.5. Marginal revenue decreases as price decreases and quantity sold increases. Eventually, marginal revenue will reach zero, and the sale of additional units actually causes the firm to lose money.
breakeven point
the point at which the costs of producing a product equal the revenue made from selling the product For example, if a product priced at $100 per unit has an average variable cost of $60 per unit, the contribution to fixed costs is $40. If total fixed costs are $120,000, the breakeven point in units is determined as follows:
cost-plus pricing
the seller's costs are determined (usually during a project or after a project is completed), and then a specified dollar amount or percentage of the cost is added to the seller's cost to establish the price.
odd-number pricing
the strategy of setting prices using odd numbers that are slightly below whole-dollar amounts
Average Total Cost (ATC)
total costs divided by quantity of output. the marginal cost curve crosses the average total cost curve at its lowest point, which is the point where production is the most efficient in terms of costs. This is the point at which manufacturers should maintain their production. In the example laid out in Table 12.1, this occurs between five and six units of production.(point where ATC is lowest is best) Average total cost decreases as long as marginal cost is less than average total cost and increases when marginal cost rises above average total cost.
Average Variable Cost (AVC)
total variable costs divided by quantity of output
random discounting
unsystematic temporary price reduction. That is, they reduce their prices temporarily on a nonsystematic basis. When price reductions occur randomly, current users of that brand are not able to predict when the reductions will occur. Therefore, they are less likely to delay their purchases in anticipation of buying the product at a lower price.