Chapter 9: Pricing — Understanding and Capturing Customer Value Flashcards
Identify the three major pricing strategies and discuss the importance of understanding customer-value perceptions, company costs, and competitor strategies when setting prices.
The three major pricing strategies are
1) cost-based pricing
2) customer value-based pricing
3) competition-based pricing.
The importance of understanding these is that these three are what affects a customer’s decision in buying your product, in turn affecting your product sales.
If a customer’s perception of a product’s value doesn’t match the price set on it, the customer would for sure not buy the product.
If a product’s price doesn’t generate enough revenue to cancel out the company costs, the company would for sure be making a loss.
If a firm doesn’t consider competitors’ strategies when pricing their products, customer would perceive competitor’s products as having more value, in turn flocking to buy their products instead.
Should firms reduce their product prices?
Not always should they since price reductions can lead to cut profits and initiate price wars or they can cheapen perceptions of brand quality. Instead, companies should sell value, not price.
Elaborate on cost-based pricing strategy.
It is the strategy whereas prices are set based on the cost of producing, distributing, and selling a product. It is product-driven rather than value-driven.
What are the two types of costs?
The two types of costs are
1) fixed costs - do not vary with production or sales level e.g. rental fee, executive salary
2) variable costs - vary directly with the level of production e.g. cost of raw materials, electricity
Elaborate on the types of cost-based pricing strategy.
There are three types of cost-based pricing strategy:
1) cost-plus (markup) pricing - popular; simplifies pricing; sellers more certain about cost
2) break-even pricing - calculate how many units to sell to cover the total cost
3) target return pricing - calculate how many units to sell to reach target sales
Elaborate on value-based pricing.
It is the strategy whereas prices are set based on buyer’s perceptions of value rather than the seller’s cost. Marketers first assess customer needs and values, then set the target price and plan a marketing program.
What are the two types of value-based pricing?
The two types of value-based pricing are
1) good value pricing - combine the right combination of quality and good service at a fair price
2) value-added pricing - attaching value-added features and services to differentiate a company’s offers and charging higher prices
Elaborate on competition-based pricing.
It is the strategy whereas prices are set based on competitors’ strategies, costs, prices, and market offerings. Prices can be higher, lower, or equal.
Identify and define the other important internal and external factors affecting a firm’s pricing decisions.
Firms should seek to price their products below the price ceiling (customer perceptions of value), but above the price floor (product cost). To set the right price they need to consider
1) Internal factors:
- marketing objectives and marketing mix: must consider the price’s effect on objective accomplishments / pricing needs to be coordinated with packaging, promotion and, distribution
- organizational considerations: who in the organization sets prices?
2) External factors:
- market and demand: flexibility of price depends on the nature of the market
- economy: recession made consumers more value-conscious -> fixed by a) cut price or feature more affordable items b) reposition brands to enhance value
- channel member reaction to price
- governmental reaction
- social concerns
Discuss the four types of markets.
There are four types of markets:
1) pure competition - many buyers and sellers where each has little effect on the going market price
2) monopolistic competition - many buyers and sellers who trade over a range of prices; similar products but not perfect substitutes; DIFFERENTIATION is very important
3) oligopolistic competition - few sellers who are sensitive to each other’s pricing/marketing strategy e.g. coke and pepsi, internet service providers
4) pure monopoly - one single seller
What should marketers strive to do in a monopolistic competition market?
They should differentiate their products. They can set the price at any level, but must convince consumers of its value.
Explain price elasticity of demand.
There are two types of elasticity of demand:
1) Inelastic demand: change in price results in little effect on demand
2) Elastic demand: change in price results in big effect on demand
Describe the major strategies for pricing imitative and new products.
There are two major strategies for pricing new products:
1) market-skimming: setting a high price for a new product to skim revenue layer-by-layer; used when product’s quality and image supports its higher price, costs of low volume cannot be so high
2) market-penetration: setting a low initial price in order to penetrate the market quickly and deeply; used when market is highly price sensitive, costs falls as sales volume increase
- both strategies require competition to be kept out of the market
Explain how companies find a set of prices that maximizes the profits from the total product mix.
Companies employ techniques to do so:
1) product line pricing - setting prices across an entire product line
2) optional-product pricing - pricing optional or accessory products sold with the main product e.g. computer + keyboard
3) captive-product pricing - pricing products that must be used with the main product e.g. printer + ink cartridge
4) by-product pricing - pricing low-value by-products to get rid of them e.g. petroleum gel from oil refinery
5) product bundle pricing - pricing bundles of products sold together e.g. fast food menus
Identify the major strategies for price adjustments.
The major strategies for price adjustments are
1) discount and allowance pricing
2) segmented pricing
3) psychological pricing
4) promotional pricing
5) geographical pricing
6) dynamic pricing
7) international pricing
