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Principles of Marketing > 8. Offering value: Pricing > Flashcards

8. Offering value: Pricing Flashcards

1
Q

What is the profit formula?

A

Profits = [Price - Cost] * Unit sales

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2
Q

Describe where these values of the profit formula come from?

A
  • Price → firms don’t know; it is up to the market
  • Cost → Found within the organization
  • Unit sales → depends on the promotion & product development
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3
Q

What are the two types of cost?

A
  • 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
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4
Q

What is the definition of downsizing?

A

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

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5
Q

What is an example of variability of price of a product?

A

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.

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6
Q

What are the types of reference prices?

A
  • Fair price
  • Typical price
  • Last price paid
  • Upper-bound price
  • Lower-bound price
  • Competitor prices
  • Expected future price
  • Usual discounted price
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7
Q

How do customers manage cognitive activity?

A

It is managed through brand loyalty, reference groups and price-quality heuristic

high price = high quality

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8
Q

How do consumers process price information?

A

High involvement products
- Comprehension: interpretation and assignment of meaning
- Integration: comparison and integration with other information
- Attitude formation

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9
Q

What is quality assurance pricing?

A

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

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10
Q

What is price to a consumer?

A
  • 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.
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11
Q

What is the definition of prestige pricing?

A

The aim of prestige pricing is to maintain a high price to encourage certain views on the product such as premium.

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12
Q

What questions should be considered when using prestige pricing?

A
  • 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?
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13
Q

What is the definition of prospect theory?

A

A theory that shows the significance and favourability of situations
- Loss > equivalent gain (significance)
- Sure gain > probabilistic gain (favoured)
- Probabilistic loss > definite loss (favoured)

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14
Q

What is the framing effect?

A

A cognitive bias where customers purchase products based on the positive or negative semantics of a product.

e.g gain or loss

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15
Q

What is reference pricing?

A

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.

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16
Q

How to offer reference pricing?

A
  • “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
17
Q

What are the psychological tactics used to make the product cheaper?

A
  • 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
18
Q

What is the definition of cost-based approach?

A

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

19
Q

What are the benefits of cost-based approach?

A

Profit is assured as long as markup figure is sufficient and sales are to be expected

20
Q

What is the definition of competition-based approach?

A

The price depends on the price of its competitors
- > benchmark → >profit → <units sold
- < benchmark → <profit → >units sold

21
Q

What is the definition of customer-based approach?

A
  • 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
22
Q

What to consider in pricing strategies?

A
  • Margin (cost base for business model)
  • Value (willingness to pay)
  • Anchors (Competitors’ prices & other frames)
23
Q

What are the factors influencing pricing strategies?

A
  • Gain market share
  • Short-term profitability
  • Entry deterrence (start with brand loyalty)
  • Product (re)positioning
  • Exit strategy
24
Q

Describe the Pricing Tactics.

A

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

24
Q

Describe the Pricing Tactics.

A

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

25
Q
  1. Selecting the pricing objective

What are the factors influencing the objective?

A
  • Survival
  • Maximum current profit (skimming)
  • Maximum market share (penetration)
  • Product quality leadership (stability)
  • Ethical pricing
26
Q
  1. Determining demand

What can be used to determine demand?

A
  • Price sensitivity
  • Estimate demand curves
  • Price elasticity of demand
27
Q
  1. Determining Demand

What are the factors influencing the to reduced price sensitivity?

A
  • The product is more distinctive
  • Buyers are unaware of substitutes
  • Part of the cost is paid by another party
  • Buyers cannot store the product
28
Q
  1. Estimating costs

What types of costs should be estimated?

A
  • Fixed costs
  • Variable costs
  • Total costs
  • Average cost
29
Q
  1. Analysing competitor’s costs, prices, and offers

What is the purpose of analysing competitors costs?

A
  • To find the benchmark for competitors base pricing
  • To find out why they price a similar product at that price and apply that reasoning to your own product
30
Q
  1. Incorporate knowledge of consumer value

What is total customer benefit?

A

The perceived value from a given market offering

31
Q

What are factors in total customer benefit?

A

Image benefit → Personnel benefit → Services benefit → Product benefit → Total customer benefit

32
Q

What is total customer cost?

A

The perceived bundle of costs customer expect to pay for the product.

33
Q

What are factors in total customer cost?

A

Psychological cost → Energy cost → Time cost → Monetary cost → Total customer cost

34
Q

What is customer delivered value?

A

Total customer benefit - total customer cost

35
Q
  1. Select pricing strategy

What are the types of strategies to choose from?

A
  • Cost-based pricing
  • Competitor-based pricing
  • Consumer-based pricing
36
Q
  1. Selecting the final price

What are the factors determining the final price?

A
  • Impact of other marketing activities
  • Company pricing policies
  • Impact of price on channel members (production)
37
Q
  1. Measure/manage pricing strategy

How does the company measure the pricing strategy?

A
  • Feedback from customers
  • Sales
  • Changes to business’ finances
  • Changes to competition

Principles of Marketing (12 decks)

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