UB MGM 301 - Final Exam Study Guide (20 pages)

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Final Exam Study Guide

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Final Exam Study Guide


A combination of book and lecture based notes with in-depth descriptions of all relevant information.

Study Guide
University at Buffalo, The State University of New York
Mgm 301 - Principles of Marketing
Principles of Marketing Documents
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MGM 301 Final Exam Study Guide Lectures 22 29 Lecture 22 November 10 What is the purpose of price What are the types of competition Name the pricing objectives Explain cost based pricing and profit based pricing Price the money or other considerations including other products and services exchanged for the ownership or use of a product or service The purpose of price is not to recover cost but to capture the value of the product in the consumer s mind Price communicates value Value Perceived benefits Price Value the ratio of perceived benefits to price for a given price as perceived benefits increase value increases ex if you re used to paying 7 for a medium pizza a large one at the same price would be more valuable conversely for a given price value decreases when perceived benefits decrease Types of Competition Price Based not a good way to compete unless one company has a cost advantage Competitors prices are only important if the prospective buyer both knows about those prices and can act to purchase them easily Non Price Based ex Apple vs Dell ad showing the relative advantage of the product as opposed to focusing on the prices of the products Pricing Objectives Pricing objectives involve specifying the role of price in an organization s marketing and strategic plans Profit o Three different objectives relate to a firm s profit which is often measured in terms of return on investment ROI or return on assets ROA o One objective is managing for long run profits where companies give up immediate profit by developing quality products to penetrate competitive markets over the long term products are priced relatively low compared to their cost to develop but the firm expects to make greater profits later because of its high market share o A maximizing current profit objective is common in many firms because the targets can be set and performance measured quickly such as for a quarter or year o A target return objective occurs when a firm sets a profit goal that is usually determined by its board of directors Sales o o Increased sales revenue can lead to increases in market share and profit Objectives related to dollar sales revenue or unit sales have the advantage of being translated easily into meaningful targets for marketing managers responsible for a product line or brand Market Share o The ratio of the firm s sales revenues or unit sales to those of the industry competitors plus the firm itself o Companies often pursue a market share objective when industry sales are relatively flat or declining Unit Volume o The quantity produced or sold o Firms that use this as a pricing objective often sell multiple products at very different prices and need to match the unit volume demanded by customers with price and production capacity o This can be counterproductive if a volume objective is achieved by drastic price cutting and drives down profit Survival o Specialty toy retailers are increasingly facing survival problems because they can t match the price cuts offered by big discount retailers like Wal Mart and Target Social Responsibility o A firm may forgo higher profits on sales and follow a pricing objective that recognizes its obligations to customers and society in general Pricing Approaches There are 5 basic ways a company can decide on the price of a product or service Cost based Profit based Demand based Competition based Value based Companies usually use multiple approaches when actually computing price The point of price is to provide value in the eyes of the consumer Cost Based Pricing Approach Key concepts o Total Cost TC the total expense incurred by a firm in producing and marketing a product the sum of the fixed and variable cost o o o o o o Fixed Cost FC the sum of the expenses of the firm that are stable and do not change with the quantity of a product that is produced and sold ex rent executive salaries and insurance Variable Cost VC the sum of the expenses of the firm that vary directly with the quantity of a product that is produced and sold as the QS doubles the VC doubles Ex direct labor and direct materials used in producing the product and sales commissions that are tied directly to the quantity sold TC FC VC Unit Variable Cost UVC the variable cost expressed on per unit basis for a product UVC VC Q Marginal Cost MC the change in total cost that results from producing and marketing one additional unit of a product MC change in TC 1 unit increase in Q slope of TC curve TYPES OF COST BASED PRICING Break Even Analysis A technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output The break even point BEP is the quantity at which total revenue and total cost are equal profit then comes from all units sold beyond this point o BEP FC P UVC o EXAMPLE IN BOOK PG 343 344 Cost Plus Pricing o 2 variants P total cost of total cost P total cost fixed fee Summing the total unit cost of providing a product or service and adding a specific amount to the cost to arrive at a price Generally assumes 2 forms Cost plus percentage of cost pricing a fixed percentage is added to the total unit cost often used to price one or few of a kind items ex when an architectural firm charges a of the construction cost of the Rock and Roll Hall of Fame and Museum in Cleveland OH Cost plus fixed fee pricing a supplier is reimbursed for all costs regardless of what they turn out to be but is allowed only a fixed fee as a profit that is independent of the final cost of the project used usually when buying highly technical few of a kind products like hydroelectric power plants or space satellites because governments have found that general contractors are reluctant to specify a formal fixed price for the procurement o Ex if NASA agreed to pay Lockheed Martin 4 billion as the cost for a spacecraft and agreed to a 6 5 billion fee for providing the lunar spacecraft even if Lockheed Martin s cost increased to 5 billion its fees would remain at 6 5 billion Cost plus pricing is the most commonly used method to set prices for business products Ex the rising cost of legal fees has prompted some law firms to adopt a cost plus approach rather than billing clients on an hourly basis they agree on a fixed fee based on expected costs plus a profit for the law firm Markup Pricing o P Cost of Goods 100 Mark Up 100 Managers of supermarkets and other retail stores have such a large number of products that estimating the demand for each

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