CH11: Pricing and Sales Promotions Flashcards
price
the value of a good or service, determined by negotiation between buyers and sellers
who gave rise to the idea of setting one price for all buyers? [in chapter quizzes]
large scale retailers at the end of the 19th century; e.g. Tiffany, Woolworth, etc.
reference prices
internal prices against which consumers compare the price of goods; can result in a perceived price that is different from the stated price of the good
image pricing
the use of higher prices as an indicator of quality; effective with ego-sensitive products such as luxury goods
price cues
any marketing tactic used to persuade customers that prices offer good value compared to competitors’ prices, past prices or future prices; e.g. prices ending in “9”, sale signs, etc.
the 6 main steps in setting price
- define pricing objective
- determine demand
- estimate costs
- analyze competitors
- select pricing method
- set final price
the 4 common pricing objectives
- short term profit
- market penetration
- market skimming
- quality leadership
short term profit pricing objective
choose a price that produces maximum current profit, cash flow, or ROI; may sacrifice long term viability
market penetration pricing objective
price to maximize market share (generally lower than the competition); count on future economies of scale to improve margins
market skimming pricing objective
set high prices to take advantage of early adopters, and slowly lower price over time; common when companies introduce new technologies
quality leadership pricing objective
price so that quality of the product can be maintained as high as possible
price elasticity of demand
the degree to which a change in price leads to a change in quantity sold; high fluctuations in demand = elastic; low fluctuation in demand = inelastic
fixed costs
overhead; costs that do not vary with production level or sales revenue (e.g. corporate headquarters rent)
variable costs
costs that vary directly with level of production (e.g. inventory storage)
total costs
sum of fixed and variable costs
average cost
cost per unit; total cost divided by units produced
experience curve
as a company gains experience producing a product, the cost of production per unit decreases; the “learning curve” of production
the 3 major considerations in price
- costs (price floor)
- competitor pricing (orientation point)
- customer assessment of unique features (price ceiling; e.g. what customers think the set of features is worth)
main pricing methods
- markup pricing
- target return pricing
- economic value to customer
- competitive pricing
- auction pricing
markup pricing
adding a standard markup to the product’s cost;
markup price = [unit cost] / (1 - [desired return])
unit cost equation
unit cost = variable cost + (fixed cost / unit sales)
target return pricing
price that yields the target rate of return on investment
main components of the break-even chart
- total revenue
- total cost
- fixed cost
- x-axis is sales volume
- y-axis is dollars
- breakeven point is where total revenue and total cost lines cross
economic value to customer pricing
based on buyer’s image of product, channel deliverables, warranty quality, customer support, service package, etc.
competitive pricing
firm bases the price largely on competitors’ prices
auction pricing
- English/ascending (e.g. eBay)
- Dutch/descending
- Sealed bid (e.g. govt contracts)
price discrimination
when a company sells a product or service at two or more prices that do not reflect a proportional difference in costs (first, second, third degree)
first degree price discrimination
charging each customer a different price, depending on intensity of demand
second degree price discrimination
discounting based on volume (e.g. bulk discounts)
third degree price discrimination
charging different amounts to different consumer segments
- customer segment
- product form
- distribution channel
- location
- time
product mix pricing strategies
- loss leader (e.g. gas for Wawa)
- optional feature (e.g. Tesla FSD)
- captive (e.g. Gillette cartridge razors)
- two part (e.g. cell plans)
- by-product (e.g. car maintenance)
- product bundling; pure, tied-in, or mixed (e.g. Disney+ bundle can be unbundled)
when to initiate price cuts
- excess plant capacity
- domination of market
- increase market share
when to initiate price increases
- cost inflation
- anticipatory pricing
- outsized demand
cost inflation
rising costs unmatched by productivity that squeeze profit margins and lead companies to make price increases
anticipatory pricing
companies raise prices in anticipation of inflation or government price controls
strategies to anticipate competitor response
- assume they react in kind
- assume they act in accordance with their own self-interests given the circumstances
incentives
sales promotion tools designed to stimulate quicker or greater purchase of products or services; usually short-term
drawbacks of sales promotions
- can prompt consumer stockpiling
- can devalue offerings in buyers’ minds
- can produce high immediate sales response but cannibalize future sales
consumer incentive objectives
- encouraging more frequent purchase
- fostering trial among nonusers
- attracting switchers
retailer incentive objectives
- persuading retailer to carry the brand or carry more units
- inducing retailers to promote the brand
- motivating retailers and sales staff to push the product
incentive price/approach considerations
- size
- conditions for participation
- duration
- distribution vehicle
- timing
- total sales promotion budget
push strategy
uses sales force, promotion money, or other means to induce intermediaries to carry, promote, and sell the product
pull strategy
uses advertising and other comms to persuade customers to demand the product from intermediaries
types of customer incentives
- price reductions
- coupons
- cash refunds/rebates
- price packs
- premiums
- frequency programs
- prizes
- tie-in promotions
- seasonal discounts
- financing
types of trade incentives
- allowances
- free goods
- price-off
- payment discount
allowances
extra payments offered in return for the retailer performing certain extra functions
free goods
free merchandise to intermediaries who buy a certain quantity or feature a certain product
price-off
straight discount off list price on each case purchased during a specified time period
payment discount
price reduction to buyers who pay bills promptly (e.g. deducting 2% if paid within 10 days instead of 30)
sales force incentives
sales commissions, sales contests, prizes, etc.; used to encourage sales force to support a new product or to boost sales
