MK323 Final Exam Study Guide Chapter 13 Pricing Concepts for Establishing Value 5 C s of Pricing Customers Value Channel Members Costs Company Objectives Competition Company Objectives 1 Profit Oriented Focusing on target profit pricing maximizing profits or target return pricing a Target profit pricing When a firm has a particular profit goal as their overriding concern Use price to stimulate sales level b Maximizing profits If a firm can specify a mathematical model that captures all the factors required to explain and predict sales profits it should be able to identify the price at which its profits are maximized Target return pricing Employ pricing strategies designed to produce a specific return on their investment expressed as a percentage of sales c 2 Sales Orientation Increasing sales will help the firm more than increasing profits Premium Pricing 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 3 Competitor Oriented Strategize according to the premise that they should measure themselves primarily against their competition Competitive Parity They set prices that are similar to those of their major competitors Status Quo Pricing Changes prices only to meet those of the competition 4 Customer Oriented Explicitly invokes the concept of value Increase value by focusing on customer satisfaction and setting prices to match customer expectations Customers 1 2 3 Demand Curve Shows how many units of a product or service consumers will demand during a specific period of time at different prices Prestige products services Consumers purchase for their status rather than their functionality Price Elasticity of Demand Measures how changes in price affect the quantity of the product demanded Price elasticity of Demand quantity demanded price Elastic Price sensitive when the price elasticity is less than 1 When 1 decrease in price produces more than a 1 decrease in quantity sold Inelastic Price insensitive when its price elasticity is greater than 1 When 1 decrease in price results in less than 1 decrease in quantity sold Factors Influencing PED 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 Cross Price Elasticity The change in the quantity of Product A demanded compared with the change in price in product B a b Complementary Products Products whose demands are positively related such that they rise and fall together Substitute Products Because changes in their demand are negatively related A positive demand for product A causes a negative demand for product B Costs Variable Costs Costs primarily labour and materials that vary with production volume Fixed Costs Costs that remain essentially the same level regardless of any changes in the volume of production Total Costs The sum of the variable and fixed costs Break Even Analysis Technique that examines the relationships among cost price revenue and profit over different levels of production and sales Break even Point The point at which the number of units sold generates just enough revenue to equal the total costs Break even point units costs Target profit Contribution per unit Contribution per unit The price less the variable cost per unit Competition Oligopolistic Competition Monopolistic Competition Pure Competition Macro Influences on Pricing Only a few firms dominate Firms change their prices in reaction to competition to avoid upsetting an otherwise stable competitive environment Price War Occurs when 2 or more firms compete primarily by lowering their prices Occurs when there are many firms competing for customers in a given market but their products are differentiated Product differentiation is more appealing to customers than pricing Different companies that consumers perceive as substitutable sell commodity products Fair Trade Socially responsible movement that ensure that producers receive fair prices for their products Channel Members Manufacturers wholesalers retailers can have different perspectives when it comes to pricing strategies Gray Market Employs irregular but not necessarily illegal methods it legally circumvents authorized channels of distribution to sell goods at prices lower than those intended by the manufacturer The internet Online information and products has made consumers more price sensitive and opened new categories of products to those who could not access them previously Economic factors increase in consumers disposable income and status consciousness Cross shopping The pattern of buying both premium and low priced merchandise or patronizing both expensive status oriented retailers and price oriented retailers Chapter 14 Strategic Pricing Methods Pricing Strategies Cost based pricing Pricing Strategies Cost Based Methods Competitor Based Methods Value Based Methods Determine the final price to charge by starting with the cost Do not recognize the role that consumers or competitor s prices play in the marketplace They may set prices to reflect the way they want consumers to interpret their own prices relative to the competitors offerings Include approaches to setting prices that focus on the overall value of the product offering as perceived by the consumer Improvement Value Method An estimate of how much more or less consumers are willing to pay for a product relative to other comparable products Cost of Ownership Method Consumers may be willing to pay more for a particular product because over its entire lifetime it will eventually cost less to own than a cheaper alternative Competitor based pricing Value based Pricing Psychological Factors Affecting Value Based Pricing Strategies Consumers Use of Reference Prices o o o o o Reference Price The price against which buyers compare the actual selling price of the product and that facilitates their evaluation process External Reference Price A higher price to which the consumer can compare the selling price to evaluate the deal Internal Reference Price To judge a price offering by accessing price information stored in their memory Everyday Low Pricing EDLP vs High Low Pricing Everyday Low Pricing Companies stress the continuity of their retail prices at a level somewhere between the regular non sale price and the deep discount sale price their competitors may offer