Marketing Test 3 Chapter 11

Explain what a demand curve is and the role of revenues in pricing decisions.

A demand curve is a graph relating the quantity sold and price, which shows the maximum number of units that will be sold at a given price. Three demand factors affect price: (a) consumer tastes, (b) price and availability of substitute products, and (c) consumer income. These demand factors determine consumers' willingness and ability to pay for products and services. Assuming these demand factors remain unchanged, of the price of a product is lowered or raised, the the quantity demanded for it will increase or decrease, respectively. The demand curve relates to a firm's total revenue, which is the total money received form the sale of a product, or the price of one unit times the quantity of units sold.

demand curve

A graph relating the quantity sold and the price, which shows how many units will be sold at a given price.

break-even analysis

A technique that examines the relationship between total revenue and total cost to determine profitability at different levels of output.

pricing objectives

Expectations that specify the role of price in an organization's marketing and strategic plans.

pricing constraints

Factors that limit the range of prices a firm may set.

Explain the role of costs in pricing decisions and describe how combinations of price, fixed cost, and unit variable cost affect a firm's break-even point.

Four important costs impact a firm's pricing decisions: (a) total cost, or total expenses, the sum of the fixed costs and variable costs incurred by a firm in producing and marketing a product; (b) fixed costs, the sum of the expenses of the firm that are stable and do not change with the quantity of a product that is produced and sold; (c) variable cost, the sum of the expenses of the firm that vary directly with the quantity of a product that is produced or sold; (d) unit variable cost, the variable cost expressed on a per unit basis. Break-even analysis is a technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output. The break-even point is the quantity at which total revenue and total cost are equal. Assuming no chance in price, if the costs of a firm's product increases due to higher fixed costs (manufacturing or advertising) or variable costs (Direct labor or materials) then its break-even point will be higher. And if the total cost is unchanged, an increase in price will reduce the break-even point.

Describe the nature and importance of pricing and the approaches used to select an approximate price level.

Price is the money or other considerations exchanges for the ownership or use of a product or service. Although price technically involves money, the amount exchanged is often different from the list or quoted price because of incentives (rebates, discounts), allowances (trade), and extra fees (finance charges, surcharges). Demand, cost, profit, and competition influence the initial consideration of the approximate price level for a product or service. Demand-Oriented pricing approaches stress consumer demand and revenue implications of pricing and include seven types: skimming, penetration, prestige, odd-even, target, bundle, and yield management. Cost-orientated pricing approaches emphasize the cost aspects of pricing and include two types: standard markup and cost-plus pricing. Profit-orientated pricing approaches focus on a balance between revenues and costs to set a price and include three types: target profit, target return-on-sales, and target return-on-investment pricing. Finally, competition-orientated pricing approaches stress with competitors or the marketplace are doing and include three types: customary; above-, at-, or below-market; and loss-leander pricing.

Recognize the objectives a firm has in setting prices and the constraints that restrict the range of prices a firm can charge.

Pricing objectives specify the role of price in a firm's marketing strategy and may include profit, sales revenue, market share, unit volume, survival, or some socially responsible price level. Pricing constraints that restrict a firm's pricing flexibility include demand, product newness, production and marketing costs, prices of competitive substitutes, and legal and ethical considerations.

profit equation

Profit equals total revenue minus total costs.

price elasticity of demand

The percentage change in the quantity demanded relative to a percentage change in price. (E = Percentage change in quantity demanded / Percentage change in price. )

value

The ratio of perceived benefits to price.

total cost (TC)

The total expenses incurred by a firm in producing and marketing a product; total cost is the sum of fixed costs and variable costs.

total revenue (TR)

The total money received from the sale of a product; the unit price of a product multiplied by the quantity sold.

Describe the steps taken in setting a final price.

Three common steps marketing managers often use in setting a final price are: 1. Select an approximate price level as a starting point. 2. Set the list or quoted price, choosing between one-price policy or a flexible-price policy 3. Modify the list or quoted price by considering discounts and allowances.

price

the money or other considerations (including other products and services) exchanged for the ownership or use of a product or service.