Chapter 5: Decisions on pricing Flashcards
Elements taken into account during pricing decisions
- Buyer: value they give to the utiliy it has
- Market: Meeting point of monetary value
- Seller: value from which company is able to sell
Choices when changing a product price
- Change consideration to be paid by the buyer
- Modify quantity of product
- Modify commercial conditions
- Vary quality
- Change complementary services
- Set price structures
- Modify form of payment
Internal factors for price decisions
- Costs
- Product Life Cycle
- Goals of the company
Internal factors for price decisions: Costs
Minimum limit for setting the price
- Reduced by economies of scale
- Profitability threshold: minimum amount an organization must market to cover costs it has incurred
Internal factors for price decisions: Goals of the company
- Maximize short term profit
- Maximize long term profit
- Maintain/improve market share
- Prevent entry of competitors
- Leadership by quality or image of the product
- Survival
- Segment the market
External factors for price decisions
- Sensitivity of consumers to price
- Interdependence in demand for other products
External factors for price decisions: Sensitivity of consumers to price
Demand price elasticity
External factors for price decisions: Interdependence in demand for other products
- Cross elasticity
- Disinguish between complementary products and substitutes
- Interaction with other marketing instruments
- Competitors
- Stakeholders and interest groups:
Intermediaries
Creditors
Shareholders
Department directors - Legal restrictions
Pricing strategies
- Strategies based on demand
- Strategies based on product portfolio
- Prices for new products
- Strategies based on competition
Pricing strategies: Strategies based on demand
- Fixed or variable price strategies
- Promotional strategies
- Psychological pricing
- Pricing strategies based on geographical areas
Pricing strategies: Strategies based on demand (Fixed or variable price strategies)
Fixed price: single price not modifiable Variable price: flexible price - Discount prompt payment - Discount by quantity - Discounts functional - Discount seasonal - Discount by bonus - Discount by target audiences
Pricing strategies: Strategies based on demand (Promotional strategies)
- Random offers or discounts
- Coupons
- Regular sales
- Credit
- Professional pricing
- Ethical pricing
Pricing strategies: Strategies based on demand (Psychological pricing)
- Accustomed or habitual price
- Rounded/not ronded prices
- Prestige price
- Low cost price
- Price according to perceived value
- Reference price
Pricing strategies: Strategies based on demand (Pricing strategies based on geographical areas)
- Factory prices
- Prices on freight absorption
- Uniform delivery prices
- Delivery prices by zones
Pricing strategies: Strategies based on product portfolio
- Prices at one product line
- Prices at optional products or accessories
- Prices at captive or necessary products
- Prices per package or batches of products
- Price lines
Pricing strategies: Prices for new products
- Skimming price
- Penetration price
Pricing strategies: Prices for new products (Skimming)
- High price at launch and reductions in future
- Requirements:
Innovative product
Short product life cycle
Demand is price inelastic
Strong promotional expense
Pricing strategies: Prices for new products (Penetration)
- Low price at launch to get fast market share
- Requirements:
Not a novelty product
Demand is very elastic
Expanding market
Economies of scale
Pricing strategies: Strategies based on competition
- Price maintenance
- Price reduction
- Premium prices
- Bids and contests
Pricing strategies: Strategies based on competition (Price maintenance)
Strong competition and similar products
Pricing strategies: Strategies based on competition (Price reduction)
Reasons: - Lower quality or complementary services - Stimulate demand in global market - Output excess capacity - Improved company costs Factors to take into account: - Response of consumers and competitors - Possible price war - Impact on product line - Long term impact on profits
Pricing strategies: Strategies based on competition (Premium prices)
Reasons:
- Superior quality
- Cost inflation
- Monopoly control
Pricing strategies: Strategies based on competition (Bids and contests)
The one who offers lowest price or highest quality gets contract
Methods for determination of prices
- Cost-based prices
- Demand-based prices
- Competition-based prices
Methods for determination of prices: Cost-based prices
- Costs relevant for pricing
- Minimum price
- Technical price
- Target price method
- Cost plus margin
Methods for determination of prices: Cost-based prices (Costs relevant for pricing)
- Long term: all costs
- Short term: variable costs
Methods for determination of prices: Cost-based prices (Minimum price)
Contribution margin= PV-CVU
Methods for determination of prices: Cost-based prices (Technical price)
- PV=CVU+CFU=CTU
- Break even point
Methods for determination of prices: Cost-based prices (Target price method)
- Set a price that allows to obtain certain profit or sales volume
- Pv=CVU+CFU+Bo
Methods for determination of prices: Cost-based prices (Cost plus margin)
Adding a profit margin to the total cost
PV=CTU(1+m)
Methods for determination of prices: Demand-based prices
- Demand price elasticity
- Residual elasticity: Elasticity of demand price + (elasticity of competition * cross elasticity)
- Optimal price: Price that maximizes profit
- Price based on value perceived by customers
Methods for determination of prices: Competition-based prices
Percentage in which the price exceeds that of competition Calculated by: - Price of a specific competitor - Average price of competitors - Weighted price
Types of competition-based prices
Same price - Poor differentiation - Well-informed buyers Below competitive level - Low margin but high sales volume - Strict cost control Above competitive level - Prestigious products Pricing leadership - Larget companies are usualy leaders
