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Midterm

MGMA01H3 Study Guide - Midterm Guide: Fixed Cost, Marketing Mix, Psychological Pricing


Department
Management
Course Code
MGMA01H3
Professor
Sam J Maglio
Study Guide
Midterm

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Ch.11 – Pricing
What is a Price?
Price: amount of money charged for a product or service; sum of all values that
customers exchange for the benefits of having or using the product or service
- Major factor affecting buyer choice
- Non-price factors also take importance
- Only element in marketing mix that produces revenue
- Most flexible element
Major Pricing Strategies
- Price falls between too high to produce demand and too low to produce profit
- Customer perception of product value sets limit
- If price is perceived greater than value then will not buy
- Product costs sets requirements
- If price is below costs than net loss
- Must consider internal and external factors when setting price between the two
- Competitors’ strategies and prices, marketing strategy and mix and nature of market and
demand
- Three major pricing strategies: customer value, cost and competition based pricing
Customer Value-Based Pricing: setting price based on buyers’ perceptions of value
rather than on the seller’s cost
- Price and other mix variables considered before marketing program
- Pricing begins with analyzing consumer needs
- Perceived value differs based on consumer and situation
Good-Value Pricing: offering right combination of quality and good service at a fair
price
-Everyday Low Pricing (EDLP) charging EDLP with few or no temporary discounts
-High-Low Pricing charging higher prices everyday but lower price promotions on
selected items
Value-Added Pricing: attaching value-added features and services to differentiate a
company’s offer and charging higher prices
Cost-Based Pricing: setting prices based on costs for producing, distributing and selling
product plus a fair rate of return for effort and risk
Fixed Costs (Overhead): costs that do not vary with production or sales level
Variable Costs: costs that vary directly with level of production
Total Costs: sum of fixed and variable costs for any given level of production
Experience (Learning) Curve: drop in average per-unit production cost that comes with
accumulated production experience

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- If downward-sloping curve exists than significant for company
- Higher production means lower costs but buyers still have to buy higher output
- Gain high market share by pricing low due to low costs
- Aggressive pricing might give product cheap image
Cost-Plus (Markup) Pricing: adding a standard markup to the cost of a product
- Unit cost = VC + FC/unit sale
- Markup Price = Unit Cost/(1 – desired return)
- Markup – Unit Cost = profit per unit sold
- Ignores demand and competitors prices
Break-Even (Target Return) Pricing: setting price to break even on the costs of making
and marketing a product or setting price to make a target return
- Break-Even Volume = FC/(P – VC)
- To make profit must sell over breakeven volume at P
Competition-Based Pricing: setting prices based on competitors’ strategies, costs,
prices and market offerings
- Consumer will base judgement of product value on price of similar products from
competitors
- Compare market offerings and customer perceived value
- Competitor pricing strategy
- No matter the price must provide superior value
Other Internal and External Considerations
Affecting Price Decisions
- Internal factors are marketing strategy, objectives and mix
- External factors are nature of market and demand
- Pricing strategy is largely determined by decisions on market positions
- Set prices to attract new customers or profitably retain existing ones
- Low prices to prevent entry or match competitors prices to stabilize market
- Price to keep loyalty and support of resellers or avoid government intervention
- Temporarily reduce price to create excitement for brand
- Price to help sales of other products in company’s line
- Price must be coordinated with product design, distribution and promotion decisions
- Mix variables can affect price
- Often position product on price and tailor other mix decisions to desired price
Target Costing: pricing that starts with an ideal selling price and then targets costs that
will ensure that the price is met
- Best strategy is to sell at highest justifiable price by making product worth it
- Small companies have top management set prices
- Large companies have divisional or product managers handle prices
- Industries such as airlines and oil companies have pricing departments
- Sales, production and finance managers and accountants can also affect price
- Seller’s pricing freedom varies with different types of markets
-Pure Competition has no differentiation thus little say in price
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