C.3. Pricing Decisions Flashcards

Question

What is economic profit in the context of a monopoly?

Answer 1

The amount by which total revenue exceeds the total economic costs, including both explicit and implicit costs.

Answer 2

Due to high barriers to entry, preventing other firms from entering the market.

Answer 3

The demand curve of a monopolistically competitive firm is more elastic than that of a monopoly because it faces competition from many firms selling similar but differentiated products.

Answer 4

In the long term, economic profit in monopolistic competition is eliminated as new firms enter the market. The resulting competitive pricing and increase in supply causes the price to decrease to the point where there is no more economic profit for the member firms.

Answer 5

It reflects the fact that a price decrease by one firm will be matched by others, while a price increase will not be matched, leading to sticky prices.

Answer 6

* Marketing objectives * Marketing mix strategy * Costs * Organizational considerations ## Footnote **Marketing objectives**: target market and positioning for the product **Marketing mix strategy**: coordination with product design, distribution, and promotion plans **Costs**: determine the lower limit for prices **Organizational considerations**: who has the authority to set prices

Answer 7

* The market and demand * Competitors' activities * Other external factors ## Footnote **The market and demand**: set upper limit for prices **Competitors' activities**: prices, offers, and possible reactions to the company’s pricing **Other external factors**: Inflation, recession, interest rates

Answer 8

It involves setting a price based on the cost of production plus a profit margin.

Answer 9

* Cost-based approaches * Value-based approaches * Competition/market-based approaches

Answer 10

In cost-plus pricing, the company determines its costs and then adds a standard monetary amount of profit to the cost to determine the price. ## Footnote This method is often used by suppliers of unique products and services, such as construction companies and printing companies.

Answer 11

A method of setting a product's selling price by adding a predetermined percentage or fixed amount (the "markup") to the cost of the product. The markup is intended to cover costs and generate a desired profit. ## Footnote Markup pricing can be either markup on cost or markup on selling price. Markup on cost involves adding a standard markup percentage to the cost, while markup on selling price involves calculating the markup as a percentage of the selling price.

Answer 12

Price = Item Cost + (Item Cost × Markup Percentage) ## Footnote The "cost" typically refers to full absorption cost, which includes direct materials, direct labor, and overhead.

Answer 13

Price = Item Cost / (1 – Markup Percentage) ## Footnote The markup is a percentage of the **selling price**, not the cost. It lets a retailer say its markup is only X%, but if it is calculated as a percentage of the selling price, the markup percentage will be lower than if the markup percentage for the same sale is calculated as a percentage of cost.

Answer 14

It involves determining a price at which the company will break even. ## Footnote This method does not consider the price-demand relationship (as the price increases, demand usually decreases, and vice versa), so sales volume must be factored into the model.

Answer 15

Pricing method where the company determines a price at which it will make a target profit. Target profit pricing is based on forecasts of total revenue and total cost at various sales volume levels. ## Footnote This method does not consider the price-demand relationship (as the price increases, demand usually decreases, and vice versa), so sales volume must be factored into the model.

Answer 16

Pricing set according to buyers’ perceptions of the product's or service's value. When the perceived value is high, such as for prestige items, items that are unique, or items that are in scarce supply, companies are more likely to use value-based pricing. ## Footnote This approach requires understanding the perceived value to avoid overpricing or underpricing. However, measuring perceived value can be difficult

Answer 17

EDLP is a strategy where a company promises its prices will always be low, so consumers do not need to wait for sales. ## Footnote This approach can reduce advertising costs and encourage repeat business.

Answer 18

It involves charging high "everyday" prices but offering frequent discounts and sales. ## Footnote This strategy can increase costs and may erode consumer confidence in everyday prices.

Answer 19

A method of establishing a price point based almost entirely on the prices of competitors. ## Footnote This method is often used in homogeneous industries where products are similar.

Answer 20

Open bidding involves competing price offers visible to all parties. The price is determined through a process where bidders offer a series of competing price offers, generally gradually lower, until no one else will go lower. Closed bidding involves secret bids. ## Footnote Closed bids are based on perceptions of competitors' numbers rather than intrinsic contract value.

Answer 21

It begins with a target selling price and organizes resources to create the product or service at a cost that yields an adequate profit. ## Footnote This approach focuses on cost optimization based on customer demand and competitor analysis.

Answer 22

Discount offered to buyers who pay their invoices within a certain period. ## Footnote For example, terms might be 2/10, net 30, meaning a 2% discount if paid within 10 days.

Answer 23

Discount offered to customers who purchase in large volumes. ## Footnote U.S. laws require volume discounts to be offered equally to all customers if the seller has cost savings associated with selling large quantities, such as lower selling costs, lower inventory costs, and lower transportation costs.

Answer 24

Reduced prices for products or services purchased out of season. ## Footnote These discounts help smooth out sales variations throughout the fiscal year.

Answer 25

Discount offered to members of distribution channels who perform specific functions. ## Footnote Under U.S. law, these discounts must be offered equally to all channel members.

Answer 26

A price reduction based on a particular action taken by the purchaser. ## Footnote Examples include trade-in allowances or upgrade allowances to purchasers and promotional allowances to dealers and retailers.

Answer 27

* Market penetration pricing * Market skimming

Answer 28

Setting a low initial price to maximize market share and discourage competition with the expectation of high sales volume, lower per-unit costs, and higher long-term profit. ## Footnote The market must be price-sensitive and demand for the product must be elastic for this strategy to work.

Answer 29

Setting a high initial price to attract early adopters and then lowering it as competition increases.

Answer 30

Creating product lines, with each successive item in the line offering more features and priced higher.

Answer 31

Offering optional products, features, and services along with the main product.

Answer 32

Pricing a product low but charging high prices for the required additional or "captive" products that are needed for it to function properly. ## Footnote An example is printers and ink cartridges.

Answer 33

Pricing for products that result from the production of goods that have no real value to the manufacturer. If by-products can be sold for any amount, their revenue can offset costs of the main product and reduce waste. ## Footnote By-products should be priced as high as possible, but the manufacturer should accept any price that is higher than the cost of delivery.

Answer 34

Combining products, features, or services and offering them at a price lower than the price of the items if purchased individually.

Answer 35

Short-term pricing maximizes contribution by adjusting prices based on demand. Long-term pricing focuses on return on investment.

Answer 36

Short-term pricing is opportunistic and more responsive to changes in demand than is long-term pricing.

Answer 37

Over the long term, customers prefer stable and predictable prices. The company needs to include all costs involved in the production and sale of a product and set stable prices that will earn the desired return on investment.

Answer 38

A long-term pricing approach that involves setting prices according to demand and competitors’ actions. ## Footnote Management begins with the market price, then determines how to produce and sell the product at a cost that will earn an adequate profit.

Answer 39

1. Establish a target price 2. Determine target operating income per unit 3. Determine target cost per unit 4. Calculate the estimated actual per-unit cost over the product's lifetime 5. Compare the estimated actual per-unit cost with the target cost per unit and if it is higher, find ways to reduce costs 6. Implement cost reductions

Answer 40

Analyzing a product’s functions, components, value chain, and the costs of all the business functions in its value chain to determine the maximum price customers will pay for the product and then to design or redesign the product so it can be produced at a cost that provides an adequate profit margin at that maximum price. Management distinguishes between a **value-added cost** and a **nonvalue-added cost**. Value-added costs cannot be eliminated, so value engineering seeks to reduce those costs by improving efficiency.

Answer 41

A long-term pricing approach that involves focusing on manufacturing costs and setting prices to both recoup the company’s investment and achieve a desired return on investment.

Answer 42

A cost-based long-term pricing approach which involves calculating production costs and adding a markup to achieve a target rate of return.

Answer 43

The target operating income per year divided by the expected sales units per year. ## Footnote This calculation helps determine the required income per unit to achieve the desired return.

Answer 44

False ## Footnote In highly competitive markets, markups and profit margins tend to be lower.

Answer 45

Customer preferences and competitor responses. ## Footnote Market-based pricing starts with the market price. The market and the market price then motivate managers to reduce costs to achieve the target cost.

Answer 46

The product life cycle (PLC) is the time from a product’s initial research and development to the point when the company no longer offers customer servicing and support for it. **Life cycle costing** tracks and accumulates all the costs of each product through the value chain throughout its life cycle. ## Footnote After considering the product’s life cycle budgeted costs, management sets a price that will maximize life-cycle operating income.

Answer 47

* Product development * Introduction * Growth * Maturity * Decline ## Footnote Some sources include product development as the first stage, followed by introduction, growth, maturity, and decline. Each stage has specific marketing and pricing strategies.

Answer 48

Introduction stage ## Footnote High prices help recover development costs quickly if demand is inelastic.

Answer 49

To maximize market share. ## Footnote This involves improving product quality, adding features, and expanding distribution by entering new markets.

Answer 50

* Prices decrease due to competition. * Profits decrease due to the lower prices coupled with increased promotion costs. ## Footnote The company becomes more of a price-taker than a price-setter.

Answer 51

* **Maintain** the product. * **Harvest** by withdrawing funding and promotional support. If sales hold up anyway, harvesting tactics will increase short-term profits. * **Drop** the product or dispose of it by selling it. ## Footnote Which strategy is selected depends on the product's profitability and market conditions.

Answer 52

The total costs to be paid by the customer during the period the customer owns the product. ## Footnote This includes purchase, usage, maintenance, and disposal costs.

Answer 53

ownership ## Footnote Ownership costs include installation, training, operating, maintaining, and disposal costs.

Answer 54

The practice of charging different prices for the same product or service to different customers based on customer flexibility. ## Footnote Price discrimination allows companies to maximize profits by charging more to customers with less flexible or less elastic demand.

Answer 55

Charging different prices for the same product or service depending on the amount of demand at a given time. ## Footnote Prices rise when demand is highest and are lower when demand decreases, reflecting the law of supply and demand.

Answer 56

Setting the price of a product artificially low for export to and sale in another country to underprice or undermine a domestic industry. ## Footnote Dumping is regulated internationally under the General Agreement on Tariffs and Trade (GATT) and the Anti-Dumping Agreement.

Answer 57

Setting a price below the cost of production to drive out competitors and restrict supply, then recovering lost profits later through higher prices that it can charge because of its increased market share.

Answer 58

Selling products to resellers at different prices when the goods cross a state line, known as interstate commerce.

Answer 59

Two or more companies act together (or collude) to either restrict output or to set prices at an artificially high level.

Answer 60

A group of suppliers that creates a formal, written agreement to govern production and pricing to limit competitive forces within a market. ## Footnote Cartels are illegal in the U.S. and many other countries, although not in some international markets.

Answer 61

Factors that cannot be measured in numerical terms but can be judged and assessed, and they should be considered in making any decision.

Answer 62

* Effects on employee morale and labor relations * Relationships with suppliers * Effects on current and potential customers * Protecting the company's reputation * Improving worker safety * Social impact and reaction by the public and creditors to a decision * Quality considerations, especially in production and outsourcing decisions * Responses of investors * Creating a positive impact on the community * Maintaining the brand * Legal constraints * Potential customer service improvements * Expenditures to enhance product and service quality

C.3. Pricing Decisions Flashcards

Understand demand, supply, and pricing strategies based on market structures and product life cycles. (86 cards)