8. Offering value: Pricing Flashcards
What is the profit formula?
Profits = [Price - Cost] * Unit sales
Describe where these values of the profit formula come from?
- Price → firms don’t know; it is up to the market
- Cost → Found within the organization
- Unit sales → depends on the promotion & product development
What are the two types of cost?
- Fixed
- Costs that stay the same
- E.g Rent, Insurance, Equipment, salaries
- Variable costs
- Costs that change
- E.g Raw materials, hourly wages, shipping, commissions
What is the definition of downsizing?
The price will be stay the same but get less of the product, due to cost of items getting higher and to survey if consumers will stay pay.
Example: Restaurants do this by shrinking the portion or removing the ingredients
What is an example of variability of price of a product?
If Coca-cola increases its prices by less than 1c on a can of cola, it would translate to a net income increase of $300 million.
What are the types of reference prices?
- Fair price
- Typical price
- Last price paid
- Upper-bound price
- Lower-bound price
- Competitor prices
- Expected future price
- Usual discounted price
How do customers manage cognitive activity?
It is managed through brand loyalty, reference groups and price-quality heuristic
high price = high quality
How do consumers process price information?
High involvement products
- Comprehension: interpretation and assignment of meaning
- Integration: comparison and integration with other information
- Attitude formation
What is quality assurance pricing?
It is a strategy that communicates the extra work done in order to create the product justifying the higher price to provide customer satisfaction.
- Effective when
- Product performance varies
- Credence goods
- Cost of product are high
What is price to a consumer?
- Money, time, behavioural effort and cognitive activity
- The cost of receiving the product benefits over its product life span, not just the initial purchase price.
What is the definition of prestige pricing?
The aim of prestige pricing is to maintain a high price to encourage certain views on the product such as premium.
What questions should be considered when using prestige pricing?
- Informational asymmetry: Can the buyer test the claims of “exceptional quality”?
- Market status: can the good be considered to be a luxury or a superior good?
- Market dynamics: What is the level of competition and entry barriers?
What is the definition of prospect theory?
A theory that shows the significance and favourability of situations
- Loss > equivalent gain (significance)
- Sure gain > probabilistic gain (favoured)
- Probabilistic loss > definite loss (favoured)
What is the framing effect?
A cognitive bias where customers purchase products based on the positive or negative semantics of a product.
e.g gain or loss
What is reference pricing?
A strategy that allows customers to compare between the initial and current price making it seem like a “gain” that they found a lower price.
How to offer reference pricing?
- “Isolation effect” - placing it next to pricey alternative
- Placing discount and initial price stickers together
- Offering inferior products around it to make it look better
What are the psychological tactics used to make the product cheaper?
- Using $2.99 vs $3.00 makes it relate closer to 2 than 3
- No dollar sign(e.g 3.00), make customers spend more
What is the definition of cost-based approach?
The price is based on the cost of goods/service being sold(production costs) + profit margin
Example: a cupcake
- fixed costs: $1.25, var costs: $0.75 total: $2.00
- Cost plus pricing: $2.00 + $2.00 = $4.00
- Target return pricing: unit cost + (desired returned x invested capital)/unit sales
- $2 + (1.5 x 10000)/6000 = $4.50
- Break evens at $4.50
What are the benefits of cost-based approach?
Profit is assured as long as markup figure is sufficient and sales are to be expected
What is the definition of competition-based approach?
The price depends on the price of its competitors
- > benchmark → >profit → <units sold
- < benchmark → <profit → >units sold
What is the definition of customer-based approach?
- Focused on the product’s perceived value
- Successful due to emotions, niche markets, or when the product is in shortage(drinks at match)
- Only used when a firm’s costs are irrelevant to consumers
- Optimal approach to pricing
- Based on Customer’s perceptions value, customer’s price sensitivity, demand is inelastic
What to consider in pricing strategies?
- Margin (cost base for business model)
- Value (willingness to pay)
- Anchors (Competitors’ prices & other frames)
What are the factors influencing pricing strategies?
- Gain market share
- Short-term profitability
- Entry deterrence (start with brand loyalty)
- Product (re)positioning
- Exit strategy
Describe the Pricing Tactics.
Penetration Pricing
- price set below pricing level to gain market share
- Long-term profits follow dominant market share
- May discourage new entrants(business)
- Difficult to increase price after this
Skimming
- Setting a price above value pricing level
- Used for unique products or early stage of PLC
- Maximises short-run profits
Price discrimination
- Charging a different price for the same good in different markets
- requires each market to be impenetrable and different price elasticity of demand in each market
