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Chapter 7

MKT 300 Chapter Notes - Chapter 7: Reservation Price, Demand Curve, Price Premium

Course Code
MKT 300
Armand Gervais

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7.1: Price Premium
Price premium, or relative price, is the percentage by which a product’s
selling price exceeds or falls short of a benchmark price
Marketers need to monitor price premiums as early indicators of
competitive pricing strategies
Changes in price premiums can also be signs of product shortages,
excess inventories, or other changes in the relationships between
supply and demand
By comparing a brand’s price with a market average, managers can
gain valuable insight into its strength
Price Premium (%) =
Brand A Price
Benchmark Price($)
Average Price Paid can be calculated two ways:
1. As the ratio of total category revenue to total category unit sales
2. As the unit-share weighted average price in the category
oA market share gain by a premium-priced brand will cause the
overall average price paid in its market to rise; in turn, this will
reduce the price di'erential between that brand and the market
Price Premium (%) =
Revenue Market Share()
Unit Market Share()
Average Price Charged: the simple unweighted average price of the
brands in the category
oRequires only knowledge of prices; not a'ected by changes in
unit share
Average Price Displayed: managers who seek a benchmark that
captures di'erences in the scale and strength of brand’s distribution
might weight each brand’s price in proportion to a numerical measure
of distribution
*Don’t need this* 7.2: Reservation Price and Percent Good Value
Reservation Price: the price above which a customer will not buy a
product; maximum willingness to pay
Maximum Reservation Price (MRP): the lowest price at which quantity
demanded equals zero
Percent Good Value: the proportion of customers who perceive a
product to represent a good value, that is, to carry a selling price at or
below their reservation price
Maximum Willingness to Buy (MWB): the quantity that customers will
“buy” when the price of a product is zero
Linear demand curve de5ned by MWB and MRP:
oQ = MWB * [ 1 -
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