CH. 14- Pricing

Sales orientation

A company objective based on the belief that increasing sales will help the firm more than will increasing profits o Example: a new health club might focus on unit sales, dollar sales, or market share and therefore be willing to set lower membership fee and accept less profit at first o Premium pricing: A competitor-based pricing method by which the firm deliberately prices a product above the prices set for competing products to capture those customers who always shop for the best or for whom price does not matter

Competitor orientation

A company objective based on the premise that a firm should measure itself primarily against its competition o Competitive parity: A firm's strategy of setting process that are similar to those of major competitors o Status quo pricing: A competitor oriented strategy in which a firm changes prices only to meet those of competition

Customer orientation

A company objective based on the premise that the firm should measure itself primarily according to whether it meets its customers' needs

Profit orientation

A company objective that can be implemented by focusing on target profit pricing, maximizing profits, or target pricing return. o Target profit pricing: pricing strategy implemented by firms when they have a particular profit goal as their overriding concern; uses price to stimulate a certain level of sales at a certain profit per unit. o Maximizing profits: profit strategy that relies primarily on economic theory. If a firm can accurately specify a mathematical model that captures all the factors required to explain and predict sales and profits, it should be able to identify the price at which its profits are maximized. o Target return pricing: pricing strategy implemented by firms less concerned with the absolute level of profits and more interested in the rate at which their profits are generated relative to their investments; designed to produce a specific return on investment, usually expressed as a percentage of sales.

4. Describe how to calculate a product's breakeven point:

Break-even analysis: technique used to examine the relationship among cost, price, revenue, and profit over different levels of production and sales to determine breakeven point · Break- even point: the point at which the number of units sold generates just enough revenue to equal the total costs; at this point, profits are zero · Variable cost: those costs primarily labor and materials that vary with production volume · Fixed cost: remain at same level regardless of changes in volume of production · Total cost: VC + FC · Contribution per unit: equals the price less the variable cost per unit · Break-even point = fixed cost/contributions per unit (look at examples pg. 316)

13. Additional pricing tactics:

Bundling: McDonalds value meals · Unbundling: automobiles, cruises · Trial captive pricing: Verizon fios · Value-added: Whole foods - people pay more b/c more believed value · Rebates: automobile discount · Equal line: cake mixes, college courses, clothing lines

2. Explain the relationship between price and quantity sold:

Demand curve: shows how many units of a product or service consumers will demand during a specific period at different prices · Classic downward sloping demand curve - as price increases, demand for the product/service decreases - buy more as the price decreases · Horizontal axis = quantity demanded, vertical axis = price possibilities · With prestige products or services (purchased for status rather than functionality) higher price may lead to greater quantity sold but only to a certain point.

3. Explain Price Elasticity

Price elasticity of demand measures how changes in a price affect the quantity of the product demanded; specifically, the ratio of the percentage change in quantity demanded to the percentage change in price. · = % change in quantity demanded/% change in price · Elastic: market for a product or service that is price sensitive - small changes in price will generate fairly large changes in quantity demanded · Inelastic: price insensitive · Income effect: change in quantity of a product demanded by consumers due to change in income · Substitution effect: consumers' ability to substitute other products for the focal brand, thus increasing the price elasticity of demand for the focal brand (greater availability of substitute = higher price elasticity) · Cross- price elasticity: percentage change in demand for product A that occurs in response to a percentage change in the price of product B · Complementary products: products whose demand curves are positively related, such that they rise or fall together; a percentage increase in demand for one results in a percentage increase in demand for another. · Substitute products: products for which changes in demand are negatively related; that is, a percentage increase in the quantity of one results in a percentage decrease in quantity of the other

1. List the 4 pricing orientations:

Profit orientation Sales orientation Competitor orientation Customer orientation

12. Calculate the implications of a price change:

price reduction %/(original % margin - price reduction %) = Needed sales increase o Example: A company who enjoys 30% margin and decides to reduce price by 6%. What % sales increase is needed to offset the reduction? (.06)(.20-.06)=25% needed sales increase price increase%/(original %margin+price increase%)=B/E sales decrease o Example: A company enjoys 40% margin and decides to increase price by 8%. How far can sales drop before the company's profits drop below prior levels? o .08/(.40+.08) = 17% sales decrease

11. Describe three strategic reasons supporting why a company might price a product below cost:

· Cover variable cost · Gain an important order · Increase market share

8. List the pricing practices that have potential to deceive customers:

· Deceptive reference price: reference price inflated or fictional - deceptive · Loss leader pricing: takes the tactic of leader pricing one step further by lowering the price below the store's cost · Bait- and- switch: a deceptive practice of luring customers into the store with very low advertised price on an item (bait), only to aggressively pressure them into purchasing a higher priced model (the switch) by disparaging the low-priced item, comparing it unfavorable with the higher-priced model, or professing an inadequate supply of the lower priced item. · Price discrimination: the practice of selling the same product to different resellers (wholesalers, distributors, or retailers) or to the ultimate consumer at different prices; some but not all forms are illegal · Price fixing: practice of colluding with other firms to control pricing o Horizontal price fixing: occurs when competitors that produce and sell competing products collude, or work together, to control prices, effectively taking price out of the decision process for customers o Vertical price fixing: occurs when parties at different levels of the same marketing channel (e.g. manufacturers and retailers) collude to control the prices passed on to consumers. · Manufacturer's suggested retail price (MSRP): the price that manufacturers suggest retailers use to sell their merchandise

6. Describe the difference between everyday low prices (EDLP) and high-low strategy: (319)

· Every-day low pricing : a strategy companies use to emphasize the continuity of their retail prices at a level somewhere between the regular, non-sale price and the deep-discounted sale prices their competitors may offer - adds value o Odd prices · High/low pricing : A pricing strategy that relies on the promotion of sales, during which prices are temporarily reduced to encourage purchase o Sellers using a high/low pricing strategy often communicative strategy using a reference price, which is the price against which buyers compare the actual selling price of the product and that facilitates the evaluation process.

10. Describe the different types of basic pricing objectives a for-profit or non-profit organization might have, and how each might be used.

· For profit: profit maximization, penetration, volume, competitive, relationship incentives · Not-for-profit: profit maximization, penetration, cost recovery, market suppression, market incentives

Understand why price is set at MC=MR based on economic theory:

· Marginal cost = Marginal revenue · Breakeven point between revenue and cost curves · At this point the company earns profit at the same rate of the contribution per unit

7. Describe the pricing strategy frequently used when introducing a new product: (look at chart in slides)

· Market penetration strategy: A growth strategy they employs the existing marketing mix and focuses the firm's efforts in existing customers o Experience curve effect: Refers to the drop in unit cost as the accumulated volume sold increases; as sales continue to grow, the cost continue to drop, allowing even further reduction in the price Oligopolistic competition : occurs when only a few firms donate a market Ex: soft drinks market and commercial airlines Price war: when two or more firms compete primarily by lowering their prices. Predatory pricing: firm's practice of setting a very low price for one or more of its products with the intent to · Price skimming: A strategy of selling a new product or service at a high price that innovators and early adopters are willing to pay in order to obtain it; after the high-price market segment becomes saturated and sales begin to slow down, the firm generally lowers the price to capture (or skim) the next most price sensitive segment. ((CHART))

5. Indicate the four types of price competitive levels:

·Monopoly: one firm provides the product or service in a particular industry ·Oligopolistic competition: occurs when only a few firms donate a market EX: soft drinks market and commercial airlines -Price War: when two or more firms compete primarily by lowering their prices -Predatory Pricing: firm's practice of setting a very low price for one or more of its products with the intent to drive its competition out of business; illegal ·Monopolistic competition : when there are many firms that sell closely related but not homogeneous products; these products may be viewed as substitutes but not perfect substitutes o Ex: hundreds of companies make wrist watches but highly differentiated (brands) · Pure competition: occurs when different companies sell commodity products that consumers perceive as substitutable; price usually set based on laws of supply and demand o Ex: wheat