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MKT 300 Chapter 14

Pricing Concepts for Establishing Value

QuestionAnswer
The five C's of pricing Competition, Costs, Company Objectives, Customers, Channel Members.
Price The overall sacrifice a consumer is willing to make to acquire a specific product or service.
Company Objectives and Pricing Strategy Implications Profit-Oriented, Sales-Oriented, Competitor Oriented, Customer-Oriented.
Profit-Oriented Institute a companywide policy that all products must provide for at least an 18% profit margin to reach a particular profit goal for the firm.
Sales-Oriented Set prices very low to generate new sales and take sales away from competitors, even if profits suffer.
Competitor-Oriented To discourage more competitors from entering the market, set prices very low.
Customer-Oriented Target a market segment of consumers who highly value a particular product benefit and set prices relatively high (referred to as premium pricing)
Profit Orientation Specifically by focusing on target profit pricing, maximizing profits, or target return pricing.
Target Profit Pricing A pricing strategy implemented by firms when they have a particular profit goal as their overriding concern; uses price to simulate a certain level of sales at a certain profit per unit.
Maximizing Profits A profit strategy that relies primarily on economic theory. If a firm can accurately specify a mathematical model that captures all the factors req to explain & predict sales & profits, it should be able to identify the price at which its profits maxed.
Premium Pricing A competitor-based pricing method by which the firm deliberately prices set for competing products to capture those consumers who always shop for the best or for whom price doesn't matter.
Competitor Orientation A company objective based on the premise that the firm should measure itself primarily against its competition.
Competitive Parity A firm's strategy of setting prices that are similar to those of major competitors.
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.
Demand Curve Shows how many units of a product or service consumers will demand during a specific period at different prices.
Prestige Products or Services Those that customers purchase for status rather than functionality.
Price Elasticity of Demand Measures how change in a price affect the quantity of the product demanded; specifically, the ratio of the percentage change in quality demanded to the percentage change in price.
Elastic Refers to a market for a product or service that is price sensitive; that is, relatively small changes in price will generate fairly large changes in the quantity demanded.
Inelastic Refers to a market for a product or service that is price insensitive; that is, relatively small changes in price will not generate large changes in the quantity demanded.
Income Effect Refers to the change in the quantity of a product demanded by consumers due to a change in their income.
Substitution Effect Refers to consumers' ability to substitute other products for the focal brand, thus increasing the price elasticity of demand for the focal brand.
Cross-Price Elasticity The percentage change in demand for product A that occurs in response to a percentage change in the price of product B; see complimentary products.
Complimentary 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 the other.
Substitute Products Products for which changes in demand are negatively related; that is, a percentage increase in the quantity demanded for product A results in a % decrease in the quantity demanded for product B.
Variable Costs Those costs, primarily labor and materials, that vary with production volume.
Fixed Costs Those costs that remain essentially at the same level, regardless of any changes in the volume of production.
Total Cost The sum of variable and fixed costs.
Break-Even Analysis Technique used to examine the relationships among cost, price, revenue, and profit over different levels of production and sales to determine the break-even 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.
Contribution Per Unit Equals the price less the variable cost per unit. Variable used to determine the break-even point in units.
Monopoly One firm provides the product or service in a particular industry.
Oligopolistic Competition Occurs when only a few firms dominate the market.
Price War Occurs when two or more firms compete primarily by lowering their prices.
Predatory Pricing A 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 under both the Sherman Antitrust Act and FTC Act.
Monopolistic Competition Occurs when there are many firms that sell closely related but not homogeneous products; these products may be viewed as substitutes but are not perfect substitutes.
Pure Competition Occurs when different companies sell commodity products that consumers perceive as substitutable; price usually is set according to the laws of supply and demand.
Gray Market Employs irregular but not necessary illegal methods; generally, it legally circumvents authorized channels of distribution to sell goods at prices lower than those intended by the manufacturer.
Created by: towilliamsjr
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