6. Pricing Decisions Flashcards
Price 2
- Price brings together all components of the marketing program.
- Price is the only component of the marketing mix that generates profits!!
Factors that should be considered when calculating price: 4
- The business strategy and the other components of the marketing mix with which it must be compatible
- The extent to which the product is perceived to differ from competitive offerings
- Competitors’ costs and prices
- Availability and prices of possible substitutes
Price-Setting Decision Process 7
- Set Strategic Pricing Objectives
- Estimating Demand
- Estimating Costs
- Analyzing Competitors’ Costs and Prices
- Methods Managers Use to Determine an Appropriate Price Level
- Set a price level
- Deciding on a Price Structure: Adapting Prices to Market Variations
set Strategic Pricing Objectives
Strategic pricing objectives should reflect what the firm hopes to accomplish with the product in its target market
Market share leadership
Set low price to increase market share
profit maximisation
Choose the price that produces the maximum profit
competition based 2
- price set is primarily influenced by competitors’ prices
- Keep price consistent
product quality leadership
use price to signal high quality to position as the quality leader
pricing strategies 2
- Skimming Pricing
- Penetration Pricing
Skimming Pricing 4
- Setting a high price for a new product to skim maximum revenues from the target market
- Results in fewer but more profitable sales
- Aims to reduce price in future
- Might cause customers’ resentment
Penetration Pricing 3
- Setting a low price in order to build large market share quickly
- Market must be price elastic
- Aims to discourage other new entrants
Estimating Demand 3
- The total number of customers willing to buy during a given period varies according to the price
- The familiar demand curve depicts this variation in the quantity demanded at different prices
- Inverse relation between a product’s price and the quantity demanded: the higher the price, the less people want to buy
HOW DEMAND AND SUPPLY ESTABLISH PRICE 2
- Price Equilibrium
- Elasticity of Demand
Price Equilibrium
The price at which demand and supply are equal.
Elasticity of Demand
Consumers’ responsiveness or sensitivity to changes in price.
The degree of responsiveness of demand to a price change
- Elastic demand
- Inelastic demand
- Unitary demand
Methods for estimating demand 2
- One approach is to survey a sample of consumers
- More realistic approaches include estimating the price–quantity relationship, in-store experiments or multiple test markets
Factors Affecting Customers’ Sensitivity to Price 3
- Buyer’s perceptions and preferences
- Buyer’s awareness and attitude towards alternative
- Buyer’s ability to buy
Buyer’s perceptions and preferences 2
- Unique value effect (unique benefits)
- Price quality effect (high quality)
Buyer’s awareness and attitude towards alternative 3
- Substitute-awareness effect (unaware of competitors)
- Difficult- comparison effect (difficult to compare)
- Sunk-investment effect
Buyer’s ability to buy 4
- Total-expenditure effect
- End-benefit effect
- Shared- cost effect
- Inventory effect
Unique value effect
Customers are less price sensitive when they perceive the product provides unique benefits, there are no acceptable substitutes
Price quality effect
Customers are less price sensitive when they perceive the product offers high quality, prestige or exclusiveness
Substiture awareness effect
Customers are less price sensitive when they are relatively unaware of competing brand or substitute products
Difficult comparison effect
Customers are less price sensitive when it is difficuly to objectively compare the quality or performance of alternatuive brands or substitutes
Sunk investment effect
Customers are less price sensitive when the purchase is necessary to gain full benefit from assts previously bought
Total expenditure effect
Customers are less price sensitive when their expenditure for the product is a relatively low proportion of their total income
End benefit effect
Customers particularly organizational buyers purchasing raw materials or component parts are less price sensitive when the expenditure is a relatively small proportion of the total cost of the end product
Shared cost effect
Customers are less price sensitive when part of the price of the product is borne by another party
Inventory effect
Customers are less price sensitive in a short run when they cannit store large quantities of the product as a hedge against future prices increases
Elastic Demand
Consumers buy more or less of a product when the price changes up-down
Inelastic Demand
An increase or decrease in price will not significantly affect demand down-down up-up
CROSS ELASTICITY OF DEMAND
When products are substitutes for one another, a price increase in one will be reflected as an increase in demand for the other. When products are complements, meaning that one product is essential to the use of the other, an increase in the price of one will decrease demand for the other or vice versa.
Estimating Costs 5
- Fixed costs
- Variable costs
- Total costs
- Marketing mix costs
- Cost and volume relationships
Fixed costs:
Constant in the short term, regardless of production volume or sales revenue
Variable costs:2
- Vary in magnitude directly with the level of production.
- They remain constant per unit
Total costs:
Equal the sum of fixed and variable costs for a given level of production
Marketing mix costs
Include both fixed and variable costs as well as other costs such as retailers or distributors’ markups that don’t even appear on the company’s books
Measuring costs:
Firm’s cost accounting system provides managers with information about the fixed and variable costs associated with each product
Cost and volume relationships: 2
- Economies of scale
- The experience curve
Analyzing Competitors’ Costs and Prices 2
- The manager needs to learn and track the price, cost, and relative quality of each competitor’s offer
- Reverse engineering can be used to take apart competing products and estimate the cost of their components, packing, and production processes
Methods Managers Use to Determine an Appropriate Price Level 3
- Cost-Oriented Methods
- Competition-Oriented Methods
- Customer-Oriented Methods
Cost-Oriented Methods 3
- Simplest and most commonly used pricing method is to add a standard markup to the cost of the product
- Does not explicitly consider the price sensitivity of demand or the pricing practices of competitors
- The approach largely ignores the price sensitivity of demand
Competition-Oriented Methods 2
- Some companies key their pricing decisions to what competitors are charging for similar offerings and pay relatively less attention to their own costs or demand schedules
- Firms that pursue competition-oriented pricing approaches do not ignore cost or return-on-investment considerations
- Price leader
- Going-rate pricing approach
Price leader: 2
- Decides an increase in industry prices is necessary to meet increased costs and maintain returns
- Ability of a firm to be a price leader whose pricing decisions are emulated by other companies is not determined solely by its size or market share
Going-rate pricing approach:
Firms try to maintain prices equal to those of one or more major competitors
Customer-Oriented Methods 2
- Pricing to capture the value perceived by the customer
- Estimating customer value by assessing value-in-use: A process which begins with the selection of a reference product, usually the product the customer is currently using or a major competitor’s product
Other perceptual pricing issues 3
- Customary price
- Psychological pricing
- Promotional pricing
Deciding on a Price Structure: Adapting Prices to Market Variations
The final step in the pricing process is usually to develop a price structure that adapts the price to variations in cost and demand
Geographic Adjustments 4
- Zone pricing
- Uniform delivered pricing
- Freight absorption pricing
- FOB origin pricing
Zone pricing:
The company divides the country into two or more pricing
Uniform delivered pricing
A standard freight charge is assessed every customer, regardless of location
Freight absorption pricing
The seller picks up all or part of the freight charges
FOB origin pricing:
The manufacturer places the goods “free on board” a transportation carrier
At this point, the title and responsibility passes to the customer, who pays the freight from the factory to the destination
Global Adjustments
Geographic adjustments become even more complicated when the geographic areas involve different countries
Prices in different countries may have to be adjusted for:
- Different exchange rates
- Variations in competition
- Market demand, or strategic objectives
- Different governmental tax policies
Differential Pricing
Occurs when a firm sells a product or service at two or more prices not determined by proportional differences in cost
Common differential pricing adjustments:
- Time pricing
- Location pricing
- Customer segment pricing
Product-Line Pricing Adjustments 3
- Required when a firm produces a line of several models that customers perceive as bearing some relationship to one another
- Sellers often bundle the various items in their product line and sell the bundle at a price less than the total of the items if priced separately
- Since some customers may not want the bundle, provision must be made to allow purchase of individual items
PRICING TACTICS 2
- Price Bundle
- Price Unbundle
