Chapter 7: Pricing Flashcards
One big difference between ‘Price’ and other P’s of marketing?
Pricing is the only element of the marketing mix that directly affects revenue, not costs.
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?
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
Factors affecting pricing decitions
- Internal Factors:
- Marketing Objectives
- Market Mix Strategy
- Costs
- Organizational Considerations - External Factors
- Nature of Product/Market
- Competition
- Environmental Factors
Internal factors: Marketing Objectives
Marketing Objectives
- Survival
- Profit maximization
- Market share leadership
- Social pricing
- Price as a component of positioning
What is social pricing?
Lowering price for products that have social benefits
Internal Factor: Costs
- Fixed, variable, and total costs
- Break-even analysis
- Learning or Experience curve: How does it relate to the PLC
WHat is break-even analysis
How many units needed to recover amount of fixed cost
Internal Factors: Organizational Considerations
Organizational Considerations:
- Who sets the price?
- Top Management, product manager, or salesperson?
- Fixed v/s Flexible pricing
External Factors: Nature of Market/Product
Nature of Market/Product
- Pure competition v/s monopoly
- Consumer’s perception of Price and Value
- Price sensitivities/Price elasticity of demand
External Factors: Competitive Factors
Competitive Factors:
- Competitors’ offers
- Competitive costs
- Competitive prices as ‘reference’ prices
External Factors: Environmental Factors
Environmental Factors:
- Inflation
- Governmental controls
- Exchange rate fluctuations
General Principles for Setting Prices
- Cost-based Pricing
- Buyer-based Pricing
- Competition-based Pricing
Cost-Based Pricing
- 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
Buyer-Based Pricing
- 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.
Competition-Based Pricing
- 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
Skimming v/s penetration
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.
Psychological Issues in Pricing
- Prospect Theory: Converting prices into
losses and gains - Reference Price: Is it a good price in
reference to something? - Transaction Value: Are you getting a good
deal? - Compromise Effect: Can you defend the
a price that you pay to someone else?
Prospect Theory
- 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 $100
Framing of Prospect Theory
Framing multiple gains or losses
- 2 distinct gains of x$ are better than one gain of 2x$
- 2 distinct losses are worse than one big loss
Reference Price
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)
- Endowment effects
- De-couple acquisition and payment by first endowing
buyers with the product (“Buy now, pay later”)
Anchoring Effect
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!
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?
Concept of transaction value
What is the compromise effect?
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.
Ethical Issues of pricing!
- 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?
