Exam 3 Study Guide mgmt 322—Marketing Management

Disclaimer: This review does not necessarily cover all questions on the exam. It is simply an additional tool to assist students in preparing for the exam. Students are still responsible for all material from assigned textbook readings, lecture/class discussions, videos, and guest presentations.

Required Materials: (2) #2 Pencils

Calculators: Each student will be allowed to bring a “basic” calculator to the exam. Computers, programmable calculators, mobile phones, or any other related devices are not allowed. Any student found using a prohibited device will receive a failing grade on the exam. No exceptions.

Format: The exam will consist of 40 multiple choice/matching questions worth two points each and four short answer/problem questions worth five points each.

Pricing Fundamentals

• understand price versus non-price competition

Price competition – emphasizing price and matching or beating competitors’ price.

Nonprice competition – emphasizing factors other than price to distinguish a product from competing brands.

• demand curve

  • be able to define

Demand curve – a graph of the quantity of a product taken by buyers in the market at various prices, given that all other factors are held constant.

• understand the relationship between price and quantity demanded when a “normal” demand curve exists for a product

As price falls, the quantity demanded usually rises and vice versa.

• price elasticity of demand

  • be able to compute and interpret your calculations

Price elasticity of demand = % change in quantity demanded/ % change in price

<1 – inelastic

>1 –elastic

=1 no change

• understand how total revenue is impacted when prices are increased or decreased under different types of demand (inelastic, elastic, unitary demand)

Inelastic – higher price – higher revenue

Elastic – higher price – lower revenue

Unitary demand – no change.

• calculate the break-even volume

Break-even point = fixed costs/ per-unit contribution to fixed costs

Product price =100

Var cost= 60

Fixed cost=40

Total fixed cost=120,000

Break even=120,000/40=3,000

• factors affecting price decisions

  • define and identify the different types of costs (fixed, variable, and unit)

Fixed – do not vary with changes in the # of units produced or sold.

Variable – vary directly with changes in the # of units produced and sold.

Unit cost- The cost incurred by a company to produce, store and sell one unit of a particular product. Unit costs include all fixed costs (i.e. plant and equipment) and all variable costs (labor, materials, etc.) involved in production.

• calculate unit cost (average total cost) at manufacturer, wholesale, and retail levels

Average total cost – sum of the average fixed cost and the average variable cost.

Average fixed cost the fixed cost per unit produced.

Average variable cost- the variable cost per unit produced.

• understand the flexibility of firms to set price under different competitive structures (perfect competition, monopolistic competition, etc.)

Monopoly – can set whatever prices the market will bear. However, the company may not price the product at the highest possible level to avoid government regulation or to penetrate a market by using a lower price.

Oligopoly – can raise the prices , hoping competitors will do the same.

Monopolistic competition – the distinguishing characteristics of the product may allow a company to set a different price than its competitors. However, firms in monopolistic competition are likely to practice nonprice competition.

Perfect competition – no flexibility in setting prices.

• legal issues (price fixing (horizontal and vertical), price discrimination, predatory pricing, price advertising)—see lecture notes for detailed descriptions and examples

Price fixing:

- horizontal (collusion) – same level of channel negotiate to set up prices;

- vertical – higher level tell lower which prices to set up.

Price discrimination- charging different prices;

Predatory price- is the practice of selling a product or service at a very low price, intending to drive competitors out of the market, or create barriers to entry for potential new competitors. If competitors or potential competitors cannot sustain equal or lower prices without losing money, they go out of business or choose not to enter the business. The predatory merchant then has fewer competitors or is even a de facto monopoly, and hypothetically could then raise prices above what the market would otherwise bear.

Price advertising-

• pricing for business markets

  • define list price and understand how it relates to other pricing strategies for business markets—see lecture notes

List price refers to the manufacturer's suggested retail pricing. It may or may not be the price asked of the consumer. Much depends on the product itself, the built-in profit margin, and supply and demand. A product that is in high demand with low availability will sometimes sell higher than the list price, though this is less common than the reverse.

Virtually all products have a suggested retail or list price. This assumes the product is sold individually to the end-user or consumer. Resellers buy products in bulk and get a substantial discount in order to be able to profit from selling the product at or below list price.

Products that are inexpensive to manufacture and manufactured in great bulk can have large built-in profit margins. Retailers often offer such products at great discounts of 50% or more. Sales on items like this can draw in customers that will buy other products as well. The list price is often printed on a product, while retailers usually place their own sticker nearby so that the customer can see the "reduced" price they are paying. Retailers are not obligated to sale an item at the list price, and selling it below list is how vendors compete with each other for business.

• be able to identify alternative price discounts (trade, quantity, etc.)

Trade discounts – a discount off the list price given by a producer to an intermediary for performing certain functions.

Quantity discounts – deductions from list price for purchasing large quantities. Cumulative, noncumulative)

Cash discounts – price reduction given to buyers for prompt payment or cash payment.

Seasonal discounts – a price reduction given to buyers for purchasing goods or services out of season.

Allowance – a concession in price to achieve a desired goal.

• understand the different types of geographic pricing (F.O.B Origin, F.O.B. Destination, etc.)

FOB origin – excludes transportation costs.

FOB destination- produces absorbs transportation costs.

Uniform geographic pricing – charging all customers the same price, regardless of geographic location.

Zone pricing – pricing based on transportation costs within major geographic zones.

Base point pricing- is geographic pricing combining factory price and freight charges from the base point nearest the buyer.

Price Management

• compare and contrast the three alternative approaches to pricing a product (cost-based, demand-based, competition-based)

Cost-based – adding a dollar amount or percentage to the cost of the product.

Demand-based pricing – pricing based on the level of demand for the product.

Competition-based pricing – pricing influenced primarily by competitor’s price.

• know the difference between cost-plus pricing and markup pricing

Cost-plus pricing – adding a specified dollar or percentage to the seller’s cost.

Markup pricing – adding to the cost of the product a predetermined percentage of that cost.

• calculate selling price using the two markup pricing methods (percentage of cost OR markup, percentage of selling price OR margin)—see lecture notes