14. Pricing Flashcards
What is cost-based pricing?
When you set prices as a function of cost. examples include:
Variable product csot
full absorption cost
life cycle cost
target based cost
What are the issues with cost-based pricing?
poor quanlity of information may lead to poor pricing and information can be quickly outdated, and costs not properly capture in the accounting system.
death spiral - if sales are going down due to high prices, the fixed cost will increase resulting in a higher cost per unit which will then result in a higher selling price and even less sales.
What is demand-based pricing?
it focuses on two things - the value to the customer and the demand (competition).
What is predatory pricing?
When a company delibetartly prices below costs to drive out competitiors and restrict supply - competitiors may not be able to match the low price and go out of business.
Key points:
- delberate price cutting - free gifts/products
- forces smaller/weaker rivals out of business
- works in the short term but not the long term
- anti competitive and illegal if proven
What is penetration pricing
Setting the price low to attract customers and to gain market share and then raising later.
What is price skimming
Selling goods at a higher price initially so that fewer sales are needed ot break even. over time, the price is lowered to widen the market.
this is good for early-adopters who have a low price sensitivity.
Key points:
High price, limited volumes.
short window of opportunity
suitable for products that have a short life cycle or face competition at some point in the future
What is peak load pricing
charging a higher price for the same product or service when there is a higher demand
key points:
adjust price to demand and volume
the higher teh demand the higher the price
What is loss leader pricing
Selling a product at a price below market cost to stiulate the sales of other, more profitable goods or services.
key points:
products sold below market price
customer draw to stimulate sales of more profitable goods or services
purcahses of other items more than cover the loss on item sold.
What is tender/contract pricing?
making an offer, bid, or propsal or expressing interest in response to an invitation or request for tender.
key points:
proposal sbumitted for a contract/job
aims to cover materials andl abour costs, and generate a profit
often undisclosed and in competitive markets.
Value-based pricing?
Setting prices based on a trade-off ebtween perceived value vs incentive to produce. this uses value cerves to rank the attributes of the focal firm’s cost-volume-rofit vs main rivals.
Key points:
focuses on a single market segment
compared based on the next best alternative
focuses on differentiated features, not the brand.
Example - starbucks
