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
