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Product & Pricing Management > Adapting the Price and Pricing Strategies > Flashcards

Adapting the Price and Pricing Strategies Flashcards

1
Q

Adapting the Price: Geographical Pricing

A
  • Barter
  • Compensation deal
  • Buyback arrangement
  • offset
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2
Q

Adapting the Price: Price Discounts and Allowances

A
  • Discount (for prompt paying)
  • Quantity Discount
  • Functional Discount (offered by manufacturer to trade channel, must be same discount for each channel)
  • Seasonal Discount (hotels, airlines)
  • Allowance (turning in an old item and buying a new one)
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3
Q

Adapting the Price: Strategies

A
  • loss-leader pricing
  • special event pricing
  • service contracts
  • psychological discounting
  • special customer pricing
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4
Q

Adapting the Price: Price Discrimination

A
  • Customer-segment pricing
  • product-form pricing
  • Yield-pricing
  • time pricing
  • location pricing
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5
Q

Initiating Price Changes

A
  • Initiating Price Cuts (excess plant capacity, market domination)
  • Price-Cutting traps (low quality, price war, fragile market share, price concessions)
  • Initiating price increases (delayed quotation pricing, unbundling (e.g. airline services), reduction of discounts, escalator clauses)
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6
Q

Responding to Price Changes

A
  • Anticipating competitive responses

- responding to competitors’ price changes

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7
Q

Product-Line Pricing: Cross-elasticity of demand

A
  • relates price elasticity simultaneously to more than one product
  • measures the responsiveness of quantity demanded of product A to a price change in product B
  • products are considered complements (substitutes) if lowering (raising) the price of product A leads to an increase in the unit sales of product B
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8
Q

Product Line Pricing

A
  • products are not priced in isolation
  • may be sold at a loss to entice buyers
  • ensure that the firm can offer potential buyers complete product lines
  • thus the price may bear little relationship to the actual cost of a product
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9
Q

Product-Line Pricing: Factors

A
  • lowest-priced product & price: traffic builder to capture hesitants or first-time buyers
  • highest-priced product & price: premium item in quality and features
  • price differentials for all other products in the line: differences in perceived value, get larger from less to more expensive items in the product line
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10
Q

Estimating the profit impact from price changes

A
  • Break-even analysis to assess the effect of price changes on volume
  • impact of price changes on profit can be determined by looking at cost, price and volume data for individual products
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11
Q

Determining the unit volume necessary to break even

A

percentage change in unit volume to break even on a price change = - (percentage price change) / (original contribution margin) + (percentage price change)

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12
Q

New Product Pricing Strategies

A
  • Skimming (price set very high initially and reduced over time)
  • Penetration (product introduced at low price)
  • Intermediate (price between extremes, most common initial pricing decision)
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13
Q

When is Skimming Pricing Strategy appropriate?

A
  • inelastic demand
  • protected by patent or copyright
  • constrained production capacity
  • quick amortisation
  • high perceived value
  • high price-market segment
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14
Q

When is Penetration Pricing Strategy appropriate?

A
  • elastic demand
  • not unique or protected by patent/copyright
  • competitors enter the market as well
  • objective is large market share
  • large sales volume leads to large savings in production
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15
Q

Distinction of Pricing Strategies

A
  • Full-Cost Price Strategies (consider variable and fixed costs or direct and indirect costs)
  • Variable-Cost Price Strategies (consider only direct variable cost associated with offering)
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16
Q

Full-Cost Price Strategies

A
  • Mark-up Pricing: Cost of offering + fixed markup
  • Break-Even Pricing: unit fixed costs + unit variable costs
  • Rate-of-Return Pricing: Obtain a pre-specified rate of return on investment for organization
17
Q

Mark-up pricing: Formula

A

Unit Selling Mark-up Price = Total Unit Cost / (1 - Desired Mark-up)

  • mark-up can be percentage of cost or selling price
18
Q

Rate-of-Return Pricing: Formula

A

Price = (ROI * Investment) + (Unit Cost + Quantity) / Quantity

ROI = Profit / Investment

19
Q

Variable-Cost Pricing Strategies (Contribution Pricing)

A
  • when firm operates under capacity and fixed costs are a great proportion of total costs
  • short term, relevant costs are variable, not total
  • variable unit cost = minimum selling price
  • any price above minimum contributes to fixed costs and profit
20
Q

Variable-Cost Pricing: Demand-Oriented Pricing

A
  • stimulates demand: var. cost prices are lower than full-cost prices, demand is assumed to increase
  • shifts demand: shifts demand from one time period to another
21
Q

Pricing and Competitive Interaction

A

Marketers rarely look beyond an initial pricing decision to consider:

  • competitor countermoves
  • own subsequent moves
  • outcome of those measures

Remedies: Long-Term Focus or Competitor Focus

22
Q

Competitive Interaction

A

Sequential action and reaction of rival companies in:

  • setting and changing product prices
  • assessing likely outcomes (sales, unit volume, company or market profit)
23
Q

Remedy: Long-Term Focus

A
  • competitive interaction stretches over multiple periods and their consequences are not always immediately observable
  • envision future pricing moves, competitor countermoves and likely outcomes
24
Q

Remedy: Competitor Focus

A

Questions to avoid misjudgement about prices set or changed by competitors:

1) What are competitors’ goals and objectives?
2) How do they differ from our goals?
3) What differing assumptions do we and each competitor make about our companies, products and markets?
4) What strengths and weaknesses does each competitor believe it has and we have?

=> Misreading the situation can result in price wars

25
Q

Price War

A
  • successive price cutting by competitors to increase or maintain unit sales and market share
  • overall lower price level benefits none of the competitors
  • if competitors match lower prices, market shares and sales can be lost
26
Q

Price War: When to cut prices

A
  • firm has cost or technological advantage
  • primary demand increases if prices are lowered
  • price cut specific to products or customers not across the board
27
Q

Contemporary Pricing: Internet & Benefits

A
  • price transparency
  • informed customers
  • rising international competition
  • reverse auctions
  • new business models
  • lower costs
  • frequent price changes
  • convenience, easy shipping, range of products

Product & Pricing Management (4 decks)

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