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Marketing Final > Chapter 7: Pricing > Flashcards

Chapter 7: Pricing Flashcards

1
Q

One big difference between ‘Price’ and other P’s of marketing?

A

Pricing is the only element of the marketing mix that directly affects revenue, not costs.

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2
Q

A company has annual sales of 100,000 units
for one its products. The selling price for this
product is $100, variable cost is $60, and the
allocation of fixed overheads is $3 million. The
analysis of the market suggests that you have
the following two options for the next year:

  • Increase sales by 1% by keeping the current price,
    or
  • Increase price by 1% and have the same sales as
    this year.

What is the benefits of each option?

A

Increase sales by 1% by keeping the current price –> Choose to increase market share

Increase price by 1% and have the same sales as last year –> More profitable

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3
Q

Factors affecting pricing decitions

A
  1. Internal Factors:
    - Marketing Objectives
    - Market Mix Strategy
    - Costs
    - Organizational Considerations
  2. External Factors
    - Nature of Product/Market
    - Competition
    - Environmental Factors
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4
Q

Internal factors: Marketing Objectives

A

Marketing Objectives
- Survival
- Profit maximization
- Market share leadership
- Social pricing
- Price as a component of positioning

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5
Q

What is social pricing?

A

Lowering price for products that have social benefits

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6
Q

Internal Factor: Costs

A
  • Fixed, variable, and total costs
  • Break-even analysis
  • Learning or Experience curve: How does it relate to the PLC
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7
Q

WHat is break-even analysis

A

How many units needed to recover amount of fixed cost

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8
Q

Internal Factors: Organizational Considerations

A

Organizational Considerations:
- Who sets the price?
- Top Management, product manager, or salesperson?
- Fixed v/s Flexible pricing

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9
Q

External Factors: Nature of Market/Product

A

Nature of Market/Product
- Pure competition v/s monopoly
- Consumer’s perception of Price and Value
- Price sensitivities/Price elasticity of demand

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10
Q

External Factors: Competitive Factors

A

Competitive Factors:
- Competitors’ offers
- Competitive costs
- Competitive prices as ‘reference’ prices

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11
Q

External Factors: Environmental Factors

A

Environmental Factors:
- Inflation
- Governmental controls
- Exchange rate fluctuations

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12
Q

General Principles for Setting Prices

A
  • Cost-based Pricing
  • Buyer-based Pricing
  • Competition-based Pricing
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13
Q

Cost-Based Pricing

A
  • Also called Mark-u & cost-plus
  • Recover costs and make money on top of the cost
  • Need to know the cost and break-even analysis
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14
Q

Buyer-Based Pricing

A
  • Also called value-based pricing
  • To capture the perceived value of the product
  • Use buyer’s perceptions of benefits and buyer’s perceptions of costs.
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15
Q

Competition-Based Pricing

A
  • Also called going-rate pricing or parity pricing
  • Primary focus is pricing ‘relative’ to how the competitors have priced
  • Less focus on costs and consumer’s perceptions
  • Huge emphasize of game theory and marketing muscle play
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16
Q

Skimming v/s penetration

A

Skim: Set high prices initially
(Intel, Sony)
- Skim the market, get the segments of the high-paying customers.
- After that, slowly lowers price

Penetration: Set low initial prices
- Set low prices, hoping people try & love the product.

17
Q

Psychological Issues in Pricing

A
  1. Prospect Theory: Converting prices into
    losses and gains
  2. Reference Price: Is it a good price in
    reference to something?
  3. Transaction Value: Are you getting a good
    deal?
  4. Compromise Effect: Can you defend the
    a price that you pay to someone else?
18
Q

Prospect Theory

A
  • Consumers translate exchanges into losses
    and gains, relative to some reference point
  • Pleasure from gains and displeasure from
    losses decrease marginally
  • Losses loom larger than gains
    e.g., to compensate for losing $100, must
    gain back more than $100
19
Q

Framing of Prospect Theory

A

Framing multiple gains or losses
- 2 distinct gains of x$ are better than one gain of 2x$
- 2 distinct losses are worse than one big loss

20
Q

Reference Price

A

Reference price is seen to be affected by Order Effects:
- Primacy i.e., influenced by what is seen first
- (Price it at $799 and not $800)
–> Because customers focuses more on the first digit of the price (based on research)

  1. Endowment effects
    - De-couple acquisition and payment by first endowing
    buyers with the product (“Buy now, pay later”)
21
Q

Anchoring Effect

A

Anchoring Effect: Huge comparison of initial v/s said price!
- You find a jacket that you like. The price on the
sleeve says $1000, which is way too expensive.

  • As you put the jacket back on the rack, a
    salesperson stops you and says, “This jacket is
    on sale! For $400.”
  • Suddenly, $400 feels like a steal!
22
Q

Beer on the beach analogy

If the nearest place that sells beer is a) A run-
down store b) A five-star hotel, how much are
you willing to pay for the beer? Why would you be willing to pay more for the five-star hotel beer even if it is the same product?

A

Concept of transaction value

23
Q

What is the compromise effect?

A

The compromise effect is a phenomenon where consumers tend to favor the middle option when presented with a set of choices. This happens because the middle option is perceived as more reasonable or a safer choice compared to the extremes.

24
Q

Ethical Issues of pricing!

A
  • Is it fair to charge different prices to different
    people for the same product?
  • Is it fair to charge different prices at different
    occasions?
  • Is it fair to charge a higher price if customers
    don’t negotiate?
  • Is it fair to charge customers for something
    that was not explicitly part of the contract?
25
Q

Pricing and Ethical Issues

A
  • Legal Issues
  • One-off buying v/s long-term relationship
  • Word of Mouth
  • Profits v/s Goodwill
  • Corporate and personal value system

Marketing Final (9 decks)

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