Chapter 9

Question 1

What are the different pricing strategies?

Answer 1

Customer Value-Based Pricing
Competition-Based Pricing
Cost-Based Pricing

Question 2

What is Customer Value-Based Pricing?

Answer 2

Customer-oriented pricing involves understanding how much value consumers place on the benefits they receive from the product and setting a price that captures that value.

Question 3

Is price decided after product design?

Answer 3

NO. Price is considered along with all other marketing mix variables before the marketing program is set.

Question 4

How can companies measure value? (customer value-based pricing)/

Answer 4

By asking the consumers how much they would pay for a basic product and for each benefit added to the offer
By conducting experiments to test the perceived value of different product offers

Question 5

What are the 2 types of value-based pricing?

Answer 5

Good-value pricing
Value-added pricing

Question 6

What is Good-Value Pricing?

Answer 6

Offering the right combination of quality and good service at a fair price
They do this by:
1. less-expensive versions of established brand name products or new lower-price lines
2. involves redesigning existing brands to offer more quality for a given price or the same quality for less
3. Everyday low pricing & high-low pricing

Question 7

What is Value-Added pricing?

Answer 7

Rather than cutting prices to match competitors, companies add quality, services, and value-added features to differentiate their offers and thus support their higher prices.

Question 8

What is cost-based pricing?

Answer 8

It is about setting prices based on the costs of producing, distributing, and selling the product plus a fair rate of return for the company’s effort and risk.
For instance, companies with lower costs can set lower prices that result in smaller margins but greater sales and profits.
Other companies intentionally pay higher costs to be able to add value and claim higher prices and margins.

Question 9

What is a fixed cost?

Answer 9

Costs that do not vary with production or sales level
ex: bills for rent, heat, and executive salaries

Question 10

What is a variable cost?

Answer 10

Costs that vary directly with the level of production
These costs tend to be the same for each unit produced, but total varies with number of units produced

Question 11

What is a total cost?

Answer 11

sum of fixed and variable costs for any given level of production.

Question 12

what is cost-plus pricing?

Answer 12

IT is establishing a product’s price by adding a standard markup to its cost.
This ignores customer demand and competitive price, but it is easy.

Question 13

What is Break-even pricing?

Answer 13

Company will try to determine the price at which they’ll break even or make the target return they are seeking

Question 14

What is target return pricing?

Answer 14

A variation of break-even pricing, uses the concept of a break-even chart, which shows total cost and revenue at different sales volume levels.

Question 15

What are some of the issues with break-even and target return?

Answer 15

This fails to consider customer value and the relationship between price and demand
(as price increases, demand decreases and the market may not buy even the lower volume needed to break even at higher prices)
When that happens, company must trim its costs to lower the break-even point so that it can charge the lower price consumers expect

Question 16

What is competition-based pricing?

Answer 16

It is setting prices based on competitors’ strategies, costs, prices, and market offerings.
Consumers will base their judgments of a product’s value on the prices that competitors charge for similar products.

Question 17

What are the questions to ask when setting competition-based pricing?

Answer 17

How does the company’s marketing offering compare with competitors’ offerings in terms of customer value?
How strong are current competitors, and what are their current pricing strategies?

Question 18

What is the goal of competition-based pricing?

Answer 18

To set prices according to the relative value. If a company creates greater value for customers, higher prices are justified.
NO MATTER WHAT PRICES YOU CHARGE, YOU HAVE TO BE CERTAIN YOUR CONSUMERS UNDERSTAND WHAT YOUR VALUE IS AND YOU HAVE TO DELIVER IT

Question 19

What are the internal factors affecting price decisions?

Answer 19

• Overall marketing strategy, objectives and mix
  Pricing decisions must be coordinated with packaging, promotion, and distribution decisions.
  Positioning may be based on price (target costing start with an ideal selling price, then target costs that ensure the price is met)
  Nonprice positions can be created to differentiate the marketing offer.
• Organizational considerations
  Management must decide who within the organization should set prices
• small companies –> prices set by top management
• large companies –> pricing handled by divisional or product managers
• industrial markets –> salespeople may be allowed to negotiate with customers within certain price ranges. Even so, top mgmt sets the pricing objectives and policies, and it often approves prices proposed by lower-level mgmt or salespeople
• in industries in which pricing is a key factor (ex:airline, steel, railroads, oil, etc.) companies often have pricing departments to set the best prices or help others set them.

Question 20

What are the external factors affecting price decisions?

Answer 20

Market and demand
economy
impact on other parties in its environment

Question 21

What is peculiar about price-demand relationship?

Answer 21

Each price the company might charge will lead to a different level of demand

Question 22

What is the price elasticity of demand?

Answer 22

How responsive demand will be to a change in price.
If it is inelastic, the demand hardly changes with a small change in price.
If it is elastic, demand changes greatly.

Question 23

What happens if the demand is elastic?

Answer 23

Sellers will consider lowering their prices, since a lower price will produce more total revenue as long as extra costs of producing don’t exceed extra revenue

Question 24

Has customer price sensitivity increased?

Answer 24

Yes, forces like deregulation and instant price comparison (the world wide webbbbbbbbs) have increased it.

Question 25

What can you tell me about the market and demand external factor?

Answer 25

Market and demand
* seller’s pricing freedom varies with different types of markets.
– pure competition
many buyers and sellers trading in a uniform commodity (ex: wheat)
marketing, research, product development don’t have a lot of incidences
– monopolistic competition
many buyers and sellers trading over a range of prices (because sellers can differentiate their offers to buyers) rather than single market price
Many competitors=less affected by competitor’s pricing strategies
use branding, advertising and personal selling to set their offers apart
– oligopolistic competition
Only a few large sellers (ex: phone situation in Canada)
few sellers –> each seller is alert and responsive to competitor’s pricing strategies and marketing moves
Price is a major competitive tool (to woo subscribers away from competitors, they offer discounts/free equipment upgrade)
– pure monopoly
Dominated by one seller
govt monopoly, private regulated monopoly, private unregulated monopoly
Pricing handled differently in each case

Question 26

The economy external factors

Answer 26

Factors impacting pricing strategies
- boom/recession
- inflation
- interest rates

responses to the frugality of post-recession consumers
- cut prices and offer discounts to help spur short-term sales
- develop more affordable items
- redefine value propositions
ex: developing price tiers, adding more affordable lines and premium lines.

Question 27

What about the external factor: impact on other parties in its environment?

Answer 27

• How will resellers react to various prices?
  Companies should set prices that give resellers
  a fair profit
  encourage their support
  help them to sell the product effectively
• the government is another important external influence on pricing decisions
• social concerns may need to be taken into account

Question 28

Name new product pricing strategies

Answer 28

Market-skimming pricing
Market-penetration pricing

Question 29

What is market-skimming?

Answer 29

Setting a high price to skim maximum revenues from the segments willing to pay the high price
Company makes fewer, but more profitable sales

This makes sense when
product quality and image support higher price & enough buyers want the product at that price
Costs of producing a smaller volume are not so high that they cancel the advantage of charging more
Competitors are not able to enter the market easily and undercut high price

Question 30

What is Market-penetration pricing?

Answer 30

setting a low price to attract a large number of buyers and a large market share
This makes sens when
The market is highly price sensitive so that a low price produces more market growth
production and distribution must decrease as sales volume increases
low price helps keep out the competition, and penetration company must maintain its low price position

Question 31

What is product mix pricing?

Answer 31

Strategy for setting a product’s price has to be changed when the product is part of a product mix
A set of prices that maximizes its profits on the total product mix
the various products have related demand and costs and face different degrees of competition

Question 32

What is product line pricing?

Answer 32

Setting prices across an entire product line

We need to determine price steps between products in the line
Price steps should take into account cost differences between products in the line
Account for differences in customer perceptions of the value of different features

Question 33

What is Optional-product pricing?

Answer 33

Pricing optional or accessory products sold with the main product
Happens for accessory products sold along with main product
Decide which items to include in the base price and which to offer as options

Question 34

What is Captive Product pricing?

Answer 34

Pricing products that must be used with the main product
Products having to be used with smtg else (ex: cartridges)
Price product in itself low and set high markup on the captive product
Must be used alongside main product
You need to be careful how you markup the supplies bc it might make customers feel resentful if they see you just want to make cash off of them by having hella high profit margins
For services –> two-part pricing
pay for the ticket itself at laronde, but have to pay for food or extras in the park itself

Question 35

What is by-product pricing?

Answer 35

Pricing low-value by-products to get rid of or make $ on them
Company seeks market for these by-products to help offset costs of disposing of them and help make the price of the main product more competitive
Ex: animal bedding pallets with wood

Question 36

What is product bundle pricing?

Answer 36

Pricing bundles of products sold together
offer up several products together as a bundle at a reduced price
price bundling can promote sales of products consumers might not otherwise buy, but combined price must be low enough for them to get bundle
ex: Microsoft office, fast food, etc.