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what is price
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that which is given up in an exchange to acquire a good/ service
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two roles price plays in evaluation of product alternatives
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measure of sacrifice and as an information cue
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the sacrifice effect of price
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that which is given up- can be money, time lost while waiting to acquire g/s
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the information effect of price
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we infer quality information from price- higher quality equals higher price
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value is based upon perceived satisfaction, so reasonable price really means
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perceived reasonable value
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revenue
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price charged to customers multiplied by number of units sold
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pricing objectives need to be
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specific attainable and measurable, they require periodic monitoring
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three categories of pricing objectives
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profit oriented, sales oriented, status quo
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profit oriented pricing objective: profit maximization
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setting prices so total revenue is as large as possible, does not signify unreasonably high prices
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profit oriented pricing objective: profit maximization- how
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exapand revenue by increasing customer satisfaction or reduce costs by operating more efficiently, or both
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profit oriented pricing objective: profit maximization- the best way to do it
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company can slightly cut costs while increasing customer loyalty through customer service initiatives, loyalty programs, CRM and allocating fewer resources to programs that are designed to improve efficiency and cut costs
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profit oriented pricing objective: satisfactory profits
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strive for profits that are satisfactory to stockholders and management- level of profits is consistent with level or risk the organization faces
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profit oriented pricing objective: return on investment (ROI)
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most common- measures managements overall effectiveness in generating profits with available assets. it puts firms profits into perspective by showing profits relative to investments
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profit oriented pricing objective: ROI equation
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net profits/ total assets
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profit oriented pricing objective: what must you compare your ROI with
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the industry average, evaluated in terms of competitive environment, risk in industry and economic conditions
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profit oriented pricing objective: what does manager do with ROI
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it can use it as a standard to determine whether a particular price and marketing mix are feasible
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sales oriented pricing objectives: market share
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companys product sales as a percentage of total sales in industry. can be reported in terms of revenue or in units
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profits do not automatically follow from having large market share
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true
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sales oriented pricing objectives: sales maximization
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companies try to maximize sales. they ignore profits, competition and marketing environment. objective is to determine which price-quantity relationship generates most cash revenue
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sales oriented pricing objectives: when to use sales maximization
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used on temporary basis to sell off excess inventory- never for long run
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status quo pricing objectives, what does the strategy ignore
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seeks to maintain existing prices to meet competitions prices. ignores customers perceived value of firms goods and those offered by competitors. also ignores costs and demand
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after marketing managers establish pricing goals they must..
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set specific prices to reach those goals
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prices companies set for each product depends on two factors
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demand for good and cost to the seller for that good
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when pricing goals are mainly sales oriented demand considerations dominate
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true
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demand
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quantity of product that will be sold in market at various prices for specified period
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demand curve horizontal and vertical axis
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vertical-prices, horizontal-quantity
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supply
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quantity of a product that will be offered to the market by a supplier at various prices for specified period
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output tends to increase at higher prices because manufacturers can...
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sell more and earn greater profits
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price equilibrium
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when demand and supply are equal- price below would be shortage, price above would be too much
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elasticity of demand and equation
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consumers responsiveness or sensitivity in which consumer demand is sensitive to price changes: %change in quantity demanded of good a/ %change in price of good a (if E is > 1, demand is elastic)
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elastic demand, inelastic demand, unitary elasticity
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1. situation in which consumer demand is sensitive to prices changes 2. increase or decrease in price does not significantly affect demand for product. 3. an increase in sales exactly offsets a decrease in price so total rev remains the same
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when demand is elastic, sellers can raise prices and increase total revenue
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false- inelastic
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items that are relatively inexpensive but convenient have what type of demand
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inelastic
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factors that affect elasticity of demand
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availability of substitutes, price relative to purchasing power, product durability, products other uses, rate of inflation
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factors that affect elasticity of demand: availability of substitutes
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when many substitutes for products are available consumer can easily switch between products. demand is elastic
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factors that affect elasticity of demand: price relative to purchasing power
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if price is so low that it is not consequential to purchasers budget then it is inelastic
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factors that affect elasticity of demand: product durability
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consumers have the option to repair durable products rather than replace them- elastic demand
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factors that affect elasticity of demand: products other uses
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if there are multiple uses for a product (steel) the more elastic demand is
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factors that affect elasticity of demand: rate of inflation
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when a countrys inflation rate is high, demand becomes more elastic because consumers are more price sensitive
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raising prices to max revenue: dynamic pricing is most useful when.. (airline example)
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two product characteristics co exist, the product expires at a certain point in time and capacity is fixed well in advance and can only be increased at a high cost. ex- flights expire at a certain date, and there are only a certain amount of flights. the money to increase these flights would be very high
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raising prices to max revenue: yield management systems YMS
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use complex software to profitably fill unused capacity- discounting early sales, limiting early sales and overbooking capacity
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