MGM 301 Final: MGM Final exam study guide
20 Jun 2018
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MGM 301 Final Exam Study Guide
Chapter 13, 14: Pricing
Price—the money or other considerations (other products/services) exchanged for the ownership
or use of a product or service
Barter—exchanging of products and services for other products and services rather than money
Final Price = [List Price] – [(Incentives) + (Allowances)] + [Extra Fees]
Price as an Indicator of Value
Perceived benefits—quality, durability, etc.
Value—the ratio of perceived benefits to price
oValue = Perceived benefits ÷ Price
As perceived benefits increase, value increases
Value pricing—the practice of simultaneously increasing product and service benefits while
maintaining or decreasing price
o“The higher the price, the higher the quality”
oValue could involve the judgment by a consumer of the worth and desirability of a
product/service relative to substitutes that satisfy the same need
“Reference Value” emerges—involves comparing the costs and benefits of
substitute items
Profit = Total Revenue – Total Cost
(Unit Price X Quantity Sold) – (Fixed Cost + Variable Cost)
Price affects the quantity sold
Since the quantity sold usually affects a firm’s cost because of efficiency of production, price
also indirectly affects costs
Steps to setting price:
1. Identify Pricing Objectives and Constraints
Pricing Objectives—involve specifying the role of price in an organization’s marketing
strategic plans
oFrequently reflect corporate goals
oProfit—measured in terms of return on investment (ROI) or return on assets (ROA)
Managing for long-run profits—companies give up immediate profit by
developing quality products to penetrate competitive markets over the long term
Products are priced low compared to cost to develop—but firm expects to
make greater profits later because of its high market share
Maximizing current profit—(for a quarter or year) short-run
Target return—firm sets a profit goal
oSales—increase sales revenue which will lead to increases in market share & profit
oMarket Share—ratio of the firm’s sales revenue or unit sales compared to those of the
industry (plus the firm itself)
Pursue this objective when industry sales are relatively flat or declining
oUnit Volume—the quantity produced/sold; firm sells multiple products at very
different prices
Can be counterproductive if volume objective is achieved—by drastic price
cutting that drives down profit
oSurvival
oSocial Responsibility—recognizes its obligations to customers and society—
predatory pricing—purposely driving out the competition
Pricing Constraints—factors that limit the range of prices a firm may set
oRelate to conditions existing in the marketplace
oDemand for the Product Class, Product, and Brand—the number of potential buyers
for the products class (cars), product (sports cars), and brand (Telsa Roadster Sport)
clearly affects the price a seller can charge
Generally, the greater the demand for a product, the higher the price that be set
oNewness of the Product: Stage in the Product Life Cycle—the newer a product and
the earlier it is in its life cycle, the higher is the price that can be usually charged—
because of patents & limited competition early in the PLC
oSingle Product versus a Product Line—with a wide range of products, the price of
individual models has to be consistent with the others based on features provided, &
meaningful price differentials must communicate value to the customer
oCost of Producing and Marketing the Product—in the long-run, a firm’s price must
cover all the costs of producing and marketing a product
oCost of Changing Prices and Time Period They Apply
oType of Competitive Market—pure competition, monopolistic competition, oligopoly,
or pure monopoly
Strategies
Available
Pure
Competition
(Many sellers who
follow the market
price for identical,
commodity
products)
Monopolistic
Competition
(Many sellers who
compete on non-
price factors)
Oligopoly
(few sellers who
are sensitive to
each other’s
prices)
Pure
Monopoly
(One seller who
sets the price
for a unique
product)
Extent of price
competition
Almost none:
market sets
price
Some:
compete over
range of prices
Some: price
leader or
follower of
competitors
None: sole
seller sets price
Extent of
product
differentiation
None: products
are identical
Some:
differentiate
products from
competitors
Various:
depends on
industry
None: no other
producers
Extent of
advertising
Little: purpose
is to inform
prospects that
seller’s
products are
available
Much: purpose
is to
differentiate
firm’s products
from
competitors
Some: purpose
is to inform
but avoid price
competition
Little: purpose
is to increase
demand for
product class
Type dramatically influences the range of price competition and, in turn, the
nature of product differentiation & extent of advertising
oCompetitor’s Prices—firm must be aware of what present and potential competitors
are charging now and are likely to charge in the near future
2. Estimate Demand and Revenue
Fundamentals of Estimating Demand
oThe lower the price, the higher the demand
oThe Demand Curve—a graph relating the quantity sold and price—shows the
maximum number of units that will be sold at a given price
