Marketing: Chapter 14

Formula for Price elasticity of demand

(% change in quantity demanded)/(%change in price)

Break-even point formula

(Fixed costs + Target profit)/(Contributions per unit)

Target Return Price formula

(Variable costs + (Fixed costs/Expected unit sales)) * (1 x Target return % (expressed as a decimal)

substitution effect

Brand loyalty has the most significant effect

a useful technique that enables managers to examine the relationships among cost, price, revenue and profit over different levels of production and sales

Break-even analysis

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

Break-even point

manufacturers, wholesalers and retailers, have different perspectives when it comes to pricing strategies

Channel members

Goals should spill down to the pricing strategy, such that the pricing of a company's products and services should support and allow the firm to reach its overall goals.

Company objectives

fourth C, has a profound impact on pricing strategies

Competition

means the firms set prices that are similar to those of their major competitors.

Competitive parity

these firms strategize according to the premise that they should measure themselves primarily against their competition.

Competitor orientation

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

Complementary products

must make effective pricing decisions and strong structures so they can determine the degree to which their products or services will be profitable at different prices

Costs

is the percentage change in the quantity of Product A demanded compared with the percentage change in price in Product B. If Product A's price increases, Product B's price could either increase or decrease, depending on the situation and whether the products are complementary or substitutes.

Cross-price elasticity

a firm uses this when it sets its pricing strategy based on how it can add value to its products or services

Customer orientation

this is the second of the five c's. This group wants value and as you likely recall, price is half of the value equation

Customers

As price increase, quantity demanded for a product or service will ____.

Decrease

shows how many units of a product or service consumers will demand during a specific period of time at different prices. Can be either straight or curved. Assumes that everything else remains unchanged. Marketers create this curve assuming that the firm will not increase its expenditure on advertising and that the economy will not change in any significant way. Enables a firm to examine prices in terms of demand and the firm's objectives

Demand curve

the market for a product or service is price sensitive. When the price elasticity is less than -1

Elastic

are those costs that remain essentially at the same level, regardless of any changes in the volume of production. Typically these costs include items such as rent, utilities, insurance, administrative salaries, and the depreciation of the physical plant and equipment

Fixed Costs

refers to the change in the quantity of a product demanded by consumers due to changes in their incomes. As they increase their spending behavior changes

Income effect

refers to the process of charging different prices for goods or services based on the type of customer; time of the day, week, or even season; and level of demand

Individualized pricing

the market for a product is generally viewed as price insensitive. When its price elasticity is greater than -1. If a firm must raise prices, it is helpful to do so with these type of products or service

Inelastic

another term for target return percentage

Markup

strategy 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

Maximizing profits

occurs when there are many firms competing for customers in a given market but their products are differentiated. When so many firms compete, product differentiation rather than strict price competition tends to appeal to consumers

Monopolistic competition

one firm provides the product or service in a particular industry, which results in less price competition. Are regulated and can be dismantled by the government through antitrust laws to protect customers from paying overly high prices for goods and services.

Monopoly

can indicate how much money the firm is making or losing at a single period of time, it cannot tell managers how many units a firm must produce and sell before it stops losing money and at least breaks even, which is what the break-even point does.

Number of Units Sold

only a few firms dominate. Typically change their prices in reaction to competition to avoid upsetting an otherwise stable competitive environment. (ie oil industry)

Oligopolistic competition

which occurs when a firm sets a very low price for one or more of its products with the intent of driving its competition out of business. Is illegal in the U.S. under both the Sherman Antitrust Act and the Federal Trade Commision Act

Predatory pricing

means 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.

Premium pricing

consumers purchase for their staFtus rather than for their functionality. The higher the price, the greater the status associated with it and the greater the exclusivity, because fewer people can afford to purchase it

Prestige products or services

the overall sacrifice a consumer is willing to make to acquire a specific product or service. The sacrifice includes the money that must be paid to the seller to acquire the item, but also involves nonmonetary, such as the value of the time necessary to acquire the product or service, or monetary

Price

measures how changes in a price affect the quantity of the product demanded. It is the ratio of the percentage change in quantity demanded to the percentage change in price

Price elasticity of demand

occurs when two or more firms compete primarily by lowering their prices.

Price war

Total revenue formula

Price x Quantity

implement this specifically by focusing on target profit pricing, maximizing profits, or target return pricing

Profit orientation

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

Pure competition

helps its members achieve economies of scale by buying as a group (Ie Ace Hardware)

Retailers' cooperative

firms using this to set prices believe that increasing sales will help the firm more than will increasing profits.

Sales orientation

A monetary sacrifice in the overall price of a product or service

Shipping

changes prices only to meet those of the competition.

Status quo pricing

changes in their demand are negatively related.

Substitute products

consumers' ability to replace other products with focal brand

Substitution effect

refers to the consumers' ability to substitute other products for the focal brand. The greater the availability of substitute products, the higher the price elasticity of demand for any given product will be

Substitution effect

usually implement this when they have a particular profit goal as their overriding concern. In this case firms use price to stimulate a certain level of sales at a certain profit per unit

Target profit pricing

when firms are less concerned with the absolute level of profits and more interested in the rate at which their profits are generated relative to their investments. These firms employ pricing strategies designed to produce a specific return on their investment, usually expressed as a percentage of sales.

Target return pricing

fixed costs, total costs, and total revenue

The three curves of the break-even analysis

An example of a nonmonetary sacrifice made in acquiring a product or service

Time

is simply the sum of the variable and fixed costs

Total cost

are those costs, primarily labor and materials that vary with production volume

Variable costs

Five Cs of Pricing

company objectives, customers, costs, competition, and channel members

A firm may set low prices to (3)

discourage new firms from entering the market, encourage current firms to leave the market, and/or take market share away from competitors- all to gain overall market share

Total costs formula

fixed costs + total variable costs

Contribution per unit formula

is the price less that variable cost per unit

Four levels of Competition

monopoly, oligopolistic competition, monopolistic competition, and pure competition

Getting consumers to believe that a particular brand is (3) ___________ in some way makes other brands seem less substitutable

unique, different or extraordinary