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MKTG 3310 Exam 5 Study Guide

by: Melissa Cooey

MKTG 3310 Exam 5 Study Guide MKTG 3310-001

Marketplace > Auburn University > Business > MKTG 3310-001 > MKTG 3310 Exam 5 Study Guide
Melissa Cooey

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Study guide for exam 5. This study guide covers all of the questions asked by Mr. Wolter on the study guide he provided us. Including: Appendix 1 & 2, pricing formulas, and pricing strategies.
Jeremy Wolter
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This 6 page Study Guide was uploaded by Melissa Cooey on Wednesday April 6, 2016. The Study Guide belongs to MKTG 3310-001 at Auburn University taught by Jeremy Wolter in Spring 2016. Since its upload, it has received 270 views. For similar materials see PRINCIPLES OF MARKETING in Business at Auburn University.


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Date Created: 04/06/16
Tuesday, April 5, 2016 MKTG 3310 Exam 5 Study Guide Appendix 1 - Price - the money charged for a product, or the sum of all the values that customers exchange for the benefits of having or using the product. - Pricing is important because it affects the entire value creating idea. - 4 types of markets: - Pure competition - a lot of buyers/sellers. Products are not differentiated. Natural laws of supply and demand. Firms do not have a lot of pricing power. - Monopolistic - companies have more control over the demand curve. More differentiated products, and slightly more pricing power - Oligopolistic competition - Few sellers, companies have even more control over pricing. The companies react to their competitors and tries to undercut them. - Pure monopoly - company has complete control of the market and have most of the pricing power. - Demand curve - a curve that shows the relationship between the price of a product, and the quantity of the product demanded. - Assumptions of the demand curve: - Ceteris paribus - “all else equal”: Requires that, when analyzing the relationship between 2 variables (such as price and quantity demanded), other variables must be held constant. - Law of demand - “When the price of a product falls, the demand for it will increase. When the price of the product goes up, the demand for it will decrease.” - Implication - demand curve slopes downward. - Price elasticity: - Price elasticity of demand (E) = percentage change in quantity demanded/ percentage change in price. Elasticity measures the responsiveness of demand to changes in price. - How does price elasticity affect a demand curve? 1 Tuesday, April 5, 2016 - Elastic - where the percentage change in demand is greater than the percentage change in price. Demand curve is more horizontal. - Inelastic - where the percentage change in demand is less than the percentage change in price. Steeper of a demand curve. - What factors influence price price elasticity? - substitutes - more substitutes = more elastic. - necessities - necessity = inelastic - percent of disposable income - more precent of the income means that means that your product is usually more elastic. - Examples: - gas - inelastic - milk - inelastic - movie tickets - elastic because there are substitutes - diamonds - inelastic because there are no substitutes - What is the difference between moving along a demand curve, and shifting the demand curve? - Movement along the demand curve represents a change in demand based on price of the product. Who is wiling to buy the product at a specific price. - Shifting of the demand curve represents the entire market’s demand for a product changed. Shift right = increase of demand. Shift left = decrease of demand. - Some aspects that shift a demand curve: - income - prices of related goods - tastes - population and demographics - expected future prices - Complements - goods and services that are used together. Ex =. hot dogs & hot dog buns. 2 Tuesday, April 5, 2016 - Normal good - a good for which the demand increases when income rises, and the demand decreases when income falls. Ex. Clothes. - Inferior good - a good for which the demand decreases when income rises, and the demand increases when income falls. Ex. Ramen noodles. - Substitutes - goods and services that can be used for the same purpose. Ex. jeans and khakis Chapter 10 - Pricing Strategies - Why is pricing so important when considering profitability? - if you have the ability to increase your price, this is more profitable than any other element. - Price ceiling - no demand above this price. - Price floor - no profits below this price. - Cost-based pricing - setting prices based on the costs of production, distributing, and selling the product plus a fair rate of return for the company’s effort and risk. - Value-based pricing (demand pricing) - using buyer’s perceptions of value as the key to pricing. - Competition-based pricing - setting prices based on competitor’s strategies, costs, prices, and market offerings. - Approaches to cost-based pricing: - Markup (cost-plus) - adding a standard increase to the cost of production. - Experience curve - a planned reduction in price for increased production. - Approaches to value-based (demand) pricing: - Good-value pricing - the right combination of quality and good service at a fair price. - Value-added - attaching services and features to a product to support higher prices. - EDLP pricing / Hi-low pricing - keeping prices at a standard low rate vs. discounting. 3 Tuesday, April 5, 2016 - Sequence of steps for demand-based pricing: - assess customer needs and value perceptions -> set target price to match customer perceived value -> determine costs that can be incurred -> design product to deliver desired value at target price - Sequence of steps for cost-based pricing: - design a good product -> determine product cost -> set price based on cost -> convince buyers of product’s value - Types of costs: - Fixed costs - costs that do not vary with production or sales level. - Variable costs - costs that vary directly with the level of production. - Total costs - the sum of the fixed and variable costs for any given level of production. - Price discrimination -charging different prices to different groups of customers. - What is the purpose of price discrimination? - to gain the most amount of revenue based on customer’s willingness to pay. - 3 methods of price discrimination: - Method #1 - allow customers at the bottom of the demand curve to pay less. Ex. discounts, rebates, specials, contests. - Method #2 - charge customers at the top of the demand curve more. Ex. dynamic pricing, value-added pricing, freemium. - Method #3 - allow customers to pay exactly what they are willing. Would this work for other industries? This method worked for a restaurant and a coffee shop, but a movie theatre lost money. It CAN work, but it’s not guaranteed. - 3 determinants of negative attributions: - perceptions of excess profits. - perceived immorality. - deception - taking advantage of a situation - inability to understand pricing strategy. 4 Tuesday, April 5, 2016 - What does reputation have to do with this? - if people believe that the pricing strategies are unfair, then the company’s reputation will suffer. Appendix 2 - Pricing Formulas - How do you calculate the following?: - Price elasticity: - Price elasticity of demand = percentage change in quantity demanded÷percentage change in price - Percentage change = (new number - original number)÷original number - Unit contribution margin: - Total cost = total variable costs + total fixed costs - Unit cost - unit variable cost + (total fixed cost÷unit sales) - Unit cost = (total variables cost÷unit sales) + (total fixed cost÷unit sales) - Unit contribution margin = (price - unit variable cost)÷price - Markup: - Dollar markup = selling price - cost - Markup percentage of cost = dollar markup÷cost - Markup percentage of price = dollar markup÷price - Markup price = unit cost÷(1-desired return on sales) - Markup chain: demand-based pricing: - Markup chain price = retail price - retailer margin - wholesaler margin - Retailer margin = retailer price * retailer margin percentage - Wholesaler margin = wholesaler price * wholesaler margin percentage - Wholesaler price = retailer price - retailer margin - Manufacturer price = wholesaler price - wholesaler margin 5 Tuesday, April 5, 2016 Psychological Pricing - Be familiar with how customers react to the following pricing phenomenon's: - Odd/Even - when we look at prices, generally we’re lazy. When we see $24.99, we think it’s $1 cheaper than $25. We process the number to the left, and ignore the rest. - Decoys - if you give people a slightly less attractive version of an option, the original option looks significantly better. - Price placement - placing the price higher up on the page = we view it as higher in price. We associate smaller prices as being to the left. Best price placement = bottom left. - Price preciseness - we associate preciseness with smaller numbers. Products sell better when prices are taken all the way to the decimal. - Priming - when a stimulus object influences reactions to a post-stimulus price. - Pain of payment - it is painful to give money away. Companies try to distance themselves from the act of giving away money. Ex. removing the dollar sign from receipts. 6


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