chapter 14 (5 C's of pricing)

Substitute products

Changes in demand are negatively related

Status quo pricing

Changes prices only meet those of competition

5th C of the 5 C's

Channel Members

retailers' cooperative

Ace Hardware is a ___________, such that it helps its members achieve economies of scale by buying as a group.

Competitor oriented example of pricing strategy

Discourage more competitors from entering the market, set prices very low

Contribution per unit

Price minus variable cost per unit.

Total Revenue

Price multiplied by the Quantity

Elastic

Price sensitive. When a 1% decrease in price results in more than 1% increase in quantity sold.

Cross-price elasticity

% change in the quantity of product A demanded compared with the % change in price in product B

Income effect

Refers to the change in the quantity of a product demanded by consumers due to a change in their income.

Competitive parity

Set prices similar to major competitors

Sales oriented example of pricing strategy.

Set prices very low to generate new sales and take sales away from competitors, even if profits suffer.

Demand Curve

how many units or service consumers will demand during a specific period of time at different prices.

The 5 C's of pricing

1. Company objectives 2. Customers 3. Cost 4. Competition 5. Channel Members

Pure competition

A large number of sellers offer standardized products or commodities that consumers perceive as substitutable, such as grains, gold, meats, spices or minerals.

Break even analysis

A technique used by managers to examine the relationships among cost, price, and profit over different levels of production and sales.

Customer oriented

Add value to its product or service

4th C of the 5 C's

Competition

substitution effect

Consumer's ability to substitute other products for the focal brand

Prestige products or services.

Consumers purchase for their status rather than their functionality *Upward sloping demand curve

3rd C of the 5 C's

Cost *Variable cost *Fixed cost *Total cost

Fixed cost

Costs that remain essentially at the same level, regardless of any changes in the volume of production

Premium pricing

Firms deliberately price a product above the prices set for competing products to capture those consumers who always shop for the best or whom price doesn't matter.

Profit oriented firms

Firms do not use value as a consideration but rather focus on generating a set level of profit from each sale.

Total cost

Fixed cost Plus total variable cost.

Break-Even point formula

Fixed cost divided by Contribution per unit

Profit oriented

Focusing on target profit pricing, maximizing profits or target return pricing.

Sales oriented

Increase sales will help increase profits. *Premium pricing.

Profit oriented example of pricing strategy.

Institute a company-wide policy that all products must provide for at least an 18 percent profit margin to reach a particular profit goal for the firm

Channel members

Manufacturers Wholesalers retailers

Competitor pricing

Measure themselves primarily against their competition *Competitive parity *Status quo pricing

Price elasticity of demand

Measures how changes in a price affect the quantity of the product demanded. % change in quantity/%change in price.

Monopoly

One firm provides the product or service in a particular industry, which result in less competition

Oligopolistic competition

Only a few firms dominate *Price wars *Predatory pricing

Variable cost

Primarily labor and materials that vary with production volume

Complementary products

Products whose demands are positively related, such that they rise or fall together.

Company objectives

Profit oriented Sales oriented Competitor oriented Customer oriented

Customer oriented example of pricing strategy

Target a market segment of consumers who highly value a particular product benefit and set prices relatively high

Dynamic pricing (individualized pricing)

The process of charging different prices for goods or services based on the type of consumer, time of the day, week, or even season and level of demand or loyalty systems.

Total cost

The sum of the variable cost and fixed cost

Total Variable cost

Variable cost per unit Multiplied by the quantity

Predatory pricing

When a firm sets a very low price for one or more pf its products with the intent to drive its competition our of business.

Customer

When firms have developed their company objectives, they turn to understanding ________'s reactions to different prices *Second C of the 5 C's of pricing.

Monopolistic competition

When there are many firms competing for customers in a given market but their products are differentiated

Price war

When two or more firms compare primarily by lowering their prices.

Grey markets

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.

Price

overall sacrifice a consumer is willing to make to acquire a specific product or service

Break-even point

point at which the number of units sold generates just enough revenue to equal the total costs.

Inelastic

price insensitive When a 1% decrease in price results in less than 1% increase in quantity sold.