real marketing test 6
How do legal and regulatory forces influence pricing decisions?
**Legal and regulatory issues can also influence price in many ways. For example, the fed. government can set price controls, freeze prices at They also may have regulatory agencies that set prices on things like insurance, diary, and liquor. (ex. setting a lower limit of what the farmer can earn for milK) For one, the sherman antitrust act prohibits price fixing, which is when competing firms get together and raise and lower prices together for mutual benefit (all agree to raise prices so customers have no choice but to pay more, because there is no cheaper alternatives) Companies must have completly independent pricing policies another thing is the Federal trade commission act and the wheeler-lea act prohibits deceptive pricing, which is using false or misleading statements or practices to persuade a product is a better deal than it really is (ex. saying that the competition price is higher to make your price seem like a better deal than it is) **another thing is that price discrimination is illigal, which is employing price differentials that injure competition by giving one or more buyers a competitive advantage. The Robison-Patman act made it so that you need to charge the same price for the same product. It is not illegal to use price differentials if they result from differencees in the costs of selling or transportation to various customers, arise becaues the firm has had to cut its price to a particular buyer to meet comp prices, or do not hinder comp. (ex. airplanes can charge differently if demand is different) **another thing that is illegal is predatory pricing. this is when a company sets a products price so low that rival firms can't compete, so they withdraw from the marketplace (this has the intent to drive out competitors)
Identify the six stages in the process of establishing prices.
1. Developing Pricing Objectives: This is trying to figure out where the company wants to go and what kind of goals that the company wants to achieve through pricing (has nothing to do with the customer at this point) 2. Target Market Evaluation: Considering how your customers percieve the products prices and what they are willing to pay (Value proposition: is it worth it?) 3. Evaluation of Competitiors' prices: What is the competition charging? How much does something cost and what are the benefits vs sacrafices of something in comparision of something that I may consider substitutes? 4. Setting the basis of the price: what kind of things need to be considered when setting a price, what are you going to base/revolve your price around? 3 types of basis: 1. competition 2. price 3. cost may use a mix of all 3. This all depends on the product, the market structure of the industry, the brand's market share, and consumer characteristics 5. Selecting a pricing strategy: this is a course of action designed to achieve pricing objectives. Examples include captive pricing, bundling, price lining, new product pricing (penetration and skim, etc.) 6. determination of a specific price: use your price strategy and refine it to match circumstances (slow economy) and industry pricing practices
Factors that can influence demand (demand fluctuations)
1. changes in buyers needs: as circumstances change, a person's want and willingness to have a product changes. For example, if someone that owns a sportscar has a newborn baby, they might get rid of that car because a car seat doesn't fit in it so they don't demand a sportscar anymore, but instead demands a mini van 2. variations in the effectiveness of other marketing mix variables: all mm variables are interconnected and can impact each other. For example, if you do a good job in your promo explaining your value proposition or if you make your distribution more convinient by having the product in a store close to them/let them buy it online, this increases a customers willingness to pay. 3. presense of subsititutes: when competition enters the market, people have more choices, which can lower the demand for 1 particular product in the product class 4. dynamic enviornment: laws, society, and other outside factors change regularly that influence demand
What are the 3 basis of pricing?
1. cost: what is the cost structure of the product? how much does it cost to build, fixed and variable costs, etc. want to set the price high enough to at least cover costs or else you won't make any profit (may be cost plus or markup) 2. demand: if you know the demand curve, you can charge based on how much you expect demand to be and how much you are willing to pay. (ex. you may raise costs to lower demand to keep up with production) 3. competition: what are competitors charging and what will the market bear? If you charge way more than the competition and customers don't see aditional value, they likely won't buy your product
What are the 11 consumer pricing strategies?
1. differential pricing: when you charge a different price for different customers/ situations. For example, matinee pricing. Make sure the price is simple and understandable, or people will get confused. If benefits aren't percieved to be different for differnet products, the only basis of differentiation is price 2. negotiated pricing: usually used for business to business interactions when they go back and forth to come up with a price because it is on a case to case basis 3. secondary market pricing: when you have different prices for different groups of people. This is legal because the groups are differnet in some way. For example, you may offer discounts to military, senior discounts, etc. 4. random discounting: when you randomly mark things down with no notice (ex. random sale on a newer product at the grocery store to encourage trial) 5. new product pricing: may use cash discounts for penetration pricing for convenience and shopping goods or skim pricing to get cash right away and maxamize on the newness of the product for specialty goods (like perfumes) 6. price lining: when you price based on product linesin a brand. Pricing will be similar to other products in a product line. For example, lays sour cream and onion chips will likely have a similar price to bbq chips 7. captive prices: when you ahave a low base price, an then chare a higher price for additional features. For example, a ice cream shop may advertise a low price for ice cream, but then you need to pay extra for toppings, sauces, etc. 8. baiting/bait and switch: when you have a very limited quantity at a low price to draw people in, but you know that very few people will get that cheap product, but they might buy something else (ex. black friday, may be unethical. If the sale seems too good to be true, it probably is) 9. psychological pricing: everyday low price: when you offer a slight discount everyday to help save on ad costs and promos instead of having periodic sales 10. bundling: when you bundle 2 products together and put it on sale. It helps save customers time, money, and effort. This may be used for complementary products or for the same products. 11. odd-even pricing: the phenomenon that if things are priced at an odd number (39.99) people will buy iy more often/ the co will sell more than if it was priced at an even number (30.20). Don't know why, but humans find odd numbers more appealing.
what are the factors that influence pricing
1. organizational and marketing objectives: what does the firm want to accomplish? prices can influence success, as if you set a high price you might not be able to reach a goal of increasign marketshare 2. marketing mix variables: all mm variables are interconnected, and pricing decisions can impact peoples evaluation and activites associated with the prodcut, distribution, and promotion. For example, if you have convenient distribution and persuasive promotion, you might be able to charge alittle more. 3. channel member expectations: when making price decisions, you need to consider what intermediaries expect. THey expect a profit and to get paid, and support from things like sales trainings and promos and discounts for lagge orders and prompt payment. These costs will have to get passed down 4. customer interpretation and response: for the target market I want to serve, what are they expecting/willing to pay? TM for a tiffany ring will be willing to pay more than a walmart ring. What does price communicate to potential customers? 5. competition: companies need to be aware of competitons prices so that they can adjust accordingly. For example, if there is a lot of competition and there is not much differences between products in that category, companies will likely want to price their products at or slightly below their competition 6. legal and regulatory issues: for some industires, laws can impact price. For example, the government sets a minimum price that the farmers can earn by selling milk, which influences the price the retailers sell it for. 7. price discounting: producers usually provide intermediaties with discounts or reductions from price lists to encourage them to continue doing business with them
things that impact the demand curve
1. price 2. quantity 3. quality 4. brand (people will be more willing to pay for mariott than some random hotel because they know what to expect from mariott)
factors in a target market evaluation
1. product classification: is it a convenience, shopping or specialty good? what people percieve as a fair price depends on this. (2 dollars would seem expensive for a candy bar, but a couple million dollars for a really nice house in hawaii would seem about right). What seems right is all based on perspectives! 2. The TM itself and how much discretionary income they have. For example, college kids don't have a lot of discretionary income so if you are targeting towards them, you won't want to have a fancy high priced product 3. situational influences: how the situation you are in determines how someone percieves a value proposition and if it is worth it. For example, people may be more willing to buy popcorn at a professional sports game then they would from the grocery store because it can help enhance the experience
Types of Price Discounts
1. trade: discounts given to intermediaries to create value and to compensate them for performing a specific function (retailers mark things up to get paid) 2. quantity discounts: discounts people get for buying in bulk (like at sams) 3. cash discounts: giving discounts to encourage people for paying in cash/prompt payment 2/10 net 30) 4. seasonal discounts: giving discounts for buying things outside of season (ex. grills in january) to reduce sales fluctuations 5. allowances: lowering in price to help achieve a desired goal, ex. giving people a discount on their groceries if they bring in reusable bags.
Chambers Company has just gathered estimates for conducting a breakeven analysis for a new product. Variable costs are $7 a unit. The additional plant will cost $48,000. The new product will be charged $18,000 a year for its share of general overhead. Advertising expenditures will be $80,000, and $55,000 will be spent on distribution. If the product sells for $12, what is the breakeven point in units? What is the breakeven point in dollar sales volume?
40200
How does a return on investment pricing objective differ from an objective of increasing market share?
A return on investment pricing objective is based on trying to obtain a specified rate of return on the companies investment. This is when companies set a price to achieve a certain return on investment (how much over and above we put into the business did we make as a percentage? if we put in 10000 and get out 12000, your ROI is 20% (profit is 2000) used in larger companies. In publically traded companies, ROI is a major metric that determines how well a company is doing, because it is calculated the same way as competitors. A market share objective is to increase a products sales in relation to total industry sales (sell more then their competitor and be the industry leader. High market share usually translates to high profits. Market share is not at all dependent on industry growth. (even if the industry sales are decreasing, but your hold on the competiton is increasing, your market share is increasing. This is when companies measure how well a firm is doing based on products sold and they use penetration pricing to try to have high sales compared to competiton sales and create volume. This is most applicable in low cost structure industries (pepsi vs coke or winston cigarettes vs marbiro) because they are products that have a small per product profit margin and are not easily differentiatable, so you have to create volume to make profit.
Why should a marketer be aware of competitors' prices?
Because competition impacts the alternatives and substitutes that pwoeple have, and price can impact what alternative they select. If in a competitors minds the benefits of your product and a competitors product is similar, they will look to the sacrafices to make a decision, and that is usually price. Some target markets also care the most about price than anything else, such as the target market for spirit airlines. However, it is all about the value proposition, If the value proposition is good and the benefits out weigh the sacrafices, people will still buy the product even if it is more expensive, as long as the customer understands the value proposition and deems that it is worth the price. The marketer must be aware of competitors prices so they can price their companies product accordingly. It may be above, below, or at theirs. Some companies rely on price matching as a competitive advantage and to help them survive. If a person buys their competitors product, that is a sale you are missing out on, which can reduce your revenue. In the case of nonprice competition, you still need to consider comp prices, and price it slightly above or at competition prices. People have limited resources to spend, so they need to make decisions about how they are going to use them, and price is a determining factor in that.
Why do most demand curves demonstrate an inverse relationship between price and quantity?
Because it shows that the quantity that buyers demand goes up as price goes down and quantity demanded goes down if price goes up. This makes sense, because the less something costs, in general the more people demand it and will want to/be able to buy it because there isn't as much sacrafice. This sort of demand curve remains true as long as the marketing enviornment and the buyers' needs, ability, willingness, and authority to buy remain stable. This demand curve also can be shifted based on things such as product quality, promotion, and distribution. (prestige products have a different demand curve)
Why must marketing objectives and pricing objectives be considered when making pricing decisions?
Because price can be a tool to help companies get to where they want to be and reach those objectives. For example, if your goal is to be offer value to your customers, setting a price low can help you achieve that. If you have a goal to increase sales, a good way to do that is having low prices to increase demand. If your pricing objective is to increase marketshare, having low price is a good way to do that. These objectives should be the basis of all decisions that they make, because structure should follow strategy and decisions should all be made to help a company help achieve their goals and objectives.
Compare and contrast a trade discount and a quantity discount.
Both of these types of discounts are given to attract people to buy or do a service for the company, with the intent of attracting and keeping intermediaries and customers happy and driving up demand, so that group will do what they want them to (buy product or perform services from them). A trade discount is a rediction off the list price a producer gives to an intermediary for performing certain functions. (ex. a college book store pays less for a textbook from the publisher than a customer would if they got the book directly from the publisher. These discounts act as compensation for intermediaries for performing different functions, such as selling, transporting, storing, final processing, and providing credit services. It is important for a manufacturer to have a trade discount large enough to offset the intermediaries costs plus a reasonalble discount to entice the reseller to carry the product. This type of discount is meant to attract and keep effective resellers. A quantity discount is a deduction from the list price for purchasing in large quantities, and passes on the cost savings from economies of sales. can be cumulative (after buying 10 cups of coffee you get one for free) or noncumulative (one time reduction of price based on the number of units purchased, the dollar value of an order, or the product mix purchased, ex. if you buy in bulk at sams is cheaper) this might also include big department stores being able to offer lower prices than specialty stores because they buy more product at a time from producters. This is to encourage customers to buy large quanties and in the case of cumulative discounts, to encourage customer loyalty.
Describe bundle pricing, and give three examples using different industries.
Bundle pricing is the packaging together of 2 or more products, usually of complementary nature, to be sold at a single price. This price is usually priced less then the sum of the prices of the individual products. Having the products bundled together and buying them at the same time can also provide value for a custmoer bercasue it is more convenient and saves shopping time. examples: 1. bundling shampoo and conditioner together with plastic wrap and selling tthem together 2. how fast food chains offer a lower price for meals (pop, fries, and a drink) then they would if you bought all these things seperately 3. when you buy a phone, you usually get accessories that come with it like a charger, headphones, a data plan, etc. 4. when you buy a wii, it comes with wii sports and some controllers 5. how you can get a meal kit that includes hard and soft shell taco shells at a grocery store 6. when comcast Xfinity offers a special rate when they bundle tv, internet, and phone service together 7. all inclusive vacation packages with things like hotels, meals, activities, airfares, car rentals, etc. all together in 1 package. bundling prices can help increase customer satisfaction and help cos sell slow-moving inventory by bundling them with products with a high turnover
What types of expectations may channel members have about producers' prices? How might these expectations affect pricing decisions?
Channel members will expect to recieve a profit from the function that they perform. They will likely consider what they could make if they handled a competing product or how much time and resources are required to carry the product when setting their expectations. They also will likely expect producers to give them discounts for paying with cash or paying promptly. Resellers might also expect the producers to provide support activities, such as coop advertising, sales training, service training, sales promos, and a program for returning unsold merchandise. All of these things have costs associated with them that need to be considered when determining prices, becasuse they might need to be passed on to customers.
What are the benefits of cost-based pricing?
Cost based pricing is when a a flat dollar amount or percentage is added to the cost of the product, so marketers can calculate and apply a desired level of profit to the cost of the product and apply it uniformly. This is beneficial because it is straightforward, easy to implement, and convenient, and it gives you a consistent rate of return every time and it always covers costs. YOu don't need to have a ton of knowledge about what a customer is willing to pay if you don't have access to that information. 2 types of cost-based pricing: 1. cost plus: when the sellers costs are determined 1st, and then a specified dollar amount or % of the cost is added to the sellers costs to determine a price. This is good for when production costs are difficult to predict. (example: costs $1, you add a 20 cent or 20% increase, and then you sell the product for 1.20) 2. Markup pricing: when a products price is derived by adding a predetermined percentage of the cost (called markup) to the product. This is often used by retailers. Ex. you sell greeting cards with a 100% markup, so you double its price. 2 types: markup as a percent of cost: aka markup. markup/cost markup as a percent of retail price: price: aka gross profit markup/selling price markups are based on expectations about operating costs, risks, and stockturnover so tetailers can make a profit IT can also lower price competition if competitors use standard markups and have similar costs.
What is differential pricing? In what ways can it be achieved?
Differential pricing means charging different prices to different buyers for the same quality and quantity of product. For example, offering discounted theater tickets for matinees. Some people may not see a difference in the benefits, so the only basis of differentiation that they see is the price. This can help them appeal to multiple different target markets with different price sensitivities. However, you need to be careful not to make your pricing too confusing for customers. Ways it can be achieved: 1. negotiated pricing: when the final price is established through bargaining between the buyer and the seller. This is often used business to business, as it can be complicated and on a case to case basis. It can help build relationships with customers 2. Secondary-market pricing: This means setting one price for the primary target market and a different price for another market. This might include things like offering a early bird special at a restaurant, giving discounts to military or seniors, etc. 3. periodic discounting: the temporary reduction of prices on a patterned or systematic basis. Ex. annual holiday sales (black friday, etc.) can lead to customers knowing when the sale will come so they hold off to buy the product until then. 4. random discounting: marking prices down temporarily at a random time without notice. This way, people can't guess when the sale will occur. May be used to attract new customers, draw attention to a new product, etc.
What are the advantages and disadvantages of using everyday low pricing?
Everyday low pricing is when companies price products low on a consistent basis, not a super deep discount. (instead of setting them high and then frequently discounting them) Ex. target advertises getting "everyday low prices on everyday essencials Pros: 1. the low price can be low enough to make customers feel confident that they are getting a good deal. 2. it reduces promo costs (don't need to pay for weekly ads, changing signage, etc.) 3. it reduces losses from frequent markdowns 4. it results in more stable sales cons: mixed customer response! -some people may think that EDLP is a marketing gimmick and the deals are really not that good -some people enjoy searching for and finding the best sales and find satisfaction in using coupons, etc. Seeing the markdown and using coupons can reinforce the feeling that they are getting a good deal. For example, some people stopped shopping at JC penneys when they stopped coupons and promos, and JCP saw a sharp decline in sales. People didn't like that JCP changed the way that they were used to shopping. Also, a lot of people wait to buy a product until it goes on sale, no matter how much the sale is for (like pop). If it never goes on sale, that customer might just never buy it.
Compare and contrast price and nonprice competition. Describe the conditions under which each form works best.
Price competition: Price competition is when companies emphasize price as an issue in their marketing. This might include offering no frills products or services in order to draw in people that just want the basics and don't want to spend a lot of money to get it. For example, spirit airlines emphasizes price competition, as they offer very minimal benefits and perks for a flight, but emphasizes that it is a more cost effective way to get from point A to point B. A co should compete on a price basis if: 1. they are the lost cost seller of the product, because if the prices are low and the costs are high, they won;t make much profit (ex. walmart tries to reduce costs as much as possible by doing things like not paying employees high wages to keep their costs down so they can keep prices down 2. they are marketing standardized products (because customers don't have anything else to differenciate products by) 3. must be willing and able to change price frequently, because rivals can respond to price changes with price changes of their own. Competing on price and lowering prices can help increase market share (good for convenience products) Nonprice competition: Non price competition is when companies doesn't focus on price, but instead focuses on other things such as product features, service, product quality, promotion, packaging, brand recognition, etc. to distinguish it from their competition. For example, apple products are priced high, but people still buy it over their competition because it is a status symbol, apple is a recognizable and popolar brand, and they are known for being high quality and trendy. Nonprice competition can help a company build loyalty for its brand, as customers will buy the product no matter the price. For a brand to compete in nonprice competition: 1. they must beable to distinguish their brand in another way than just price (good customer service, high quality, unique product features, distinctive features, effective promotion, etc.) 2. custmers must be able to percieve that the distinguishable featuures and deem them important 3. the distinguishing feature should be difficult for competitors to immitate 4. the firm must extensively promote the brands distinguishing characteristics to establish its superiority and set it apart from competitors in the minds of consumers.
List the characteristics of products that have inelastic demand, and give several examples of such products.
Price elasticity of demand is a measure of the sensitivity of demand to changes in price. How does the change in price impact the change in quantity sold? It is formally the percent change in quantity demanded relative to the percent change in price the percent of change in price results in a smaller change in quantity) Inelastic price is when the change in price results in a a relatively small change in quantity demanded. There is a low percent change in quanity demanded if the price is changed with inelastic demand, the reveune goes in the same direction as price. (if you raise pirces, demand will remain the same, so your revenue will raise as well. Products with inelastic demand tends to be considered essential items, such as milk. Parents will still buy milk even if their prices go up, because they know it is important for their kids to drink milk. The same thing goes for products like gas, electricity, and utilities. The more essential something is, the more inelastic the demand for that product will be. Products without readily available substitutes and for which customers have strong needs (ex. an ambulence ride) tend to have inelastic demand.
Why are pricing decisions important to an organization?
Price is the value paid for a product in a marketing exchange, and that doesn't necessarily mean the monetary price, it could just be things that you give up such as in a barter (I will mow your lawn if you cook me dinner) Price is important because it can determine if a customer buys a product, as they judge the usefulness and satisfaction of a product against what they give up, and then determine if it is worth it, as their resources are limited and they can only exchange them for so much. They need to decide how to allocate resources based on the things they most desire and decided if what they gain is worth the buying power that they have to sacrafice. Price is how they assess the worth of things of value like ideas, services, rights, and goods. Price is also important because it relates directly to the generation of total revenue 1. it is a key component of the profit equation (profit=(price x quantity sold)-total costs 2. it can also help determine the quantities sold (ex. if the price is lower, for most products they will sell more, which can help build revenue) 3. it also relates to the cost of the product, as if you sell 1 product for a more expensive price and another for a cheaper price and it costs the same, you will make more revenue on the one with the more expensive price 4. Price can also be used symbolically by companies to help tell the customer something. If it is priced high, that can emphasize the quality of a product and the prestige associated with it. If it is priced low, the company can emphasizw a bargain to attract customers that are trying to save money.
Are price leaders a realistic approach to pricing? Explain your answer.
Price leaders are products that are priced near or even below cost. This is often done in grocery stores and restraunts to attract customers by offering them low prices on a few items. This is realistic because it comes with the expectation that they will purchase other items as well. Mgmt also believes that the sales of regularly priced products will more than offset the reduced revenues from the price leaders. Ex. restraunts offering kids eat free. The restaurant will lose the revenues from the kids meal, however those meals are not as big and the kids will likely come with their family, who will likely buy food as well that is worth more, (parents meals cost more than kids meals) so the promotion drives in more customers to increase revenue, which offsets the costs of the kids meal
For what types of products would price skimming be most appropriate? For what types of products would penetration pricing be more effective?
Price skimming is when companies charge the highest possible price that buyers who most desire will pay. This "skims the cream" off the market. This is setting prices high to get more revenue, which can help recover of high research and development costs more quickly. This should be used for innovative products that people are willing to pay a lot for, wither because of its novalty or because of the prestige and status associated with it. This should be used for specialty goods. Pros of skimming are it can generate cash flow, and offsets the problems caused by pricing products too low to cover costs. It can also be used for products that have a high demand, as a high price can lower demand, which can allow the co to keep up with production. Cons:it may make products appear more lucrative and enticing for competitors. Also, they might misjudge demand and get insufficient sales. this is good for specialty goods to take advantage of the newness, prestige, and novelty of a product and to recoup cash quickly. once the newness ware off, they might switcy to using penetration pricing (ex. perfumes) Penetration pricing is setting a low price for a new product to encourage product trial, build market share, and discourage competition. This is often used for convenience and some shopping goods, because there is a lower profit margin so you have to sell a lot to make a good profit. A disadvantage is it gives the company a less flexible pricing position, as it is harder to raise prices significantly than it is to lower them this is best for connvenience and shopping goods and can use cash discounts to increase marketshare, and you need a high marketshare because profit margins are low
What is the profit equation?
Profit = Total Revenue - Total Cost profit= (qty sold x price) - (fixed costs+variable costs)
What are the major methods used for transfer pricing?
Transfer pricing is when one unit in a co sells a product to another unit in the co (the prices charged in sales between a co's units) major methods: 1. actual full cost: calculated by divinding all fixed and variable expenses for a period into the number of units produced 2. standard full cost: calculated based on what it would cost to produce the goods at full plant capacity 3. cost plus investment: calcualted as full cost plus the cost of a portion of the selling unit's assets used for internal needs 4. market-based cost: calculated at the market price less a small discount to reflect the lack of sales effort and other expenses The choise of transfer pricing methods depends of the cos mgmt strategy and the nature of the units interaction. A co must also ensure that transfer pricing is fair to all units involved in the transactions
Why do customers associate price with quality? When should prestige pricing be used?
Typically, the higher the price, people think that the quality is better, because they assume that part of the reason that it costs more because it costed the company more to make. Regardless of the price, sacrafices, and competion, if the value proposition is good and the benefits outweigh the sacrafices, people will still choose it. (they think they are getting more than they are giving it up, even if it is more expensive. Price is associated with quality because it helps them see the value of the product. It is a common idea that customers are willing to pay more for a higher quality product, and if the product is expensive, it can suggest to the customer that there is value and quality in the product, especially when they don't know a ton about it. Prestige pricing should be used when the benefits outweigh the sacrafices and when customers can see the value. Prestige pricing should be used for specialty goods, and when a buyer cares more about things such as quality, luxary, and status then price. This is often used with products such as perfumes, jewelery, cars, and some food items. This is used for products that want to portray a high quality and luxary image, and can also show that a customer can afford the best. This should be used when the brand competes on nonprice competition, and has a distinguishing feature other than price, such as quality, to stand out from competition. Part of the appeal of these products is that it makes a customer feel elite, so having a low cost so more people can own it can actually lower the demand for it.
demand curve
a graph of the quantities expected to be sold at various prices of other factors remain constant. (downward sloping line typically) if people see quality of the product, they are willing to buy more of it for the same price
Whay is the equation for the breakeven point and what does breakeven analysis do?
fixed costs/ (prices-variable costs) break even analysis analyzes how the fixed costs impact the company and helps them figure out how many products you need to cover fixed costs. (you incur fixed costs even if you don't sell any product!) It helps you figure out how much to price things for. Is the break even point for the price you are considering feasible?
Explain why optimal profits should occur when marginal cost equals marginal revenue.
marginal revenue is the change in total revenue that occurs when a firm sells an aditional unit of a product marginal costs is the extra cost incurred by producing one more unit of a product This is because total costs continue to fall after variable costs begin to rise, because fixed costs are taken into account with total costs but not with fixed costs. Optimal profits occurs when MC=MR because up until this point, the additional revenue generated from a unit sold exceeds the additional cust of producing it (profits arre still increasing), and after this point, the additional cost of producting another unit exceeds the the additional revenue generated, so profits start to decrease
In what ways do other marketing-mix variables affect pricing decisions?
marketing mix variables are all interrelated! Pricing decisions can influence evaluations and activities associated with the product, distribution, and promotion variables. for product, price impacts peoples perceptions on product quality, as people associate a higher quality with a higher price and a lower quality with a lower price. This all impacts a customers view of a brand A higher price can lead to less demand, which can lead to higher production costs per unit, and lower production costs can lead to a lower price and more sales for distribution, more premium priced products often use selective and exclusive distribution (to emphasize luxary) lower priced produts will likely use more intensive distribution also, distribution costs impacts price, because these costs may be passed on to customers. For example, if fuel prices increase, airlines will pass these prices on to the customers and raise the prices. They also need to consider intermediaries like retailers, as they will have to set prices high enough to compensate them. Price also impacts promotion. If prices are cheap, the prices will often be emphasized in ads. If prices are more expensive, the prices will often focus on non price competition and emphasize other things than price in their ads, such as quality or luxary. More expensive things also will focus more on personal selling. Price structure also impacts customer relationships, because if something has a complicated and confusing price structure, that can lead to misunderstandings and customer dissatisfaction.
difference between objective and subjective pricing
objective: physical price (1.29) subjective: what is a fair price for a product, what is fair to one person is to expensive to . another, all based on target market. price may be physical monetary price, but it could also be anything someone is willing to give up (barter)
A retailer purchases a can of soup for 24 cents and sells it for 36 cents. Calculate the markup as a percentage of cost and as a percentage of selling price.
percent of cost: 50% percent of selling price: 33.3%
what is price elasticity of demand and what are the 2 types
price elasticity is a measure of the sensitivity of demand has to changes of price (how a change of price relates to change in quantity sold) elastic demand is when a small change in price results in a big change in quantity demanded (not a very steep line) ex. soft drinks-people typically just has brand preference to pop, so they will only buy it on sale, so pop increases in demand greatly when price goes down just alittle bit inelastic demand is when a small change in price results in a small change in demand. For example, milk. Parents will buy milk regardless of the price because they know how important it is for their kids. Also gas and utilities. The more essencial and fundamental something is, the more elastic it will be.
micro economic theory
the relationship between price and the number of products sold (typically as price goes down, more people will buy it)
what is the demand curve for prestige products
this is the idea that for prestige products part of the appeal of it is that it is high quality and that having the product makes people feel special and important because they are able to afford it, so to a certain degree, increasing price increases demand as well. But, there is a point in the middle where people decide it is not worth it anymore, so price starts to drop. If a person thinks that the benefits outweigh the sacrafices, they will buy the product until they feel as though the sacrafices outweigh the benefits. This all depends on the target market!!
What is the reason for using the term F.O.B.?
FOB means free on board, and it indicates who has to pay shipping costs. FOB factory indicates the price of the merchandise at the factory, before it is loaded onto the carrier, so it excludes transportation costs. This means that the buyer must pay for shipping. FOB destination means that the producer absorbs the costs of shipping the merchandise to the customer (used to attract distant customers). It is used because it is an easy way to price products, and it explains the shipping costs between the buyers and the sellers and informs customers about the rates so they can figure out the most economical method of shipping
Under what conditions is cost-plus pricing most appropriate?
This is when the sellers costs are determined 1st, and then a specified dollar amount or % of the cost is added to the sellers costs to determine a price. The price is all based around how much how the product cost for a seller. This is good for when production costs are difficult to predict, when the producer uses raw materials, that fluctuate in cost, when there is a period of rapid inflation. When cost-plus pricing is common in industries and sellers have similar costs, price competition won't be as intense.
7 different pricing objectives
where does the firm want to go? (all internal) 1. survival: when a company needs enough cash just to stay afloat and cover costs, so the bring prices as low as you can to bring in cash to cover merchandise then use that revenue right away 2. profit: when there is a goat to bring in a certain amount of profit. How much do you have to charge to make a certain profit? used a lot for small business, pricing is all based on how much you want to make 3. return on investment: this is how much above and beyond what we want to make back that we put into the business as a percentage. This is used a lot for big publically traded companies, because it is calculated the same regardless of competition 4. marketshare: tbis is when you base success off of how many units are sold. This is best for low cost structure industries where you don't make a ton of profit on individual products and it is hard to differentiate products, so you try to penetrate market to increase market share 5. cash flow: this is a goal to have revenue coming into the business so you are able to pay bills and maybe further invest it, this is good for startups 6. status quo: this is when you just want to keep up what you are doing because it works, good for low volitity and stable industries when no competition is leavign or entering the market 7. product quality/function: this is the idea that if you change the quality or functionality of something, people will see the value and be willing to pay differently (higher quality, higher price)