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Chapter 16

Chapter 16 Textbook Notes.docx

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Stephen Charko

Chapter 16: Pricing Concepts and Strategies Pricing Objectives and the Marketing Mix… • Price: exchange value of a good or service o Pricing Objectives can be classified into four major groups: • Profitability Objectives  Marginal Analysis: method of analyzing the relationship among costs, sales price, and increased sales volume • Profit Maximization: point at which the additional revenue gained by increasing the price of a product equals the increase in total costs  Target-Return Objectives: short-run or long-run pricing objectives of achieving a specified return on either sales or investment • Volume Objectives  Market-Share Objective: volume-related pricing objective in which the goal is to achieve control of a portion of the market for a firm's good or service  Profit Impact of Market Strategies (PIMS) Project: research that discovered a strong positive relationship between a firm's market share and product quality and its return on investment • Meeting Competition Objectives  Value Pricing: pricing strategy emphasizing benefits derived from a product in comparison to the price and quality levels of competing offerings • Prestige Objectives • Not-For-Profit Objectives  Pricing strategy helps these organizations goals such as: i. Profit Maximization i. Cost Recovery where groups only try to recover the actual cost of operating the unit i. Market Incentives to encourage increased usage of the good or service i. Market Suppression where price discourages consumption (tobacco) Methods for Determining Prices… • Customary Prices: traditional prices that customers expect to pay for certain goods and services • Price Determination in Economic Theory: o Demand: schedule of the amounts of a firm's product that consumers will purchase at different prices during a specified time period o Supply: schedule of the amounts of a good or service that firms will offer for sale at different prices during a specified time period o Businesses operate and set prices in four types of market structures: 1. Pure Competition: market structure characterized by homogeneous products in which there are so many buyers and sellers that none has a significant influence on price 1. Monopolistic Competition: market structure involving a heterogeneous product and product differentiation among competing suppliers, allowing the marketer some degree of control over prices 1. Oligopoly: market structure in which relatively few sellers compete and where high start-up costs form barriers to keep out new competitors 1. Monopoly: market structure in which a single seller dominates trade in a good or service for which buyers can find no close substitutes o Cost and Revenue Curves: • Variable Costs: costs that change with the level of production (such as labour and raw materials costs) • Fixed Costs: costs that remain stable at any production level within a certain range (such as lease payments or insurance costs) • Average Total Costs: costs calculated by dividing the sum of the variable and fixed costs by the number of units produced • Marginal Cost: change in total cost that results from producing an additional unit of output o Elasticity: measure of responsiveness of purchasers and suppliers to a change in price • ∆Y/∆P • Price Determination in Practice: o Cost-Plus Pricing: practice of adding a percentage of specified dollar amount-or markup-to the base cost of a product to cover unassigned costs and to provide a profit o Full-Cost Pricing: pricing method that uses all relevant variable costs in setting a product's price and allocates those fixed costs not directly attributed to the production of the priced item o Incremental-Cost Pricing: pricing method that attempts to use only costs directly attributable to a specific output in setting prices o Break-Even Analysis: pricing technique used to determine the number of products that must be sold at a specified price to generate enough revenue to cover total cost o Yield Management: pricing strategy that allows marketers to vary prices based on such factors as demand, even though the cost of providing those goods or services remains the same; designed to maximize revenues in situations such as airfares, lodging, auto rentals, and theatre tickets, where costs are fixed Pricing Strategies… • Skimming Pricing Strategy: pricing strategy involving the use of an initial high price relative to competitive offerings. Price is dropped in incremental steps as supply begins to exceed demand, or when competition catches up o Step Out: pricing practice in which one firm raises prices and then waits to see if others follow suit • Penetration Pricing Strategy: pricing strategy involving the use of a relatively low entry price compared with competitive offerings, based on the theory that this initial low price will help secure market acceptance • Everyday Low Pricing (EDLP): pricing strategy of continuously offering low prices rather than relying on such short-term price cuts as cents-off coupons, rebates, and special sales • Competitive Pricing Strategy: pricing strategy designed to de-emphasize price as a comparative variable by pricing a good or service at the general level of comparable offerings o Opening Price Point: setting an opening price point below that of the competition, usually on a high-quality private label item Price Quotations… • List Price: established price normally quoted to potential buyers o Reductions from List Price: • Market Price: price a consumer or marketing intermediary actu
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