Chapter 8: Value - Based Pricing and Pricing Strategies

Question 1

cost-based pricing

Answer 1

Starts with cost and desired margin and is marked up along the channel to a customer selling price of $940

Question 2

market-based pricing

Answer 2

Price is set based on competitive advantage and value ($1000) and discounts and costs deducted to arrive at a company margin

Question 3

If you win a consumer on
price, you will lose a
consumer on _______; if you
win a consumer on value,
you will keep that
consumer on _______.”

Answer 3

price

value

Question 4

Value-in-use pricing

Answer 4

– Based on customer life cycle costs
– Acquiring, owning, using, maintaining, disposing

Question 5

Perceived-value pricing

Answer 5

– based on value provided when comparing price and benefits relative to competitors
– How much of a price premium can the business obtain and still deliver meaningful customer value?

Question 6

what are the five kinds of value pricing?

Answer 6

1. Value-in-use pricing
2. Life-Cycle Pricing
3. Perceived-value pricing
4. Performance-based pricing
5. Customerization value pricing

Question 7

Life-Cycle Value Pricing

Answer 7

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 8

Performance-based pricing

Answer 8

– based on customer preferences for different levels of price and performance (positioning)

Question 9

customerization value-pricing

Answer 9

– Unbundle product features and price each one
– Customers then select features and price (value package savings)

Question 10

price-margin management: McKinsey Waterfall

Answer 10

– Costs that cut into the company’s
bottom line
* discounts, promotions etc

Question 11

pocket price

Answer 11

the amount the business receives

Question 12

pocket price bandwidth

Answer 12

The percentage difference between
the lowest pocket price and the highest (a business’s different channels or regional markets produce different pocket prices).

– Different channels = different BW
– Look beyond avg. pocket price
– Identify needless price leakage

Question 13

skim pricing

Answer 13

essentially a temporary premium-pricing strategy

Question 14

what are the favourable conditions for skim pricing (6)?

Answer 14

1. Considerable differentiation
2. Quality-sensitive customers
3. Sustainable advantage
4. Few competitors
5. Few substitutes
6. Difficult competitor entry

Question 15

what are the favourable conditions for penetration pricing? (6)

Answer 15

1. No/limited differentiation
2. Price-sensitive customers
3. No sustainable advantage
4. Many competitors
5. Many substitutes
6. Easy competitor entry

Question 16

describe the order of pricing strategies with regards to product life-cycle?

Answer 16

1. Skim Pricing vs. Penetration Pricing
2. Single Segment Pricing.
3. Low Cost Leader Pricing
   technology (more efficient)
4. Multi-Segment Pricing
   – used during growth stage
5. Plus-One Pricing (mature market)
6. Reduced Focus Pricing
   – mature stage- price increases
7. Harvest Pricing
   – Decline stage

Question 17

single segment pricing

Answer 17

– value based strategy; Total cost approach
– attractive L-C savings at premium price

Question 18

low cost leader pricing

Answer 18

– volume advantage (Bic) or superior technology (more efficient)

Question 19

multi-segment pricing

Answer 19

– used during growth stage
– Maximize for multiple customer segments

Question 20

plus-one pricing (mature market)

Answer 20

– Companies eventually copy features
– Comparable to competition in every aspect
– + one i.e.: Volvo Safety Lexus Performance

Question 21

reduced focus pricing

Answer 21

– mature stage- price increases
– Reduce volume but increase margin

Question 22

harvest pricing

Answer 22

• decline stage
• raise prices, but don’t lose as much volume anymore
• At this combination of price and volume, the business had uncovered a profitable niche market and was able to manage price and vol- ume to produce an attractive gross profit

Question 23

price elasticity formula

Answer 23

price elasticity = (% change volume) / (% change price)

Question 24

substitute products

Answer 24

– Positive cross elasticity
– Lower the price of one product will decrease the demand for the other

Question 25

complementary products

Answer 25

– Negative cross elasticity
– Lower price for one increases demand for
both

Question 26

operating income formula

Answer 26

Operating Income = Volume X Margin per Unit - Fixed Expenses

Question 27

break-even volume

Answer 27

Break-Even Volume = Fixed Expenses / Margin per Unit

Question 28

break-even market share

Answer 28

Break-Even Market Share = Break-Even Volume / Market Demand