chapter 11: pricing concepts and strategies: establishing value Flashcards
importance of pricing
-strategic opportunity to create value
-signals quality or a lack of quality
price is:
usually ranked as most important factors in purchase decisions
-most challenging of the 4 P’s *least understood
what are the 5 C’s of pricing
company objectives, competition, costs, customers, channel members
1st C of pricing
company objectives: profit orientation that focuses on target profit pricing, maximizing profits, or target return pricing
target profit pricing: strategy implemented when firms have a particular profit goal as their overiding concern
maximizing profits strategy: mathematical model that captures all factors required to explain and predict sales and profits which identifies price where profits are maximized
target return pricing: when firms are less concerned with the absolute level of profits, more interested in the rate at which their profits are generated relative to their investments
1st C of pricing
company objectives: sales orientation
based on belief that increasing sales will help firms more than will increasing profits
1st C of pricing
company objectives: competitor orientation
belief that firm should measure itself primarily against competitors
1st C of pricing
company objectives: customer orientation
pricing orientation that explicitly involves the concept of customer value and setting prices to match customer expectations
2nd C of pricing
Customers: what is the price elasticity of demand?
measures how changes in price affects the quality of the product demanded
=% change in quantity demanded/ % change in price
inelastic: price insensitive
elastic: price sensitive
2nd C of pricing
Customers: what factors influence the price elasticity of demand?
income effects: as peoples income increases, demand shifts to higher-priced products
substitution effect: the greater the availability of substitute products, the higher the price elasticity of demand for a product
3rd C of Pricing
Costs: what are variable, fixed, and total costs>
variable costs: vary with production volume
fixed cost: unaffected by production volume
total cost: sum of variable and fixed costs
4th C of pricing
Competition: what are the monopoly, monopolist competition, oligopoly, and pure competition aspects
monopoly: one firm controls the market
monopolist competition: many firms selling differentiated products at different prices
oligopoly: handful of firms control market
pure competition: many firms selling commodities for same price
5th C of pricing: channel members
manufacturers, wholesalers, and retailers can have different perspectives on pricing strategies
manufacturers must protect against grey market transactions
=employs irregular but not illegal methods to allow authorized channels of distribution sell goods at prices lower than what the manufacturers intended
5th C of pricing: channel members
cost-based methods
-start with cost
-all costs calculated on a per unit basis
-assumes costs don’t vary for different levels of production
5th C of pricing: channel members
competitor-based methods
-attempts to reflect how the firm wants consumers to interpret its products relative to the competitor’s offerings
-premium pricing
5th C of pricing: channel members
value-based methods
focuses on the overall value of the product offering as perceived by consumers who determine value by company benefits they expect the product to deliver with the sacrifice they will need to make to acquire the product
