COMMERCE 2MA3 Study Guide - Final Guide: Marketing, Supply Chain, Fixed Cost
27 Apr 2018
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Chapter 11: Pricing Concepts and strategies
Price should match PERCEIEVED value
5 C’s of Pricing
1. Company Objectives
• Profit Orientation
o A company objective that can be implemented 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 stimulate a certain level of sales at a certain profit per unit.
➢ MAXIMIZING PROFITS STRATEGY: A mathematical model that captures
all the factors required to explain and predict sales and profits, which
should be able to identify the price at which its profits are maximized.
➢ TARGET RETURN PRICING: A pricing strategy implemented by firms less
concerned with the absolute level of profits and more interested in the
rate at which their profits are generated relative to their investments;
designed to produce a specific return on investment, usually expressed as
a percentage of sales.
• Sales Orientation
o A company objective based on the belief that increasing sales will help the
firm more than will increasing profits.
• Competitor orientation
o A company objective based on the premise that the firm should measure
itself primarily against its competition.
➢ Competitive Parity:
o A firm’s strategy of setting prices that are similar to those of major
competitors.
• Customer Orientation
o Pricing orientation that explicitly invokes the concept of customer value and
setting prices to match consumer expectations.
2. Customers
• Understand consumer reactions to different prices
o Price elasticity of demand: percent change in quantity demand / percent
change in price
▪ Measures how changes in a price affect the quantity of the product
demanded; specifically, the ratio of the percentage change in quantity
demanded to the percentage change in price.
o PRESTIGE P/S: Those that consumers purchase for status rather than
functionality.
o ELASTIC
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▪ 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.
o 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.
o INCOME EFFECT
▪ Refers to the change in the quantity of a product demanded by
consumers because of a change in their income.
o 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.
o CROSS PRICE ELASTICITY
▪ The percentage change in demand for Product A that occurs in
response to a percentage change in price of Product B.
o COMPLEMENTARY 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.
o SUBSTITUE 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 percentage decrease in the quantity demanded for Product B.
3. Costs
• Variable costs
o Those costs, primarily labour and materials, that vary with production
volume.
• Fixed Costs
o Those costs that remain essentially at the same level, regardless of any
changes in the volume of production.
• Total Costs
o The sum of the variable and fixed costs
4. Competition
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
5 c"s of pricing: company objectives, profit orientation, a company objective that can be implemented 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 stimulate a certain level of sales at a certain profit per unit. Maximizing profits strategy: a mathematical model that captures all the factors required to explain and predict sales and profits, which should be able to identify the price at which its profits are maximized. Improvement value: represents 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: a value-based method for setting prices that determines the total cost of owning the product over its useful life.
