chapter 11 Flashcards
sharing economy
an economy in which consumers share everything (eg. clothes and bikes) and extract more value from what they already owned.
common pricing mistakes
- not revising price often enough to capitalise on market changes.
- setting the price independently of the rest of the marketing program rather than as an intrinsic element of market-positioning strategy.
- not varying price enough for different product items, market segments, distribution channels, and purchase occasions.
effective price strategies
require a thorough understanding of consumer pricing psychology and a systematic approach to setting, adapting, and changing prices.
reference prices
comparing an observed price to an internal reference price they remember or an external frame of reference such as a posted ‘regular retail price’. marketers encourage this thinking by stating a high manufacturer’s suggested price, indicating that the price was much higher originally, or pointing to a competitor’s high price. clever marketers try to frame the price to signal the best value possible.
price-quality interferences
many consumers use price as an indicator of quality. image pricing is especially effective for ego-sensitive products, eg. perfumes, cars. when information is available about true quality, price becomes a less significant indicator. for luxury-goods customers’ demand may increase price because of a desire for uniqueness.
price endings
customers perceive an item priced $299 to be in the $200 range rather than the $300 range; they tend to process prices ‘left to right’.
setting the price
firms must set a price when they develop a new product, introduce it into new distribution channel or geographical area, and when it enters bids on new contract work.
1. selecting the pricing objective
2. determining demand
3. estimating costs
4. analysing competitors’ costs, prices, and offers
5. selecting a pricing method
6. selecting the final price
pricing objectives
- survival
- maximum current profit
- maximum market share
- maximum market skimming
- product-quality leadership
survival
overcapacity, intense competition, changing consumer wants. as long as prices cover variable costs and some fixed costs, the company stays in business.
maximum current profit
know the costs and demand associated with alternative prices and choose the price that produces maximum current profit, cash flow, or rate of return on investment.
maximum market share
market-penetration pricing. the strategy is appropriate when:
1. the market is highly price sensitive, and a low-price stimulated market growth.
2. production and distribution costs fall with accumulated production experience
3. a low price discourages actual and potential competition
maximum market skimming
a price starts high and slowly drops over time. relevant when:
1. enough buyers have a high current demand
2. the unit costs of producing a small volume are high enough to cancel the advantage of charging what the traffic will bear
3. the high initial price does not attract more competitors to the market
4. the high price communicates the image of a superior product
product-quality leadership
many brands strive to be “affordable luxuries” - products or services characterised by high levels of perceived quality, taste, and status with a price just high enough not to be out of consumers’ reach.
price sensitivity
the demand curve shows the market’s probable purchase quantity at alternative prices, summing the reactions of many individuals with different price sensitive. customers are less price-sensitive to low-cost items or items they buy infrequently. also less price sensitive if:
1. few or no substitutes or competitors
2. they do not readily notice the higher price
3. slow to change their buying habits
4. they think higher prices are justified
5. the price is only a small part of the total cost of obtaining, operating, and servicing the product over its lifetime.
a seller can successfully charge a higher price if it can convince customers that it offers the lowest total cost of ownership (TCO).
estimating demand curves
most companies attempt to measure their demand curves using several different methods. they may use surveys, price experiments, and statistical analyses.
price elasticity of demand
marketers need to know how responsive demand is. it is inelastic if demand hardly changes with a small change in price. it is elastic if demand changes considerably. the higher the elasticity, the greater the volume growth resulting from a 1 percent price reduction. price elasticity depends on the magnitude and direction of the contemplated price change. because of the distinction between long-run and short-run elasticity, sellers will not know the total effect of a price change until time passes.
fixed costs/overhead
costs that do not vary with production level or sales revenue.
activity-based cost (ABC) accounting
used instead of standard cost accounting to estimate the real profitability of selling to different types of retailers or customers.
experience-curve pricing
aggressive pricing might give the product a cheap image and this pricing strategy assumes that competitors are weak followers.
learning/experience curve
a decline in the average cost with accumulated production experience.
target costing
changing costs because of a concentrated effort by designers, engineers, and purchasing agents to reduce them through target costing.
pricing-setting method
- mark-up pricing
- target-return pricing
- perceived-value pricing
- value pricing
- everyday low pricing (EDLP)
- high-low pricing
- going-rate pricing
- auction-type pricing
mark-up pricing
adds a standard markup to the product’s cost.
markup price = unit cost / (1 - desired return on sales)
target-return pricing
the firm determines the price that yields its target rate of return on investment.
target-return price = unit cost + (desired return x invested capital) / unit sales
perceived-value pricing
price based on the customer’s perceived value, which is made up of a host of inputs, such as the buyer’s image of product performance, channel deliverables, warranty quality, customer support, and the supplier’s reputation. the key to perceived-value pricing is to deliver more unique value than competitors and to demonstrate this to prospective buyers.
value pricing
wins loyal customers by charging a fairly low price for a high-quality offering. a matter of reengineering the company’s operations to become a low-cost producer without sacrificing quality to attract many value-conscious customers.
everyday low pricing (EDLP)
charges a constant low price with little or no price promotion or special sales, eg. because constant sales and promotions are costly.
high-low pricing
the retailer charges higher prices on an everyday basis but runs frequent promotions with prices temporarily lower than the EDLP level.
going-rate pricing
the firm bases its price largely on competitors’ prices. smaller firms “follow the leader”, changing their prices when the market leader’s prices change. it is quite popular in an industry where costs are difficult to measure, or where competitive response is uncertain.
auction-type pricing
- english auctions have ascending bids with one seller and many buyers.
- two types of dutch auctions: (a) descending bids with one seller and many buyers. the auctioneer states a price and goes lower until a bidder accepts. (b) the buyer states something he wants to buy and sellers compete to offer the lowest price.
- sealed-bid auctions: one bid, not knowing other bids.
price-adaptation strategies
- geographical pricing
- price discounts and allowances
- promotional pricing
- differentiated pricing
gain-and-risk-sharing pricing
buyers may resist accepting a seller’s proposal because they
perceive a high level of risk. the seller then has the option of offering to absorb part or all the risk if it does not deliver
the full promised value.
geographical pricing
the company decides how to price its products to different customers in different locations and countries.
countertrade
offering other items in payment. four types: barter, compensation deal, buyback arrangement, and offset.
barter
good for good; the buyer and seller directly exchange goods.
compensation deal
seller receives some percentage of the payment in cash and the rest in products.
buyback arrangement
when the firm sells a plant, equipment, or technology to a company in another country and agrees to accept as partial payment products manufactured with the supplied
equipment.
offset
the firm receives full payment in cash for a sale overseas but agrees to spend a substantial amount of the money in that country within a stated time period.
discount
a price reduction to buyers who pay bills promptly. eg. “2/10, net 30”, which means payment due within 30 days and the buyer can deduct 2 percent by paying within 10 days.
quantity discount
a price reduction to those who buy large volumes. they must be offered equally to all customers and not exceed the cost savings to the seller. they can be offered on each order placed or on the number of units ordered over a given period.
functional discount/trade discount
offered by a manufacturer to trade-channel members if they perform certain functions, such as selling, storing, and record keeping. manufacturers must offer the same functional discounts within each channel.
seasonal discount
a price reduction to those who buy merchandise or services out of season. eg. hotels and airlines.
allowance
an extra payment designed to gain reseller participation in special programs.
1. trade-in allowances: granted for turning in an old item when buying a new one.
2. promotional allowances: reward dealers for participating in advertising and sales support programs.
promotional pricing
to stimulate early purchase:
1. loss-leader pricing
2. special event pricing
3. special customer pricing
4. cash rebates
5. low-interest financing
6. longer payment term
7. warranties and service contracts
8. psychological discounting
loss-leader pricing
drop price on well-known brand to stimulate additional store traffic.
special event pricing
special prices in certain seasons to draw in more customers.
cash rebates
encourage purchase of the manufacturers’ products within a specified time period.
psychological discounting
set an artificially high price and then offers the product at substantial savings.
price discrimination
a company sells a product or service at two or more prices that do not reflect a proportional difference in costs.
first-degree: the seller charges a separate price to each customer depending on the intensity of their demand.
second-degree: the seller charges less to buyers of larger volumes.
third-degree: the seller charges different amounts to different classes of buyers, eg. students.
yield pricing
offering discounted but limited early purchases, higher-priced late purchases, and the lowest rates on unsold inventory just before it expires, eg. airlines.
price discrimination works when:
- the market is segmented and they show different intensities of demand.
- the product cannot be resold.
- competitors cannot undersell the firm in the higher-price segment.
- the cost of segmenting and policing the market does not exceed the extra revenue derived from price discrimination.
- the practice does not breed customer resentment and ill will.
- the form of price discrimination is not illegal.
price-cutting outcomes
traps:
1. customers assume quality is low
2. low price buys market share but not market loyalty
3. higher-priced competitors might match the price and have longer staying power because of deeper cash reserves
4. might trigger a price war
reasons:
1. excess plant capacity
2. drive to dominate the market through lower costs
anticipatory pricing
when companies raise their prices more than the cost increase, in anticipation of further inflation or government price controls.
price increase circumstances
- cost inflation
- anticipatory pricing
- overdemand; the company can raise prices, ration supplies, or both.
considerations when responding to competitive price cuts
- the product’s stage in the life cycle
- its importance in the company’s portfolio
- the competitor’s intentions and resources
- the market price and quality sensitivity
- the behaviour of costs with volume
- the company’s alternative opportunities
