Chap 5: Pricing Flashcards
Pricing definition (Kotler, 2010)
The amount of money charged for a product/service, or the value that customers exchange for the benefits of having or using it.
In 4P, price … (Jobber, 2010)
is the revenue earner. The other 3 elements are costs.
Factors affect how consumers perceive price
Functional, Financial, Personal circumstance, Quality, Cognitive bias, Social comparison.
Anchoring
is a cognitive bias: consumers rely too heavily on an initial piece of information offered when buying. It is used when the product differentiation, novel products without competition or bidding.
The consumer purchase decision is based on …
… how they perceive the price (the current actual price to be), not “stated price”.
Three main pricing methods
Cost-plus pricing
Competitor-based pricing
Customer-needs-based pricing
Advantage and disadvantage of Cost-plus pricing
A: Needed data to set data is easy
D: Neglect demand and competitors factors
Advantage and disadvantage of Competitor-based pricing
A: Competitive situation is taken into account
D: Neglect demand factors. Risk of price war
Advantage and disadvantage of Customer-needs-based pricing
A: Link to consumers’ needs and Overcome price pressure by retailers.
D: Data is hard to find and interpret. Price will be relatively high. And customers won’t immediately recognize products’ superior benefits.
EDLP
charge a constant low price for high-quality offerings.
Advantages of EDLP
- Less costly promotion and sales
- Erode consumer confidence in everyday shelf price.
- Customers have less time and patience
Disadvantage of EDLP
Promotions can atually create excitement and draw shoppers.
A changing economic and technological development for price decision
- Environmentalism, renewed frugality, concern for home and job value.
- Technological development:
+ Buyer: price comparison, name a price and get it, get product free (freemium)
+ Seller: monitor consumer behaviour and set individual offer; certain customer access to special price
+ Both: negotiation auctions
Freemium
Hamari, Hanner, and Koivisto, 2017
core service is free but the revenue is generated through the sales of additional products and premium services.
Pricing is the most flexible elements, yet pricing decision is the most difficult to make.
(Doole and Lowe, 2012)
Many organisations believe that pricing is the most flexible, independent and controllable element of the marketing mix. However.. many managers find pricing decisions the most difficult to make. This is in part due to the fact that whilst most firms recognise the importance of pricing at a tactical level in stimulating short‐term demand, far fewer recognise the importance of the strategic role of pricing in … marketing.
Six major setting price objectives
- Survival
- Profit maximization
- Market share leadership
- Customer retention and relationship building
- Attracting new customers
- Opposing competitive threats
- Increasing customer excitement
Factors to consider when making pricing decisions
- Cost: be financially informed
- Customers: how they perceive price, which value are we offering, is this the right market.
- Positioning: where are we in marketplace.
- Competitors: what is their strategy, how they position, why customers accept that price
- Profit: for survival
Problems of the Freemium model
Hamari, Hanner and Koivisto, 2017
- A balance for investment between demand for premium content and high-quality core service.
- Due to popularity, “free” become less attractive
- Customers perceive quality not good since developers have fewer funds to run the service
Types of cost-plus pricing
- Target return pricing
- Break-even pricing
- Markup pricing
Types of customer-needs-based pricing
- Perceived-value pricing
- Value pricing (include EDLP)
Types of competitors-based pricing
- Going-rate pricing
- Auction-type pricing
Six-step process to set the price
Setting pricing objectives > Determine demand > Estimate cost > Analyze competitors’ price, cost, offer > Select pricing method > Select final price
Price adaptation
Companies usually set not a single price, but rather a pricing structure that reflects variations in geographical demand and costs, market-segment requirements, purchase timing, etc.
Price adaptation strategies
- Geographical pricing
- Price discounts and Allowances
- Promotional pricing
- Differentiated pricing
Geographical pricing examples
barter (direct exchange no money), compensation deal (70% cash, rest is the product)
Promotional pricing examples
loss leader pricing, psychological pricing ($299)
Differentiated pricing examples
Two or more prices that did not reflect a big different proportion with cost.
time pricing, customer-segment pricing
Initiating to price changes
- Initiate price cuts: may lead to price-war trap, low-quality trap, etc.
- Initiate price increases: unbundling, reduction of discount, delayed quotation pricing, escalator clauses
Pricing decisions
- Understand pricing perception of consumers
- Setting the price
- Price adaptation
- Initiating and responding to price changes
When to use a Penetration or a Skimming Strategy for pricing new products?
- Level of desire in the market
- Distinctiveness from competitive products
- Importance of price to market
- Ease of duplicating products
- Return on Investment objective
