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.