04 - Adapting the Price and Pricing Strategies for New Offerings Flashcards
Types of Price Adaptation (12)
1) Geographical Pricing
2) Price Discounts
3) Allowances
4) Loss-leader
5) Special event
6) Special customer
7) Cash rebates
8) Low-interest financing
9) Longer payment terms
10) Warranties/Service contracts
11) Psychological discounting
12) Price discrimination
Ways to Initiate and Respond to Price Changes (5)
1) Initiating price cuts due to excess plant capacity or domination of market
2) Price-cutting traps
3) Initiating price increases
4) anticipating competitive responses
5) Responding to competitors’ price changes
Definition: Product-Line Pricing
A concept where products of the same line are priced according to their cross-elasticity of demand. Here products are considered to be complements, where some products are even sold at a loss to entice buyers and these products ensure that the organization can offer potential buyers complete product lines.
Prices required for Product-Line Pricing (3)
1) Lowest-priced product price
2) Highest-priced product & price
3) Price differentials for all other products in the line.
Ways to estimate the profit impact caused by price changes (2)
1) Break-even analysis principles
2) Looking at cost, price, and volume data for individual products
Equation: % Change in Unit Volume to Break Even on a price Change
-% price change/(Original contribution margin + percentage price change)
New Product Pricing Strategies (3)
1) Skimming Pricing Strategy
2) Penetration Pricing Strategy
3) Intermediate Pricing Strategy
Definition: Skimming Pricing Strategy
The price for a new product is set very high initially and is typically reduced over time
Definition: Penetration Pricing Strategy
Product is introduced at a low price
Definition: Intermediate Pricing Strategy
Price is set between the two extremes and is used in the vast majority of initial pricing decisions
Skimming Pricing Strategy is useful if (7)
1) Demand is likely to be price inelastic
2) There are different price-market segments, of which one will pay a higher price for it
3) It can be protected by a patent or copyright
4) Production or marketing costs are unknown
5) Production capacity is constrained
6) The firm wants to quickly recoup its investment or fund other projects
7) There is a realistic perceived value in it
Penetration Pricing Strategy is useful if (6)
1) Elastic demand in target market segment
2) Neither unique nor protected by patent or copyright
3) Competitors are expected to quickly enter the market
4) There are no distinct and separate price-market segments
5) possibility of large savings in production and marketing costs if a large sales volume can be generated
6) The firm’s major objective is to obtain a large market share
Pricing strategies can be termed as either (2)
1) Full-Cost Price Strategies
2) Variable-Cost Pricing strategies
Definition: Full-Cost Price strategies
Consider both variable and fixed costs
Definition: Variable-Cost Price Strategies
Consider only the direct variable costs associated with an offering. This is also known as contribution pricing and is used when a firm operates under capacity and fixed costs are a great proportion of total costs
Types of Full-Cost Price Strategies (3)
1) Mark-up Pricing
2) Break-Even Pricing
3) Rate-of-Return Pricing
Equation: Unit Selling Mark-up Price
Total Unit Cost/(1 - Desired Market-up)
Equation: Mark-up percentage of the cost
(Unit selling price - Per Unit Cost) / Per Unit Cost
Equation: Mark-up percentage of the price
(Unit selling Price - Per Unit Cost)/ Unit Selling Price
Equation: Return on Investment (ROI)
[(Price * Quantity) - (Unit Cost * Quantity)]/Investment
Variable-Cost Price Strategies Assumptions (3)
1) Short-term, the relevant costs are variable, not total
2) Variable unit cost represents the minimum selling price
3) Any price above this minimum contributes to fixed costs and profit
Effects of Variable-Cost Price Strategies on demand (2)
1) Stimulates Demand - as variable cost prices are lower than full-cost prices
2) Shifts Demand from one time period to another
Definition: Competitive Interaction
The sequential action and reaction fo rival companies in setting and changing prices for their products and assessing likely outcomes, such as sales, unit volume and profit for each company and an entire market.
Definition: Price War
Involves successive price cutting by competitors to increase or maintain their unit sales or market share. If competitors match the lower price, market share, sales and profit gains could be lost. Usually the overall price reductions benefit none of the competitors
Characteristics increasing/decreasing the risk of Price Wars (7)
1) Product Type (Undifferentiated/Differentiated)
2) Market growth Rate (Stable or Decreasing/Increasing)
3) Price visibility to competitors (High/Low)
4) Buyer price sensitivity (High/Low)
5) Overall industry cost trend (Declining/Stable)
6) Industry capacity utilization (Low/High)
7) Number of Competitors (Many/Few)
Characteristics of Pricing in E-Commerce (8)
1) Price transparency
2) Informed consumers
3) Rising international competition
4) Reverse auctions
5) Rise of new digital models
6) Lower costs
7) High price elasticity
8) Frequent price changes
Online Buyer Benefits (7)
1) Low prices
2) Shopping convenience
3) Easy to Compare
4) Free shipping
5) Time saving
6) Easy to buy
7) Range of products
