#9 Pricing

Question 1

What is pricing?

Answer 1

Pricing is the sum of all the value that customers exchange for benefits of having/using the product or service.

Question 2

What are the factors affecting pricing?

Answer 2

MMCE

1. Marketing Objectives
   - Survival
   - Profit maximisation
   - Market share leadership
   - Product Quality Leadership
2. Marketing Mix
   - Customers seek products that give them the best value in terms of benefits, for the price paid.
   - Product design, nonprice positions, distributions, promotions
3. Costs
   - VC + FC = TC
   - Experience/learning curve = average cost drops with accumulated production experience
4. External Factors
   - Type of market (pure competition, monopolistic, oligiolistic, monopoly)
   - Elasticity of demand

Question 3

What are the 8 pricing strategies?

Answer 3

CCNPDSPP

1. Cost Pricing
2. Competition-Based Pricing
3. New Product Pricing
4. Product Mix Pricing
5. Discount and Allowance
6. Segmentation Pricing
7. Psychological Pricing
8. Promotional Pricing

Question 4

What is cost pricing?

Answer 4

Cost Pricing is an approach that adds a standard mark-up to the cost of the product, that ignores current demand and competition

• certainty about costs
• pricing is simplified
• price competition is minimised?
• much fairer to buyers and sellers?

Breakeven analysis = tries to determine the price at which firm will break even or make a certain target profit

Question 5

What is competition-based pricing?

Answer 5

• Setting Prices
• Going-Rate
• Sealed-Bid

Question 6

What is new product pricing?

Answer 6

1. Market Skimming
   - Charging the highest price to ‘skim’ maximum revenues from the target market
   - Product’s quality must support the high price
   - Costs cannot be so high to the point that they cancel the advantage of charging more
   - Competitors should not be able to enter the market easily
2. Market Penetration
   - Charging a low price for a new product in order to penetrate the market to win by volume and share
   - Market must be price-sensitive
   - Production/distribution cost must fall as sales volume increases
   - Must keep competition out and maintain low price

Question 7

What is product-mix pricing?

Answer 7

Involves setting price between various product lines based on:

• cost differences between products
• customer evaluation of different features
• competitor’s prices

OPTIONAL
CAPTIVE
BY-PRODUCT
PRODUCT-BUNDLING

Question 8

What is discount and allowance pricing?

Answer 8

Adjusting basic price to reward customers for certain responses
- e.g. seasonal discount, cash discount, quantity discount

Question 9

What is segmented pricing?

Answer 9

Selling products at different prices even though there is no difference in cost
- e.g. customer, location, time, product form

Question 10

What is psychological pricing?

Answer 10

Higher price = more quality

Question 11

What is promotional pricing?

Answer 11

Temporarily pricing below list price to increase short-term sales through:

• discounts
• warranty
• loss leaders
• cash rebates etc.

Question 12

Why initiate price changes?

Answer 12

PRICE CUT

• excess capacity
• win through low costs
• falling market share

PRICE INCREASE

• overdemand
• cost inflation

Question 13

5 Types of Pricing Issues

Answer 13

1. Discriminatory Pricing = ensuring sellers offer the same price terms to a given level of trade
2. Retail Price Maintenance = manufacturer cannot require dealers to charge a specified retail price for its product
3. Deceptive Pricing = occurs when sellers state prices/price savings that are available to customers
4. Price Fixing
5. Predatory Pricing