4. Pricing

Question 1

Cost-Plus vs. Value Based

Answer 1

Cost-plus has a product focus

Value based has a customer focus

Question 2

Goal of Pricing

Answer 2

to maximize the difference between value created for the customer and cost incurred by the company

Question 3

WTP Considerations

Answer 3

Understand WTP -> where does value come from

Price Sensitivity -> stems from variance in WTP

Question 4

Basis of WTP & Reference Prices

Answer 4

WTP is not random

Consumers try to be sensible – attempt to assess value of good by comparing to cost of alternative ways to fulfill goals

Very strongly influenced by reference prices
- I.e. This explains why we won’t typically pay full utility we derive from water

Price we will pay known as exchange value

Cost of best alternative is Reference Value

Question 5

Pricing Strategies

Answer 5

1. SKIM - price above exchange value, trade off sales for higher CM
   > useful when demand is relatively inelastic, CM is low
2. PENETRATION - price below exchange value, trade off CM for higher sales volume
   > useful when demand is relatively elastic, CM is high
3. NEUTRAL

• each strategy is relative to exchange value, can price higher or lower but depends on two things
  1. price sensitivity
  2. contribution margin

Question 6

Contribution Margin Break-Even Curve

Answer 6

A price change will be equally profitable is

Original CM * Original Q = New CM * New Q