Chapter 10: Pricing: Understanding and capturing customer value Flashcards
What’s the definition of price
= It’s the amount of money charged for a product or service.
= It is what customers give up to gain the benefits of having or using the product or service.
What element in the marketing mix produces revenue
Price
If Price is the element in the marketing mix that produces revenue what do the other elements represent
The other elements represent a cost
What do we need to understand to set a price
We need to understand how much value the customer place on the benefits received from the product, then setting a price that captures that value
What are the upper and lower limits in setting price
Customer perception of value set the UPPER limit for prices (External factor) = No demand above this price
Costs set the LOWER limit (Internal factor) = No profits below this price
What can affect customer’s perceptions of value
Competitor’s prices
What is customer value-based pricing
It uses the buyer’s perception of value, NOT the seller’s cost, as the KEY TO PRICING.
When is price considered
BEFORE the marketing program is set.
Is value-based pricing customer driven?
Yes. It focuses on how much customers are willing to pau based on the value they see
Within the value-based pricing which is customer driven, What are the 2 main METHODS
- Good-value pricing
- Value-added pricing
What is good-value pricing
= Offering the right combination of quality and fair pricing/good service at the right price
(e.g affordable product that still meet the customer’s needs)
What is Value-added pricing
= Charging higher prices but justifying them by adding unique features or services that enhance the product’s value in the eyes of the customer.
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Attaches value added features & services to differentiate offers, support higher prices and build pricing power (avoid price competition &justify prices without losing market share)
Is cost-based pricing customer-driven
No. It’s product-driven.
= The price is set based on the costs of production plus a standard profit margin, regardless of customer perception.
Describe the process of cost-based pricing
- Design a good product
- Determine product costs
- Set price based of cost (added a standard profit margin)
- Convince buyers of product’s value
Describe the process of Value-based pricing
- Assess customer needs and value perceptions
- Set target price to match the customer perceived value
- Determine the costs that can be incurred (TARGET COSTING) (determine what we’re going to have to pay)
- Design product to deliver desired value at target price.
In the context of good value-pricing, what are existing brands trying to do
Redesigning to offer more quality for the same price
or Same quality for a less price
What does Everyday low pricing (ELP) involve
Everyday low pricing involves charging a constant everyday low price with no temporary prices (e.g no sales, discounts, promotions)
What does High-low pricing involve
High-low pricing involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items.
What is competition based pricing
Competition based pricing is to set prices based on competitor’s strategies, costs, prices and market offerings.
+ comparing it to the value your product provides to customers
What are some other consideration affecting price decisions
Before setting any prices, the marketer must understand the relationship between price & demand for their products
- Pricing in different markets
- Analyzing the price demand relationship
- Price Elasticity of Demand
What are the different types of markets
- Pure competition
- Monopolistic competition
- Oligopolistic competition
- Pure monopoly
What is a Pure competition market
In pure competition, many firms sell identical or very similar products.
There are no barriers to entry and all firms are PRICE TAKERS = they can’t set their prices but must ACCEPT THE MARKET PRICE
examples includes agricultural markets like wheat or corn
What is a Monopolistic Competition
A monopolistic competition is a market structure where many firms sell similar, but differentiated products
= they’re not identical but close substitutes
Firms have some control over their prices because of product differentiation.
examples include restaurants that sell similar food but different style menu and location
What is an Oligopolistic competition
An oligopoly is a market dominated by a small number of firms that sell similar or identical product.
The goal for each firm is to become exclusive/dominant choice for consumers
These firms have SIGNIFICANT control over prices and their pricing decisions are interdependent (one firms price changes might influence the others)
One example is Airlines
What is a Pure monopoly
Ina pure monopoly, only one firm sells a unique product or service with no close substitutes.
This firm has significant control over prices.
Barriers to entry are extremely high.
Ex: Utility companies (water or electricity) where one company usually controls the service in a region
What does a demand curve show
The number of units the market will buy in a given period at different prices
How are price and demand related
Normally price and demand are inversely related
eg Higher price = Lower demand
What’s an exception to the inverse relationship of price and demand
For prestige products, higher price = higher demand when consumer perceive that higher prices indicate higher quality.
What is price elasticity of demand
Price elasticity of demand is the response of demand to a change in price
What is inelastic demand
In Inelastic demand, demand hardly changes when there is a small change in price.
eg of products: unique products, quality, prestige, lack of substitute product, low cost relative to income
eg Insulin, Basic utilities, Tobacco, Petrol
What in an Elastic demand
in an elastic demand, demand change greatly for a small change in price
eg Soft drinks, Restaurant meals, Luxury goods. Consumers might should buy a cheaper alternative or substitute.
What’s the formula for Price elasticity of demand
% change in quantity demanded / % change in price
What are some other external factors that can influence pricing decisions (other than market type and demand)
- Economic conditions
- Reseller’s response to price
- Government laws & price monitoring
- Social concerns
What are are 2 New-product pricing strategies
- Market skimming pricing
- Market-penetration pricing
What is Market skimming pricing
Market skimming pricing involves introducing a product at high price and then gradually lowering the price over time to ‘skim off layers of the market’ (target different groups of customers.
What must match the high price in market skimming pricing
The product quality and image must match the high price to justify it to consumers
Why must the buyer want the product at the high price in market skimming pricing
The buyer must perceive the value of the product at that high price, ensuring demand at initial price point
What about competitors in market skimming pricing
Competitors should not be able to enter the market easily, or they could reduce prices, making it harder to maintain high prices.
What is Market-penetration pricing
It sets a low initial price in order to penetrate the market quickly and deeply, to attract a large number of buyers quickly and gain market shares. So they build a strong customer base
- Economies of scale in production and distribution
- Low prices must help keep competition out of the market.
- Price sensitive market (market that don’t want to pay a lot)
