Chapter 8 COMPLETED

Question 1

Under-pricing (cost-based pricing)

Answer 1

Focuses on firm’s desired profit margin, but is underpriced compared to the rest of the market, leads to lower profits

Question 2

Market-based pricing (cost-based pricing)

Answer 2

Focuses on pricing a product/service based on the market and competitors. Leads to higher profit-margins than under/over cost-based pricing

Question 3

Over-pricing (cost-based pricing)

Answer 3

Focuses on firm’s desired profit margin, but a low % of the market would purchase the product/service at such price. Results in lower profits.

Question 4

5 types of value-based pricing (VLPPC)

Answer 4

Value-in-use pricing
Life-cycle value pricing
Perceived-value pricing
Performance-based pricing
Customerization value pricing

Question 5

Value-in-use pricing

Answer 5

Price is set to provide customers with an attractive savings after considering the life-cycle costs of acquiring, owning, using, maintaining, and disposing of a product

Question 6

Life-cycle value pricing

Answer 6

Price is set with respect to the total cost of ownership over the life cycle of a product on the basis of the net present value of the difference between the company’s and a competitor’s life-cycle ownership costs

Question 7

Perceived-value pricing

Answer 7

Price is set on the basis of the value that customers realize when they compare the price and benefits of the company’s product with those of a key competitor’s product

Question 8

Performance-based pricing

Answer 8

Price is set on the basis of customer preferences for different levels of price and performance and taking into consideration how the company and competitors are positioned with respect to delivering both price and performance

Question 9

Customerization value pricing

Answer 9

Price is set by unbundling a product’s features or performance levels, placing a price on each, and then allowing customers to select the features and performance that they want at a price that they are willing to pay

Question 10

Reference price

Answer 10

The price of an unbundled product with all options and features selected (basically the bundled product)

Question 11

Total cost of ownership

Answer 11

Example:
Car MSRP
+ maintenance costs
+ financing costs
+ usage costs
+ installation costs
(+) repair costs
+ depreciation
- resale value

Question 12

How customers save monetary value from customerization value pricing

Answer 12

Customers who purchase a product without all (the best) features or options will save the monetary cost of purchasing the reference price

eg: Porsche without the carbon package (100K) vs reference price of Porsche with the carbon package (120K). Value of 20K saved for that customer

Question 13

8 types of PLC pricing strategies (SSPLMPRH)

Answer 13

Skim pricing
Single-segment pricing
Penetration-pricing
Low-cost leader pricing
Multi-segment pricing
Plus-one pricing
Reduce-focus pricing
Harvest pricing

Question 14

Skim pricing

Answer 14

Businesses often implement during the early stages of the product life cycle

eg: Apple Vision Pro priced insanely high to skim the market for innovators and early adopters

Question 15

Single-segment pricing

Answer 15

Bases the price of a product on the attractive savings that a single segment of customers realize over the life of the product, not just the costs of manufacturing and marketing the product

Question 16

Penetration pricing

Answer 16

Employed during the market’s growth stage when volumes are rapidly increasing in response to lower prices. The primary objective of penetration pricing is to build volume to drive down cost

Question 17

Low-cost leader pricing

Answer 17

Offer prices that no competitor can beat, can be achieved with minimal operating expenses and cost-reduction efforts, used around growth stage

eg: Walmart

Question 18

Multi-segment pricing

Answer 18

Offering price points at different levels of performance for different segments. Used around growth stage

eg: markstrat targeting (low inc, medium inc, higher earners)

*This is not setting one price targeting multiple segments

Question 19

Plus-one pricing

Answer 19

Used when a business’s product position is the about the same as competitors’ positions in every area of product and service quality, except that in one area of meaningful performance the business’s product position is clearly superior

eg: Mercedes uses luxury

Question 20

Reduce-focus pricing

Answer 20

Price increases with the intent of reducing
volumes and market share in exchange for higher margins, used in a mature market

Question 21

Harvest pricing

Answer 21

Raise prices in order to reduce volume even more quickly than is typical of the late stage of a product’s life cycle. Subsequent cost-based price increases will result in higher margins as volume continues to fall. Used in the decline phase, although some firms are able to find a niche market where they will lose less customers than they expect and reap profits from price increases

Question 22

Inelastic price and elastic price management - does raising or lowering price increase revenue contribution?

Answer 22

Inelastic - raising price and decreasing volume improves contribution
Elastic - lowering price and increasing volume typically improves contribution at the cost of %margin

Question 23

Break-even volume

Answer 23

The number of units that must be sold at a certain price in order to break even

Question 24

Pricing substitute products

Answer 24

Have the substitute product priced at a different price point, so that the original product is either for price-inelastic/elastic customers while the sub is for the other

Question 25

Pricing complementary products

Answer 25

Based on the cross-price elasticity

eg: Ketchup and mustard have a cross-price elasticity of 0.5. 1% change in price of ketchup = 0.5% change in demand for mustard

Question 26

McKinsey waterfall

Answer 26

Costs that cut into a company’s bottom line, includes channel discounts, commissions, rebates, etc

Question 27

Pocket price

Answer 27

The amount that the business receives in the end