Chapter 11 - Pricing Concepts and Strategies: Establishing Value Flashcards
The Importance of Pricing
Price is the overall sacrifice a consumer is willing to make to acquire a specific product or service - sacrifice is usually money that must be paid to the seller to acquire the item but it may also involve other sacrifices, whether non momentary (the value of time necessary to acquire the product/service) or monetary (travel costs, taxes, and shipping costs)
Perception of price
is the only element in the marketing mix that generates revenue - consumers usually rank price as one of the most important factors in their purchase decision
- A low price might signal low quality, poor performance, or negative attributes about the product or service - consumers use price to judge its quality
The 5 C’s of Pricing
- strategies
- company objectives
- customers
- costs
- competition
- channel members
Company Objectives
Different firms embrace different goals, each firm embraces an objective that fits with where management thinks the firm needs to go on and be successful
Profit orientation -
a company objective that can be implemented by focusing on target profit pricing, maximizing profits, or target return pricing
Target profit pricing -
a strategy implemented by firms when they have particular profit goals as their overriding concern; uses price to simulate a certian level of sales at a certain profit per unit
Maximizing profits strategy
a mathematical model that captures all the factors required to explain and predict sales and profits, which should be able to identify the price at which its profits are maximized
Target return pricing
a pricing strategy implemented by firms less concerned with the absolute level of profits and more interested in the rate at which their profits are generated relative to their investments; designed to produce a specific return on investment, usually expressed as a percentage of sales
Sales orientation -
a company objective based on the belief that increasing sales will help the firm more than will increasing profits
For sales to increase consumers must see greater value
Competitor orientation -
a company objective based on the premise that the firm should measure itself primarily against its competition
Competitive party
a firm’s strategy of setting prices that are similar to those of major competitors
Customer orientation
pricing orientation that explicitly invokes the concept of customer value and setting prices to match consumer expectations
Customers
most important because it is about understanding the consumers reactions to different price
Demand curves and pricing -
shows how many units of a product or service consumers will demand during a specific period of time at different prices
As the price increases, demand for the product/ service decreases
Prestige products or services
products consumers purchase for their status rather than their functionality - the higher the price the greater the exclusivity, because fewer people can afford to purchase it
Price elasticity of demand -
measures how changes in a price affect the quantity of the product demand
Elastic
price sensitive - elasticity is less than -1, 1 percent decrease in price produces more than 1 percent increase in the quantity sold
Inelastic
price insensitive - elasticity is greater than -1, when a 1 percent decrease in price results in less than 1 percent in quantity sold
Dynamic pricing
refers to the process of charging different prices for goods or services based on the type of customer, time of day, week, or even season; and level of demand
Factors influencing price elasticity of demand
- income effect - refers to the change in the quantity of a product demanded by consumers because of a change in their income
- Substitution effect - refers to the customers ability to substitute other products for the focal brand - greater availability of substitute products, the higher the price elasticity of demand
Price elasticity -
- Cross-price elasticity - is the percentage change in the quantity of Product A demanded compared with the percentage change in Product B
- Complementary products - products whose demands are positively related, such as they rise and fall together
- Substitute products - changes in their demand are negatively related
Costs
to make effective pricing decisions, firms must understand their cost structure so they can determine the degree to which their products or services will be profitable at different prices
Variable costs
primarily labour and materials, that vary with production volume
Fixed costs -
costs that remain essentially at the same level, regardless of any changes in the volume of production
Total cost
the sum of the variable and fixed costs
Break-even analysis and decision making
help managers examine the relationship between cost, price, revenue and profit over different levels of production and sales
Break-even point
or the point at which the number of units sold generates just enough revenue to equal the total costs - at this point profits are 0
Contribution per unit
which is the price less the variable cost per unit
Competition
has an impact on pricing strategies, how competition can react to certain pricing strategies
Monopoly
only one firm that provides the product of service in a particular industry, and result in less price competition
Ex - utilities industry
Oligopoly
only a few firms dominate, firms typically change their prices in reaction to competition to avoid upsetting an otherwise stable competitive market
Ex- banking, retail gasoline, commercial airline travel
- Price war - can result in an oligopoly when two or more firms compete primarily by lowering their prices
Monopolistic competition
occurs when many firms are competing for customers in a given market but their products are differentiated
Ex - sunglasses
Pure competition
consumes perceive a large number of sellers of standardized products or commodities as substitutes
Grains, spices, gold, minerals
Price is set according to supply and demand
Channel Members
- manufactures, wholesalers, and retailers can have different perspectives when it comes to pricing strategies
Grey market -
employes irregular but not necessarily illegal methods: generally, it legally circumvents authorized channels of distribution to sell goods at prices lower than those intended by the manufacturer
Considerations for Setting Prices
The choice of pricing strategy is specific to the product/service and target market
Cost based pricing methods
determines the final price to charge by starting with the cost
Competitors based methods
- setting prices to reflect the way they want consumers to interpret their own prices relative to the competitions offerings
Value based methods
setting prices that focuses on the overall value of the product offering as perceived by the customer
Improvement value method
represents an estimate of how much more (or less) consumes are willing to pay for a product relative to other comparable products
Cost of ownership method
consumers may be willing to pay more for a particular product because over its entire lifetime, it will eventually cost less to own than a cheaper alternative
Psychological Factors Affecting Value-Based Pricing Strategies
- everyday low pricing
- high/low pricing
- new product pricing
- emerging strategies and payment options
Everyday low pricing (EDLP) -
companies stress the continuity of their retail prices at a level somewhere between the regular, non sale price and the deep-discount sale prices their competitors may offer
Adds value - consumers can spend less of their time comparing prices
high/low pricing
relies on the promotion of sales, during which prices are temporarily reduced to encourage purchases
New product pricing
to determine the consumers perception of its value and pricing it accordingly can be difficult for new products
Price skimming
a strategy of selling a new product or service at a high price that innovators and early adopters are willing to pay to obtain it; after the high-price market segment becomes saturated and sales begin to slow down, the firm generally lowers the price to capture (or skim) the new most price-sensitive segment
Market penetration pricing -
a pricing strategy of setting the initial price low for the introduction of the new product or service, with the objective of building sales, market share, and profits quickly
Experience curve effect
refers to the drop in unit cost as the accumulated volume sold increases; as sales continue to grow, the costs continue to drop, allowing even further reductions in the price
Emerging Strategies and Payment Options -
- Shrinkflation - decreasing food package sizes while leaving the prices unchanged
- Buy Now Pay Later (BNPL) - allow consumers to spread the cost of even small purchases over weeks or months - mirror installment plan for small products
Pricing Tactics
short-term methods, in contrast to long-term pricing strategies, used to focus on company objectives, customers, costs, competition, or channel members; can be responses to competitive threats (lowering price temporarily to meet a competitors price reduction) or broadly accepted methods of calculating a final price for the customer that is short-term in nature
Consumer pricing tactics
- price lining
- price bundleing
- leader price
Price lining -
establishing a price floor and a price ceiling for an entire line of similar products and then setting a few other price points in between to represent distinct differences in quality
Price Bundling
selling more than one product for a single, lower price - encourages customers to stock up so they won’t purchase other brands, try different products, incentive to purchase a less desirable product or service to obtain a more desirable one in the same bundle
Leader price
attempts to build store traffic by aggressively pricing and advertising a regularly purchased item, often priced at or above the stores cost
Has a good deal on one item, get consumers in store to buy more
Consumer Price Reductions
- markdowns
- quantity discounts for customers
- coupon and rebates
Markdowns
reductions retailers make on the initial selling price of the product
Enable retailers to get rid of slow-moving or obsolete merchandise
Quantity discounts for customers
Size discount - the larger the quantity bought, the less the cost per unit
Coupon and rebates
Coupon - provides a stated discount to consumers on the final selling price of a specific item; the retailer handles the discount
Rebate - the proportion of the purchase price returned to the buyer in the form of cash
Business - to - Business Pricing Tactics
- seasonal discount
- cash discount
- allowances
- quantity discounts
- uniform delivered versus geographic pricing
Seasonal discount -
- additional reduction offered as an incentive to retailers to order merchandise in advance of the normal buying season
Cash discount
reduces the invoice cost if the buyer pays the invoice prior to the end of the discount period
3/10, n/30, 3% discount, 10 days, net 30
Allowances -
- Advertising allowance - offers a price reduction to channel members if they agree to feature the manufacturers product in their advertising and promotional efforts
- Listing allowances - fees paid to retailers simply to get new products into stores or to gain more or better shelf space for their products
Quantity Discounts
- Cumulative quantity discount - uses the amount purchased over a specified period of time and usually involves several transactions - encourages resellers to maintain their current supplier because the cost to switch must include the loss of the discount
- Noncumulative quantity discount - based only on the amount purchased in a single order - incentives the buyer to purchase more immediately
Uniform Delivered Versus Geographic Pricing
- Uniform delivered pricing - the shipper charges one rate, no matter where the buyer is located, which makes things very simple for both the seller and the buyer
- Geographic pricing - sets different prices depending on a geographical division of the delivery areas
Deceptive or Illegal Price Advertising
Should not deceive customers to the point of causing harm
Deceptive reference prices
reference points create reference points for the buyer against which to compare the selling price
If reference point is inflated or fictitious it can cause harm to the consumer
Loss Leader pricing
- takes the tactic of leader pricing one step further by lowering the price below the stores cost
Bait and switch -
store lures customers in with a very low price on an item (bait), only to aggressively pressure these customers into purchasing a higher-priced item (switch) by disparaging the lower priced item, comparing it unfavorably with the higher-priced model, or professing an inadequate supply of the lower priced item
Predatory Pricing
A firm’s practice of setting a very low price for one of more of its products with the intent of driving its competition out of business; illegal under the competition act
Price discrimination -
the practice of selling the same product to different resellers (wholesalers, distributors, or retailers) or to the ultimate consumer at different prices; some, but not all, forms of price discrimination are illegal
Price fixing
- colluding with other firms to control prices
Horizontal price fixing -
occurs when competitors that produce and sell competing products collude, or work together, to control prices, effectively taking price out of the decision process for consumers
Vertical price fixing -
- parties at different levels of the same marketing channel collude to control the prices passed on to consumers
Manufacturer’s suggested retail price
manufactures encourage retailers to sell their merchandise at a specific price
