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price
answer
what we give up (time, money, etc) to acquire something
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Nature and Importance of Price
answer
- price is an indicator of value
- perceived value = perceived benefits - price
- perceived value = perceived benefits - price
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price is a signal
answer
- $ high = low value
- $ low = poor quality
- $ low = poor quality
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trends influencing price
answer
1) Flood of new products
2) Increased availability of bargain-priced private & generic brands.
3) Price cutting as a strategy to maintain or regain market share.
4) Internet used for comparison shopping
2) Increased availability of bargain-priced private & generic brands.
3) Price cutting as a strategy to maintain or regain market share.
4) Internet used for comparison shopping
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variable costs
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vary with production volume
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fixed costs
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unaffected by production volume
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total costs
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sum of variable costs and fixed costs
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pricing objectives
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1. Profit-Oriented
2. Sales-Oriented
3. Status Quo/competitor oriented
2. Sales-Oriented
3. Status Quo/competitor oriented
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profit oriented pricing
answer
A category of pricing objectives that focus on profit for the business
- profit maximization
- satisfactory profits
- target ROI
- profit maximization
- satisfactory profits
- target ROI
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sales oriented pricing
answer
A category of pricing objectives that focus on increasing total amount of income from sales
- market share
- sales maximization
- strategy approach: higher share companies will often have higher returns on economies of scale
- market share
- sales maximization
- strategy approach: higher share companies will often have higher returns on economies of scale
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status quo/competitor pricing
answer
a pricing objective that maintains existing prices or meets the competition's prices
-competitive parity: following a leader or firm you seek to be compared with
- values is not part of this pricing strategy
-competitive parity: following a leader or firm you seek to be compared with
- values is not part of this pricing strategy
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monopoly
answer
- rare
- few
- greatest price flexibility
- few
- greatest price flexibility
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oligopoly
answer
- few firms
- price war risk
- price war risk
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pure
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- many firms
- undifferentiated product
- prices vary in. tight range and driven by supply and demand
- undifferentiated product
- prices vary in. tight range and driven by supply and demand
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the competition
answer
- high prices may induce firms to enter the market
- competition leads to price wars
- global competition may force firms to lower prices
- competition leads to price wars
- global competition may force firms to lower prices
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elastic demand
answer
- price sensitive
- consumers buy more or less of a product when the price changes
- increased units sales when prices fall
- consumers buy more or less of a product when the price changes
- increased units sales when prices fall
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inelastic demand
answer
- increase or decrease in price doesn't affect demand
- price decrease --> revenue decrease
- price increase --> revenue increase
- price decrease --> revenue decrease
- price increase --> revenue increase
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unitary elasticity
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increase in sales exactly offsets a decrease in prices and revenue is unchanged
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key factors that affect elasticity of demand
answer
-availability of substitutes
-price relative to purchasing power and income effect
-a product's other uses
-price relative to purchasing power and income effect
-a product's other uses
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Setting the right price steps
answer
1. Establish pricing goals
2. Estimate demand, costs, and profits
3. Choose a price strategy
4. Fine-tune with pricing tactics
*results lead to right price*
2. Estimate demand, costs, and profits
3. Choose a price strategy
4. Fine-tune with pricing tactics
*results lead to right price*
question
end of curve pricing
answer
- when volume is low = cost/unit if high
- price based on high costs
- price based on high costs
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price skimming
answer
**setting high price
- inelastic demand
- unique advantages/superior
- legal protection of product
- blocked competitive entry
- demand is above supply
- inelastic demand
- unique advantages/superior
- legal protection of product
- blocked competitive entry
- demand is above supply
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penetration pricing
answer
low initial price
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Advantages of Penetration Pricing
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- Discourages or blocks competition from market entry
- Boosts sales and provides large profit increases
- Can justify production expansion
- Boosts sales and provides large profit increases
- Can justify production expansion
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Disadvantages of Penetration Pricing
answer
- Requires investment for mass production
- Selling large volumes at low prices required to make-up for lower profit per unit
- Strategy to gain market share may fail
- Selling large volumes at low prices required to make-up for lower profit per unit
- Strategy to gain market share may fail
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value-based pricing
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setting the price at a level that seems to the customer to be a good price compared to the prices of other options
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loss leader pricing
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sell below cost but gets people into store
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price fixing
answer
an agreement between two or more firms on the price they will charge for a product
Sherman Act
Sherman Act
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price discrimination
answer
the business practice of selling the same good at different prices to different customers
Robinson-Patman Act: firm cannot sell to 2 or more buyers at different prices
Robinson-Patman Act: firm cannot sell to 2 or more buyers at different prices
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predatroy pricing
answer
charging a very low price for a product with the intent of driving competitors out of business or out of market
Clayton Act
Clayton Act
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