Term
| Price Elasticity of Demand |
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Definition
the ratio of the percentage change in quantity demanded to the percentage change in price
if elasticity works in your favor your product is likely underpriced |
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Term
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Definition
| Cost, Consumer, Competition |
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Term
| the importance of Cost for marketing |
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Definition
| sufficient to know how much of a firm's costs are fixed versus variable |
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Term
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Definition
B/E = FC/(Selling Price - VC)
*commoditization drives B/E higher by decreasing price to your VC |
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Term
| Traditional Costing method |
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Definition
Product -> Cost + Profit -> Price to consumer
[Cost Plus]
most common & irrational
Why used? easy & guaranteed certain profit |
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Term
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Definition
Consumer -> Target Price -> Product
[determine price from consumer for a given bundle of utility, then build]
--this will optimize profitability |
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Term
| Market Costing implications for product development |
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Definition
Cycle times - price sensitivity still valid by product rollout
Consumer analysis - what are people going to really pay? a measurement problem |
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Term
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Definition
Expected Value to Consumer - the maximum that a customer is willing to pay for a product
[the proper way to price] |
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Term
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Definition
price of products with equal levels of utility (satisfaction) for a consumer faced with various combinations of goods
if there is uncertainty or loyalty to another brand, the incentive must be increased |
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Term
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Definition
1. Product
2. Promotion
3. Place
4. Pricing - create incentive for the consumer to buy the product and the firm to sell it.
[the 1st three are costs to the firm] |
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Term
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Definition
| True Economic Value - a measure of the benefits that the product delivers to the consumer, regardless of whether the consumer recognizes these benefits |
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Term
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Definition
the value the consumer understands the product to deliver
[the perceived value should equal the maximum price that a consumer is willing to pay for a product] |
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Term
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Definition
The firm creates value by offering a product that the consumer values at a price greater than the firm's COGS.
*by pricing between the "perceived value" and COGS, the firm has captured some of the value for itself and has allowed the customer to capture the remainder |
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Term
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Definition
TEV =
Cost of the Next-Best alternative
+
Value of the Performance Differential |
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Term
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Definition
Charge the maximum price for a product that each customer is willing to pay.
Each person has different elasticities, therefore, the market should be segmented and based on 'willingness to pay' because price sensitivity is strongly affected by the consumers' wealth. |
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Term
| What is the only Acceptable Price Discrimination |
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Definition
Desire for the product
[Not race, sex, etc.] |
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Term
| 5 General Methods of Price Discrimination |
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Definition
1. Price Lining (versioning)
2. Second Market Discounting
3. Sequential Skimming
4. Periodic Discounting
5. Random Discounting |
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Term
| Price Lining (versioning) |
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Definition
offering different product (quality) variations at different prices
*consumers self-select into the price they are willing to pay
[e.g. Mathlab throttled, iron w/ bells & whistles, Sony skimming each segment then lower price] |
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Term
| Second Market Discounting |
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Definition
producing unbranded version of a product in order to take advantage of unused capacity (attractive when production does not increase FC and low cannabalization)
[e.g. private label brands (Publix) possibly made by major brand, but charge a lower price] |
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Term
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Definition
Charge top dollar initially for the least sensitive market, then lower the price to attract the next segment and repeat.
[e.g. Sony electronics] |
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Term
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Definition
Price high at beginning of period; then lower the price at the end of period to attract consumers who are less 'quality-sensitive'
(Function of time, not demand)
[e.g. fashion type goods] |
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Term
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Definition
Price high throughout the period but insert random discounts to attract informed consumers who wait for discounts.
Uninformed consumers will buy on need and most often at highest price.
[e.g. sales and coupons] |
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Term
| 4 methods of 'manipulating' the perceptions of uniqueness |
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Definition
1. Product attributes (confuse consumer causing difficult comparisons)
2. Price (opposite of demand curve, signal of quality by raising price)
3. Advertising (pay more for advertised product)
4. Distribution (branded variants to give retailers support) |
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Term
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Definition
failure to ignore unrecoverable transaction costs when making decisions about future behavior related to that transaction
[e.g. bar cover charge; declining stock, payment depreciation] |
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Term
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Definition
the evaluation of money/value according to reference points
price sensitivity of a consumer changes in respect to the value function
- people think in percentages and reference points (don't nickel & dime consumers, better perception to charge on big price)
[e.g. the altered perception in value of a $25 savings between the prices of $50-$25 and $3000-$2975] |
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Term
| 2 marketing implications of the "value function" |
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Definition
1. Integrate losses (new car options/packages)
2. Integrate a smaller loss with a LARGER gain (payroll deductions)
* also disaggregate items to increase value (e.g. presents for kids) |
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Term
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Definition
the perceived attractiveness and fairness of a price depends on its relationship to a reference point
How good a deal did I get? (more psychological then acquisition utility)
This interferes with EVC pricing.
[e.g. salary equity or comparing salaries] |
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Term
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Definition
| the value of the good received compared to the outlay |
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Term
| 3 reference points available to consumers |
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Definition
1. the price previously paid
2. the competition's price (even when competitor's are non-identical)
3. the seller's perceived cost (consumer asks how much does it cost to make this thing? |
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Term
| Marketing Implications of Reference Points (2) |
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Definition
1. On-going vs. One-time Relationships (football ticket analogy)
- the "invisible handshake" theory of price stickiness
2. Enhancing (High) Price Attractiveness
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Term
| Factors of Psychology & Pricing (4) |
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Definition
1. The Sunk-Investment Effect
2. The Value Function
3. Transaction Utility
4. Multiple Mental Accounts |
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Term
| 5 ways to 'Enhance (High) Price Attractiveness' |
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Definition
1. increase the reference price (top-down selling)
2. encourage favorable comparisons (substitutes from other categories - gym vs. home equipment)
3. increase the perceived vendor cost (1st class airline seats; pharmaceuticals)
4. obscure the reference price (movie candy; vacation packages)
5. report the per-usage price (pennies a day) |
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Term
| Describe the psychology of 'Multiple Mental Accounts' |
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Definition
Money is freely exchangeable, but people tend to allocate expenditures into categories.
Each category has its own reference point and potential expenditures are evaluated within the context of its category.
[e.g. "vacation accounts"; "gifts"] |
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Term
| 2 suboptimalities of competition relating to price-setting |
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Definition
1. Supply & Demand (prices do not change smoothly with demand as classically thought )
2. Price Elasticity |
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Term
| 3 reasons prices do not change smoothly with Demand |
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Definition
1. Cost based Pricing - focused on costs, not consumer willingness to pay
2. Coordination failure - fear of raising prices first due to consumer backlash
3. the Invisible Handshake - prices suppressed due to perceived long-term relationship between firm and consumer |
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Term
| Price elasticity as relating to price-setting |
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Definition
determines the firm's latitude for raising prices
Firms should:
Measure It - determine which levels consumers are willing to defect in response to a price increase
Change It - attempt to raise EVC through product development (preferred method) or by altering consumer perceptions (dark side) |
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Term
| 3 issues concerning Pricing Ethics |
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Definition
1. Collusion (like signaling)
2. Price discrimination
3. Gouging |
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Term
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Definition
an exercise in one-way communication
the more often the message is sent, the more likely it will be received. However, resource constraints make it necessary to send messages efficiently and effectively. |
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Term
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Definition
"cost per thousand" vs. weighted CPM
CPM is the 'cost per 1000' people that are reached by an ad.
wCPM also weighs the audience according to the goals of the firm and the segments being reached. |
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Term
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Definition
Reach - # of people the message reaches (% of population)
Frequency - how often the message is repeated
Tradeoffs: based on goals of ads, characteristics of message, environment constraints |
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Term
| Reach vs. Freq recommendations |
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Definition
- Reach when the message is simple and the objective involves simple awareness or reminding.
- Frequency when the message is complex or the objective involves education or persuasion. |
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Term
| Reach vs. Freq circle calculations |
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Definition
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Term
| What noise factors reduce the effectiveness of ads in the Advertising environment? |
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Definition
1. Number of ads
2. Low Consumer Involvement
3. Confusion and Market-Leader Attributions |
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Term
| (5) Tactics used to address advertising noise |
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Definition
1. Huge budgets (Coke)
2. Creative execution (doughboy, aflack)
3. Creative scheduling (Sunkist vs. Coke)
4. Clear & Consistent Positioning/Message (Michelin baby - safety)
5. Promotion (sales, coupons - negative effect in long term) |
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Term
| Price promotion vs. Advertising |
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Definition
Price promotion is more responsive than Advertising, however, in the long term, advertising has a positive effect and promotions have a negative effect on brand attractiveness.
* promotion also makes consumers more price sensitive |
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Term
| (6) Achievements of Advertising |
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Definition
1. Awareness
2. Knowledge
3. Liking
4. Preference
5. Purchase
6. Brand switching/Repeat purchase
* only stage 1 & 2 should be expected of an advertising initiative |
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Term
| 2 economic schools of Advertising |
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Definition
1. Chicago school [Advertising = Information] *classical, consumers are rational
2. Harvard school [Advertising = Market power] *consumers are irrational |
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Term
| (4) key points of Classical Advertising |
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Definition
1. only INFORMS people
2. greater knowledge allows easier perception of substitutes and greater price sensitivity
3. enables all firms to communicate, making entry easier
4. greater competition leads to lower prices for consumers |
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Term
| (4) key points of Advertising = Market power |
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Definition
1. affects preferences and tastes and can falsely differentiate products
2. consumers become more brand loyal and less price sensitive because they perceive fewer substitutes
3. potential entrants face a 'loyalty' barrier to entry
4. less competition leads to higher prices for the consumer |
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Term
| 2 Behavioral schools of Advertising |
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Definition
1. consumers as Good learners (classical)
2. consumers as Poor learners (marketing) |
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Term
| (3) Types of attributes for 'Consumers as Good learners' |
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Definition
1. Search goods/attributes (learned before purchase)
2. Experience (learned when trying product)
3. Credence Goods/attributes (trust other source; DR./lawyer) |
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Term
(4) attributes of 'Consumers as Poor learners'
- [market power school of thought] |
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Definition
1. Insufficient exposure to evidence
2. Biased Encoding the Evidence
3. Inappropriate Use of Evidence
4. Use of "Signals" and Peripheral Cues |
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Term
| 2 concerns for Advertising ethics |
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Definition
1. Vulnerable Populations (children)
2. Need Creation (hand sanitizer, restless legs syndrome) |
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