7 - Pricing Flashcards
smart manager (pricing)
treats pricing as a strategic tool for creating + capturing customer value
major pricing strategies
customer value-based pricing
cost-based pricing
competition-based pricing
customer value-based pricing
uses the buyer’s perception of the value rather than the seller’s cost
- customer perceptions of the product’s value set the ceiling for prices
- product costs set the floor for prices
- > good value pricing + value added pricing
good value pricing
offering the right combination of quality and good service at a fair price
- everyday low pricing (EDLP) - constant everyday low price with few/no temporary price discounts (eg. lidl)
- high-low pricing - charging higher prices on an everyday basis but running frequent promotions to lower prices
value added pricing
attaches value-added features and services to differentiate the companies offers and thus their higher prices
cost-based pricing
prices based on:
- costs of producing
- distribution
- selling the product
- fair rate of return for effort + risk
experience curve
aka learning curve
- drop in the average cost with accumulated experience
cost-plus pricing
aka markup pricing
- adds a standard markup to the cost of the product
markup price = unit cost / 1 - desired return
unit cost = VC + (FC/unit sales)
advantages & disadvantages of cost-plus pricing
+ sellers are certain about costs
+ price competition is minimized
+ buyers feel it is fair
- ignores demand
- ignores competitors’ prices
break even pricing
setting price to break even on costs
cost base pricing vs value-based pricing
cost based pricing: product driven
- design a good product
- determine costs of production
- set price based on costs
- convince buyers of products value
value based pricing: customer driven
- assess customer needs + value perception
- set target price to match customer perceived value
- determine costs
- design product to deliver desired value at budget cost
competition-based pricing
setting prices based on competitors’ strategies, costs, prices and market offerings
target costing vs target pricing
target costing
- starts w/ ideal selling price and then targets costs
target pricing
- starts w/ cost that then determines the price
pricing puzzle
minimize costs + optimize margins = maximize price/value
who sets the prices?
top management sets pricing objectives + policies
- industries where pricing is key often have pricing departments
who can influence the prices?
sales managers
production managers
finance managers
accountants
pricing in different types of markets
pure competition – no single buyer/seller has much effect on the going market price
monopolistic competition – trade over a range of prices because sellers can differentiate their offers to buyers
oligopolistic competition – the market consists of only a few large sellers
pure monopoly – the market is dominated by one seller
relationship b/w demand and price
inversely related
higher price = lower demand
- seen by the demand curve
price elasticity of demand
measure of sensitivity of demand to changes in prices
= % change in Q demanded / % change in P
- inelastic = demand hardly changes
- elastic = demand changes greatly (price is more sensitive)
other external factors
economic conditions (boom, recession, inflation…)
government
social concerns
break even formula
FC / price - VC
