MARK 19: Financing Strategies Flashcards
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Price
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Price is that which is given up in an exchange to acquire a good or service. -Price is typically money exchanged for a good or service; however, it may include other costs such as time lost while waiting to acquire the good or service. -Consumers are interested in obtaining a "reasonable price," which means a "perceived reasonable value" at the time of the transaction. The price paid is based on the satisfaction consumers expect to receive from a product and not necessarily the satisfaction they actually receive. -Price can relate to anything with perceived value, not just money. When goods or services are exchanged, the trade is called barter.
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Revenue
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The price charged to customers multiplied by the number of units sold. -Prices are the key to revenues, which are the key to profits for an organization. -Revenue is what pays for every activity of the company. What's left over is profit. The price is set to earn a profit for the company.
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Profit
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Revenue minus expenses. -Managers strive to charge a price that will earn a fair profit. The price must not be too high or too low, and must equal a perceived value to consumers. -Lost sales mean lost revenue; on the other hand, if a price is too low, the company loses revenue. Additionally, setting prices too low may not attract as many buyers as managers might think.
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Profit-Oriented
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-Profit Maximization -Satisfactory Profits -Target Return on Investment
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Sales-Oriented
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-Market Share -Sales Maximization
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Demand
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The quantity of a product that will be sold in the market at various prices for a specified period.
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Supply
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The quantity of a product that will be offered to the market by a supplier at various prices for a specific period.
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Price Equilibrium
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The price at which demand and supply are equal.
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Elasticity of Demand
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Consumers' responsiveness or sensitivity to changes in price.
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Elasticity Formula
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|[(Q2-Q1)/{(Q2+Q1)/2}]/[(P2-P1)/{(P2+P1)/2}]|
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Price down revenue up
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elastic
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price down revenue down
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inelastic
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price up revenue up
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inelastic
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price up revenue down
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elastic
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price up or down and revenue stays the same
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unitary elasticity
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inelastic demand
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when E is less than one
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elastic demand
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when E is greater than one
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Unitary elasticity
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is when E is equal to one
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Factors that Affect Elasticity of Demand
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-Availability of substitutes -Price relative to purchasing power -Product durability -A product's other uses -Rate of inflation
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Availability of substitutes
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When many substitutes are available, it is easy to switch products, making demand elastic. The same is true in reverse, if no substitutes are available
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Price relative to purchasing power
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If a price is so low that it is an inconsequential part of an individual's budget, demand will be inelastic and people are not sensitive to the price increase.
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Product durability
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Repairing durable products rather than replacing them prolongs their useful life. If the cost of a new product increases, people might elect to repair the old product. Thus, people are sensitive to the price increase, and the demand is elastic.
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A product's other uses
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The greater the number of uses for a product, the more elastic demand tends to be. If a product has only one use, the quantity purchased probably will not vary as price varies.
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Yield Management Systems
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A technique for adjusting prices that uses complex mathematical software to profitably fill unused capacity. -When competitive pressures are high, a company must know when it can raise prices to maximize its revenues. -Yield management systems, which were first developed by the airline industry, utilize complex mathematical software to profitably fill unused capacity. -Yield management systems have spread beyond the service industries, and used by companies to set prices based on a number of variables.
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Variable Costs
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Varies with changes in level of output - Variable and fixed costs are important aspects of price determination.
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Fixed Costs
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Do not change as level of output changes - Variable and fixed costs are important aspects of price determination.
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Costs & Price
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-Sometimes the importance of demand is ignored when prices are decided, based largely or solely on the basis of costs. -Prices set on the basis of cost may be too high for the target market. On the other hand, if prices are set too low, the firm will earn a lower return than it should. -Costs should be determined as part of any price determination, in part to determine the floor below which a good or service must not be priced in the long run.
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examples of fixed costs
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-rent for office space -sales force salaries -mfg warranty expenses -tv advertisement -ceo limo lease payment
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examples of variable costs
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-packaging material -sales force commission -amazon.com shipping charges
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break even point
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total costs = total revenues
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Break-Even Quantity
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total fixed costs/ fixed cost contribution
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fixed cost contribution
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price - average variable cost
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Break-even analysis
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Break-even analysis provides a quick estimate of how much the firm must sell to break even and how much profit can be earned if a higher sales volume is obtained. It is useful to see what can be done to reduce costs or increase sales. However, it has limitations such as the difficulty in determining whether a cost is fixed or variable. Additionally, break-even analysis ignores demand.
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Profit Maximization
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A method of setting prices that occurs when marginal revenue equals marginal cost. -Profit maximization occurs when marginal revenue equals marginal cost. -As long as the revenue of the last unit produced and sold is greater than the cost of the last unit produced and sold, the firm should continue manufacturing and selling the product.
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Marginal Revenue (Cost)
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The change in total revenue (cost) with a one-unit change in output. -is the extra revenue associated with selling an extra unit of output
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Marginal cost
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is the change in total costs associated with a one-unit change in output.
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Markup Pricing
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uses the cost of buying the product, plus amounts for profit and for expenses not otherwise accounted for
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price
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cost/ 1- desired return on sales
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Keystoning
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is the practice of marking up prices 100% over cost or doubling the cost -Keystoning is a method based on experience, with many small retailers doubling the cost. Other factors that influence markups are the merchandise's appeal to customers, past response to the markup, the item's promotional value, the seasonality of the goods, their fashion appeal, the product's traditional selling price, and competition.
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Other Determinants of Price
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- stages of the product life cycle -competition -distribution strategy -promotion strategy -perceived quality
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"Higher quality equals higher price" is a description of:
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the information effect of price.
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Satisfactory profits
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is the pricing objective that seeks profits consistent with the level of risk that a company faces.
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To increase sales, Ford offered its 2010 model-year cars at the same price as 2009 models. This is an example of:
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status quo pricing
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Lower prices for goods and services will ________ supply.
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increase
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A candy manufacturer decreased the prices of its products by 20 percent but saw no change in total revenue. This is an example of:
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unitary elasticity.
