Chapter 8: Value - Based Pricing and Pricing Strategies Flashcards
cost-based pricing
Starts with cost and desired margin and is marked up along the channel to a customer selling price of $940
market-based pricing
Price is set based on competitive advantage and value ($1000) and discounts and costs deducted to arrive at a company margin
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 _______.”
price
value
Value-in-use pricing
– Based on customer life cycle costs
– Acquiring, owning, using, maintaining, disposing
Perceived-value pricing
– 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?
what are the five kinds of value pricing?
- Value-in-use pricing
- Life-Cycle Pricing
- Perceived-value pricing
- Performance-based pricing
- Customerization value pricing
Life-Cycle Value Pricing
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.
Performance-based pricing
– based on customer preferences for different levels of price and performance (positioning)
customerization value-pricing
– Unbundle product features and price each one
– Customers then select features and price (value package savings)
price-margin management: McKinsey Waterfall
– Costs that cut into the company’s
bottom line
* discounts, promotions etc
pocket price
the amount the business receives
pocket price bandwidth
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
skim pricing
essentially a temporary premium-pricing strategy
what are the favourable conditions for skim pricing (6)?
- Considerable differentiation
- Quality-sensitive customers
- Sustainable advantage
- Few competitors
- Few substitutes
- Difficult competitor entry
what are the favourable conditions for penetration pricing? (6)
- No/limited differentiation
- Price-sensitive customers
- No sustainable advantage
- Many competitors
- Many substitutes
- Easy competitor entry
describe the order of pricing strategies with regards to product life-cycle?
- Skim Pricing vs. Penetration Pricing
- Single Segment Pricing.
- Low Cost Leader Pricing
technology (more efficient) - Multi-Segment Pricing
– used during growth stage - Plus-One Pricing (mature market)
- Reduced Focus Pricing
– mature stage- price increases - Harvest Pricing
– Decline stage
single segment pricing
– value based strategy; Total cost approach
– attractive L-C savings at premium price
low cost leader pricing
– volume advantage (Bic) or superior technology (more efficient)
multi-segment pricing
– used during growth stage
– Maximize for multiple customer segments
plus-one pricing (mature market)
– Companies eventually copy features
– Comparable to competition in every aspect
– + one i.e.: Volvo Safety Lexus Performance
reduced focus pricing
– mature stage- price increases
– Reduce volume but increase margin
harvest pricing
- 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
price elasticity formula
price elasticity = (% change volume) / (% change price)
substitute products
– Positive cross elasticity
– Lower the price of one product will decrease the demand for the other
complementary products
– Negative cross elasticity
– Lower price for one increases demand for
both
operating income formula
Operating Income = Volume X Margin per Unit - Fixed Expenses
break-even volume
Break-Even Volume = Fixed Expenses / Margin per Unit
break-even market share
Break-Even Market Share = Break-Even Volume / Market Demand
