Chapter 10: Pricing Flashcards
Which has the greater impact on profit?
a. 1% increase in unit sales
b. 1% increase in price
c. 1% decrease in variable costs
d. 1% decrease in fixed costs
b. increase in price
Why is pricing so important?
The impact of pricing on profitability is massive. If you can adjust one thing to make more money, you would want to adjust price.
If you want to increase profitability, you should adjust price above all else. This is because by adjusting price, you aren’t increasing ______, like you would be doing if you increased sales.
costs
(as long as your price starts above costs to begin with)
the reflection of everything you do (everything about the product, your promotion, your people, etc.) as a business.
pricing
The single most important decision in evaluating a business is ______ _______.
pricing power
(if you have the ability to raise prices, then you have a powerful business)
The “what you get - what you give” marketing equation essentially represents the concept of “_______ _______ _______,” where the value a customer receives from a product or service is calculated by subtracting the perceived cost from the perceived benefits they gain
customer perceived value
What are the 4 influences on pricing?
- Customer perceptions (high priced vs. low priced)
- Internal costs (variable and fixed costs)
- Market characteristics (price sensitivity)
- Competition
if you think a bottle of Dasani water out of a vending machine should cost $1.25, but the price is $3.25, you are likely to decide not to purchase. This is an example of which of the influences on pricing?
Customer perceptions
a cost that changes with the quantity of the product sold; costs that vary directly with the production of one additional unit.
variable costs
(ex: the production cost of a television is directly related to how many are produced and sold)
(marketing-related variable cost examples: commissions, price discounts, coupons, and other costs tied directly to quantity)
If cost is assigned per unit, it is almost always a (variable/fixed) cost.
variable
a cost that does not change based on sales; the sum of all costs required to produce the first unit of a product.
fixed costs
(ex: general company costs like rent, utilities, insurance, salaries)
Marketing costs that are considered to be (fixed/variable) costs include sales salaries, advertising, sponsorships, and research and development costs (such as product research)
fixed
(bc these costs don’t change based on sales/the quantity sold)
the product of expected unit sales and unit price.
total revenue
(formula: expected unit sales x unit price)
The monetary gain resulting from revenues after subtracting all associated costs.
profit
(formula: total revenue - total costs)
ratio that expresses how much the sale of a unit contributes to fixed costs or profit relative to the variable cost per unit.
markup
(formula: (unit price - unit variable cost) / unit variable cost)
Setting an initially high price for a new product and using gradual, timed price drops to make as much profit as possible over time by maximizing how much you make from each sale.
skimming strategy
Introducing a new product at a relatively low price with the intention of establishing a large market share before competitors can establish themselves.
Penetration pricing
a pricing strategy promising consumers a low price without the need to wait for sale price events or comparison shopping; when a store offers consistently stable prices tied to small markups on items throughout the store
Everyday Low Prices (or EDLP)
A form of dynamic pricing in which a store offers low prices temporarily and then raises prices significantly.
high-low pricing
A pricing strategy in which the retailer discounts certain items significantly to lure customers to the store in hopes of those customers buying other merchandise at higher margins.
loss-leader pricing
(ex: Kroger might offer Kraft Real Mayo at $4.79 rather than the regular price of $5.29 to lure customers to the store who then buy their weekly groceries at regular prices)
Price-match guarantees make price (more/less) sensitive.
less (decreases price sensitivity)
(bc it acts like a guarantee; it’s like a promise which makes it more stable)
T or F: Your pricing is going to be reflective of what your goal is.
True
(so like if if your goal is to maintain cash flow, you may lower the price)
_______ _______ measures the responsiveness of demand to changes in price (that is, price sensitivity)
Price elasticity
How do you calculate price elasticity?
Price Elasticity of Demand = Percentage Change in Quantity Demand / Percentage Change in Price
(To calculate Percentage Change: (X2 - X1) / X1)
a curve that shows the inverse relationship between price and quantity demanded
demand curve
According to the demand curve, as price increases, quantity demanded (increases/decreases).
decreases
(and vice versa)
What does the demand curve tell us?
There are different people in the same market willing to pay different prices for the exact same thing.
If changes in price produce proportionately LARGER changes in quantity, demand is said to be relatively (inelastic/elastic); when there is LARGER changes in quantity compared to price
elastic (sensitive)
(occurs in situations when elasticity is GREATER than one)
If changes in price produce proportionately SMALLER changes in quantity, demand is said to be relatively (inelastic/elastic); when there is SMALLER changes in quantity as compared to price
inelastic (not sensitive)
(occurs in situations when elasticity is LESS than one)
If you can change the price a lot, and demand only shifts a tiny bit, then you have (elastic/inelastic) demand.
inelastic
What are the 3 factors that affect price elasticity/sensitivity? Describe them a little.
- Substitutes – more substitutes = more elastic
- Necessities – more necessary = less elastic/more inelastic (like if something is a necessity, changing the price won’t make demand change that much bc it is considered a necessity)
- % of Disposable Income – higher % = more elastic
T or F: If something is NOT a necessity, it is more elastic.
True
Prices for movie tickets is generally (elastic/inelastic)
inelastic
What does marketing do to a product’s price elasticity?
It should make people more accepting of higher prices if you are marketing well (should decrease price sensitivity; make it more inelastic)
How can we make pricing fully value-based?
Price Discrimination
charging different customers a different price for the same thing
(at roughly the same time).
price discrimination
(ex: airlines changing prices for different people)
Is price discrimination legal?
YES, price discriminations are GENERALLY LEGAL, particularly if they reflect the different costs of dealing with different buyers or are the result of a seller’s attempts to meet a competitor’s offering
It is only considered ILLEGAL when the intent of that discrimination is to harm competitors.
Why did Harvard say that we are “in a new era of supercharged price discrimination”?
Because of the online spaces.
Ex: Amazon charges lots of different prices for the same product to different consumers based on where you live, what software your using, etc.
a subset of heavy users who are highly engaged with a category and a brand. They are especially interested in innovative uses for the product
and in new variations on it.
superconsumers (the people at the top of the demand curve who are willing to pay a lot of money and are responsible for a large portion of sales/revenue)
Superconsumers are price (sensitive/insensitive)
insensitive (willing to pay a lot of money)
Are there super consumers for any product?
Yes; “super consumers” exist for nearly every product category
T or F: The goal of price discrimination is to maximize profits by selling the same product or service at different prices to different customers
True (it allows companies to charge each customer the maximum amount they are willing to pay)
when two or more competitors agree (either directly or indirectly) to set prices at a specific level; is an illegal pricing practice and negatively effects consumers
price fixing
(ex: when sellers agree to set high prices in a market, which forces customers to pay higher prices than they normally would if the competitors were competing normally and prices could vary)
When a company offers customers an attractive low price on an item, but then doesn’t have the item available when the customer tries to buy, instead pushing a higher priced item that typically has a higher margin
bait and switch
T or F: Bait and switch is illegal when the advertised price was never a real offer. (ex: if the item was never available bc there weren’t any for sale, or if the price includes other hidden fees or requirements that were not indicated in the initial offer) On the other hand, it is legal for a company to offer a sale price as long as the price was legitimate and at least one of the items was sold at that price.
True
A retail store advertises that they have a t-shirt that is on sale but when customers arrive to the store the t-shirt is not available. But fortunately, the associates have a higher priced t-shirt to offer the consumer to purchase instead. What negative pricing practice does the above situation describe?
bait and switch
What is Price Discrimination Method #1?
Value-based pricing (in contrast to cost-based pricing)
setting the price based on what customers are willing to pay, but doing it for very defined categories; offering multiple versions of the product at different price levels
value-based pricing
(ex: Spotify; they offer a free version and a premium version)
setting prices based on costs (especially variable costs)
cost-based pricing
Which is more difficult to do: value-based pricing or cost-based pricing?
Value-based pricing because it is more work (have to take into account your different consumers and what they’re willing to pay)
How does value-based pricing help with price discrimination?
it allows businesses to charge different prices to different customer segments based on their perceived value of the product or service, essentially capturing more profit by tailoring prices to each customer’s willingness to pay, which is the core concept of price discrimination; the higher value a customer perceives, the higher price they are willing to accept
What is Price Discrimination Method #2?
Changing prices to charge customers exactly what they are willing to pay
(ex: dynamic pricing; discounts)
(So, unlike value-based pricing where they just make categories of things, we’re talking about targeting every single person individually
Changing the price constantly to
match competitors or customer
demand
dynamic pricing
What are the four determinants of unfairness perceptions in relation to dynamic pricing?
(That is, how do people perceive dynamic pricing when they it is unfair)
- Perceptions of excessive profit (like price-gouging)
- Perceived immorality
- Inability to understand pricing strategy
- Reputation (if you have a good reputation, people will give you the benefit of the doubt that the reason why you’re changing your pricing is surely justified)
Why must firms be careful when using dynamic pricing?
bc it can lead to customer perception issues like feeling taken advantage of if not implemented transparently, potentially damaging brand loyalty and trust, especially if customers feel they are paying different prices for the same product based on their individual circumstances; this can also create ethical concerns regarding fairness and price discrimination
Where is dynamic pricing especially prevalent?
- Travel (airlines, hotels)
- Ride-Sharing Services (like rental car companies; uber)
- Online Retail (like Amazon)
where demand fluctuates significantly and businesses can adjust prices in real-time based on factors like time, location, and competition
What is Price Discrimination Method #3?
“Pay What You Want”
allowing customers to pay exactly what they are willing
“Pay What You Want” Pricing
(not having a set price and allowing customers to pay what they want)
Which of the following is true with regard to price?
a. Price only has an indirect impact on a firm’s bottom line.
b. Unlike product features, prices cannot be changed quickly
c. Historically, price has little impact on buyer choice
d. Price is a reflection of all the decisions made by the firm
d. Price is a reflection of all the decisions made by the firm
T or F: Prices can be changed quickly
True
The reason demand for movie theatre tickets has traditionally been inelastic in regards to changes in price is probably because…
a. movies are not a necessity
b. the cost is such a low percentage of movie watchers’ disposable income
c. there are so many substitutes
d. demand for diamonds has also become more inelastic to changes in price
b. the cost is such a low percentage of movie watchers’ disposable income
In what two industries has the “Pay What You Want” Price Discrimination Method been found to work?
- Coffee shops
- Restaurants
(willing to pay more for these things compared to movie theaters bc we accepted the reference prices for these industries, that is, we found the prices to be more fair than movie prices)
an expectation about the price of a given product; the price we have in our head of how much something will or should cost
reference price
How does a reference price work with the “Pay What You Want” Method?
A reference price is a powerful influence on value perceptions because it’s used as a point of comparison for the customer making purchase decisions; that is, the price customers are willing to pay in this model is heavily influenced by the reference price they have for something
T or F: We develop reference prices for everything we come into contact with, and the more we come in contact with something, the firmer and stronger our reference price is.
True
Which price discrimination method is perceived to be more fair by customers: dynamic pricing or pay what you want method?
pay what you want method
What happens when you pair Corporate Social Responsibility with Pay What You Want Method (like say you pay what you want but you’re told that a certain amount of your payment goes toward charity)?
The PWYW method was more successful when paired with CSR (people were willing to pay more).
We price discriminate because customers’ willingness to pay is ________.
varied
T or F: The Pay What You Want Model is viable for all products.
False; not all products, but can be successful for some (to determine if it’s gonna be successful you need to look into reference prices consumers have of your industry)
