Chp 11: pricing concepts + strategies Flashcards
define price
the overall sacrifice a consumer is willing to make to acquire a specific product or service
what does price sacrifice include
includes money paid to seller to acquire item, value of time necessary to acquire product, travel costs, taxes, shipping costs
5 points to price
1) Consumers judge benefits a product delivers against price and make purchase decision based on this overall judgement of value
2) Successful pricing - match product with consumer’s value perceptions
3) Firm can price products too high and too low (too low price can signal low quality, poor performance or other negative attributes). Too low price can cause retailers and manufacturers to lose money and negatively impact perceived positioning of product, even if it brings in new consumers
4) Consumers want high value, which may come with relatively high or low price depending on bundle of benefits product/service delivers
5) Price affects revenue
explain 5Cs
Successful pricing strategies built through 5 critical components
list 5Cs
1) company objectives
2) customers
3) costs
4) competition
5) channel members
C: company objectives explain
Each firm embraces an objective that fits with where mgmt thinks firm needs to go to be successful. Specific objectives reflects how firm intends to grow (by increasing profits, sales, decreasing competition, building customer satisfaction)
C: company objectives: 4 orientations
1) profit orientation
2) sales orientation
3) competitor orientation
4) customer orientation
define profit orientation
company objective that can be implemented by focusing on target profit pricing, maximizing profits or target return pricing
define target profit pricing
pricing strategy implemented by firms where they have a particular profit goal as their overriding concern, uses price to stimulate a certain level of sales at a certain profit per unit
define maximizing profits strategy
mathematical model that captures all factors required to explain and predict sales and profits, which should be able to identify the price at which its profits are maximized
define target return pricing
pricing strategy implemented by firms less concerned with absolute level of profits and more interested in rate at which their profits are generated relative to their investments, designed to produce a specific return on investment, usually expressed as % of sales
define sales orientation
company objective based on belief that increasing sales will help firm more than increasing profits
C: company objectives: 2 points to sales orientation
1) Can also set market share objective and set prices to have high market share. Can gain market share by offering high quality product at fair price
2) Implicitly for sales to increase, consumers must see greater value
define competitor orientation
company objective based on premise that firm should measure itself primarily against its competition
define competitive parity
firm’s strategy of setting prices similar to those of major competitors
C: company objectives: 2 points to competitor orientation
1) competitive parity
2) Value only implicitly considered, competitors may be using value as pricing strategy so copying strategy may provide value
define customer orientation
pricing orientation that explicitly invokes concept of customer value and setting price to match consumer expectations
C: company objectives: 2 points to customer orientation
1) Can make it easy for customers to pay, no haggle price structure to make purchase process simpler and easier thereby lowering overall price and increasing value
2) Can offer very high prices, state of the art products in full anticipation of limited sales to enhance firm’s rep and image and increase company’s value in mind of consumers
C: customers: what is this about
About understanding consumer’s reactions to different prices
C: customers: 2 things to consider
1) demand curves and pricing
2) price elasticity of demand
C: customers: define demand curve
shows how many units of a product/service consumers will demand during specific period at different prices
C: customers: define prestige products/services
those that consumers purchase for status > functionality
C: customers 3 points to demand curves
1) As price increases, demand decreases (downward sloping, can be linear or curved)
2) X - quantity demanded
3) Y - price
C: customers: explain prestige goods for demand curve
For these products, high price leads to greater status associated with it and greater exclusivity so high price leads to greater quantity sold up to certain point (demand curve upward sloping)
C: customers: explain price elasticity of necessary items
Consumers less sensitive to price increases for necessary items because they have to purchase these products even if price rises
C: customers: why do we look at price elasticity of demand
Marketers need to know how consumers will respond to price increase/decrease so they can determine if it makes sense to raise/lower price
define price elasticity of demand
measures how changes in price affects quantity of product demanded
formula for price elasticity of demand
% change in quantity demanded / % change in price
C: customers:price elasticity of demand: market is elastic
Market is price sensitive (elastic) when price elasticity < -1 (1% decrease in price -> more than 1% increase in Qd)
C: customers: define elastic
refers to market for product that s price sensitive, relatively small changes in price will generate fairly large changes in quantity demanded
C: customers: price elasticity of demand: explain market is inelastic
Market is price insensitive (inelastic) when price elasticity > -1 (1% decrease in price -> less than 1% increase in quantity sold), used when firms want to raise prices
C: customers define inelastic
refers to market for product that is price insensitive, relatively small changes in price will not generate large changes in Quantity demanded
C: customers: explain price elasticity for price increases and decreases
Consumes more sensitive to price increases than decreases & price elasticity of demand changes along demand curve
C: customers: 3 factors affecting price elasticity of demand
1) income effect
2) substitution effect
3) price elasticity
C: customers: define income effect
refers to change in quantity of a product demanded by consumers because of a change in their income
C: customers: 1 point to income effect
as income rises, demand shifts from lower priced products to higher priced alternatives. As income falls, demand shifts from less expensive alternatives or purchase less
C: customers: define substitution effect
refers to consumers ability to substitutes other products for the focal brand, thus increasing price elasticity of demand for focal brand
C: customers: 2 points to substitution effect
1) Greater availability of substitute products, higher price elasticity of demand
2) Brand loyal consumers won’t be affected by this and will have low price elasticity of demand. Make brand less substitutable and make it unique
C: customers define cross price elasticity
% change in demand for product A that occurs in response to % change in price of product B
C: customers: define complementary products
products whose demand curves are positively related, such that they rise or fall together, a % increase in demand for one results in % increase in demand for another
C: customers: define substitute products
products for which changes in demand are negatively related - % increase in quantity demanded for product A results in % decrease in quantity demanded for product B
C: costs: what should prices not be based on
Prices should not be based on costs because consumers make purchase decisions on perceived value
C: costs: 2 costs
1) variable cost
2) total cost
3) fixed cost
C: cost define variable cost
costs, primarily labour and materials, that vary with production volume
C: cost: define fixed cost
costs remain essentially at the same level, regardless of any changes in volume of production
C: cost: define total cost
sum of variable + fixed cost
C: cost define break even point
point at which number of units sold generates just enough revenue to equal total costs, profits are 0
C: cost: define contribution per unit
price - variable cost per unit, variable used to determine break even point in units
C: cost: formula for break even point in units
Fixed costs / contribution / unit
C: cost 2 points to break even analysis
1) Analyze relationship among cost, price, revenue and profit over different levels of production and sales
2) Break even analysis can help managers assess pricing strategies, conditions in which different prices may make product profitable
C: cost 3 disadvantages of break even analysis
1) normally not a single price so use avg;
2) price often gets reduced as quantity increases because costs decrease so multiple analyses needed;
3) cannot indicate how much units will sell at given price
C: competition: 4 types
1) monopoly
2) oligopoly
3) monopolistic competition
4) pure competition
C: competition 2 points to monopoly
1) One firm control market
2) Less price competition & fewer firms
C: competition: 5 points to oligopoly
1) Handful of firms control market
2) More price competition & fewer firms
3) Firms typically change prices in reaction to competition to avoid upsetting stable competitive environment
C: competition: define price war
occurs when 2+ firms compete primarily by lowering prices
C: competition: why do firms do price war
1) if new entrants want to gain market share, and established firms drop prices to preserve market share
2) avoiding appearance of being insensitive to consumers
3) overreacting to price decrease by competitors
C: competition: 3 points to monopolistic competition
1) Many firms selling differentiated products at different prices
2) Less price competition & many firms
3) Products may be viewed as substitutes but not perfect substitutes
C: competition: what may be done instead of price war in oligopoly
Better service, higher quality, brand loyalty may be used as strategies instead, consumers do not buy solely on basis of price
C: competition: 5 points to pure competition
1) Many firms selling commodities for same price
2) More price competition & many firms
3) Consumers perceive products as substitutable
4) Price usually set according to laws of supply + demand
5) Lowering prices may create price war + erode profits, can instead de-commoditized products by differentiating them
C: channel members: what does it include
Includes manufacturers, wholesalers, retailers
C: channel members: define grey market
employs irregular but not necessarily illegal methods, generally it legally circumvents authorized channels of distribution to sell goods at lower prices than those intended by manufacturer
C: channel members: 1 point
Need to balance your needs with what the manufacturer wants. If manufacturer wants high prices to convey better image, and retail wants lower prices, there will be conflict
C: channel members: 2 points to grey market
1) To prevent grey market, can put disclaimer warning consumers that warranty is void unless item is purchased from authorized dealer
2) Grey market may occur when retailer has too much product in stock and sells product at lower price to non authorized dealers
how to choose pricing strategy
specific to product and target market
3 pricing methods
1) cost based method
2) competitor based method
3) value based method
define cost based pricing method
determines final price to charge by starting with cost, without recognizing role that consumers or competitors prices play in marketplace
1 point to cost based pricing method
Assumes costs do not vary much for levels of production
define competitor based pricing method
approach that attempts to reflect how firm wants consumers to interpret its products relative to competitors offerings
2 points to competitor based pricing method
1) Setting prices at same level or close to competitor’s price signals to consumers that product is similar
2) Higher prices signals greater features, better quality or some other valued benefit
define value based pricing method
focus on overall value of product offering as perceived by consumers, who determine value by comparing benefits they expect the product to deliver with sacrifice to acquire product
2 types of value based pricing methods
1) improvement value method
2) cost of ownership method
define improvement value pricing method
represents an estimate of how much more (or less) consumers are willing to pay for a product relative to other comparable products
define cost of ownership pricing method
determines total cost of owning product over its useful life
1 point to cost of ownership pricing method
Consumers may be willing to pay more for product because over its lifetime, it will cost less than cheaper alternative
3 pricing strategies
1) everyday low pricing
2) high/low pricing
3) new product pricing
define everyday low pricing strategy
strategy companies use to emphasize continuity of their retail prices at level somewhere between regular, non sale price and deep discount sale prices their competitors may offer
2 points to everyday low pricing strategy
1) EDLP adds value by reducing search costs - consumers spend less time comparing prices at different stores
2) Some consumers perceive stores that use EDLP carry lower quality goods, whereas high/low pricing stores tend to carry better quality items. But again consumers decision comes down to value.
define high/low pricing strategy
relies on promotion of sales, during which prices are temporarily reduced to encourage purchases
explain high/low pricing strategy
Some consumers may relish challenge of getting lowest price or so be price sensitive they are willing to spend time and effort to seek lowest price
explain new product pricing strategy
When product is already on market, its approximate value has already been established
3 examples of new product pricing
1) price skimming
2) market penetration pricing
3) consumers use of reference pricing
define price skimming
strategy of selling new product/service at high price that innovators + early adopters are willing to pay to obtain it, after high-price market becomes saturated and sales slow, firm lowers price to capture (or skim) the next most price sensitive segment
2 things to ensure price skimming is effective
1) For this to work, product must be perceived as breaking new ground in some way, offering new benefits unavailable in alternative products
2) competitors can’t be able to enter market easily, otherwise price competition will force lower prices
2 reasons to use price skimming
1) May use with high price early to signal high quality, or to limit demand to build production capacities, or to earn back high R&D investment, or to test consumer’s price sensitivity
2) Can prevent competition through patent protections, inability to copy (too complex, raw materials hard to get) or high costs of entry
drawback and point to price skimming
1) Drawback: high unit costs associated with producing small volumes and may causes discontent for consumers who feel cheated when prices drop too quickly
2) Profits flow from margin
define market penetration pricing
setting initial price low for intro of new product/service with objective of building sales, market share, profits quickly
define experience curve effect
drop in unit cost as accumulated volume sold increases; as sales continue to grow, costs continue to drop allowing even further reductions in price
3 points to market penetration pricing
1) Profits flow from volume
2) Strategy discourages competition from entering market because profit margin is low and if costs to produce product drop because of accumulated volume, competitors that enter will face higher unit costs until volume catches up with early entrants
3) experience curve effect
drawback to market penetration pricing
Drawback: firm needs to have capacity to satisfy rapid rise in demand, low price does not signal high quality, avoid if some segments of market are willing to pay more for product otherwise firm is leaving money on table
define reference price
price against which buyers compare actual selling price of product and that facilitates their evaluation process
2 points to consumers use of reference pricing
1) When consumers view sale price and compare with reference price, perceptions of value of deal increases
2) Consumers also rely on reference prices stored in memory (based on what they last paid or what they expect to pay for a slice of pizza for example), and what comparative products sell for
define pricing strategy
long term approach in setting prices broadly in integrative effort based on 5 Cs of pricing
define pricing tactics
short term methods used to focus on 5Cs, can be responses to competitive threats (like lowering price temporarily to meet competitor’s price reduction) or broadly accepted methods of calculating final price for customer that is short term in nature
3 pricing tactics
1) consumer pricing tactics
2) consumer price reductions
3) business to business pricing tactics
when is consumer pricing tactics used
when firms sell products directly to consumers
3 types of consumer pricing tactics
1) price lining
2) price bundling
3) leader pricing
define price lining
establishing price floor and price ceiling for entire line of similar products and then setting a few other price points in between to represent distinct differences in quality
1 point to price lining
Having options at different price points means firm can satisfy range of tastes and budgets
define price bundling
pricing of more than one product for single, lower price than items would cost sold separately
1 point to price bundling
Can be used to sell slow moving items, to encourage consumers to stock up so they won’t purchase competing brands, to encourage trial of new product, or provide incentive to purchase less desirable product to obtain more desirable one in same bundle
define leader pricing
building store traffic by aggressively pricing and advertising a regularly purchased item, often priced at or just above store’s cost
1 point to leader pricing
When consumer goes in store to get deal, consumer will likely also pick up other items they need (these items are priced at high profit margins so purchase covers lower markup on deal product)
explain consumer price reductions
Final price consumer pays has often been adjusted from original price
3 types of consumer price reductions
1) markdowns
2) quantity discounts for consumers
3) coupons and rebates
3 points to markdowns
1) Reductions retailers take on initial selling price of product
2) Integral component of high/low strategy
3) Markdowns enable retailers to get rid of slow moving/obsolete goods, sell seasonal items after season, match competitor’s prices on goods, promote goods and increase sales (once consumer in store they buy more goods)
define size discount
most common implementation of quantity discount at consumer level. The larger the quantity bought, the less the cost of unit
2 points to quantity discounts for consumers
1) size discount
2) By buying large quantities consumers less likely to switch brands and consume more of product
define coupon
provides stated discount to consumers on final selling price of specific item, retailer handles discount
define rebates
consumer discount in which portion of purchase price is returned to buyer in cash. The manufacturer issues refund
1 point to coupons
Goal of coupons: prompt consumer to try product, reward loyal consumers, encourage repurchase. By saving consumer money, firm adds value to products
1 point to rebates
Hassle factor for rebates is higher, they must mail in documentation, and wait for cheque. But rebates provide greater control than coupons and valuable customer info
5 types of business to business pricing tactics
1) seasonal discounts
2) cash discounts
3) allowances
4) quantity discounts
5) uniform delivered vs geographic pricing
define seasonal discounts
additional reduction offered as incentive to retailers to order goods in advance of normal buying season
1 point to seasonal discounts
Dealers weigh extra cost of carrying inventory for longer period of time and benefits of larger profit
define cash discounts
additional reduction reduces invoice cost if buyer pays invoice prior to end of discount period
1 point to cash discounts
By encouraging early pmt, B2B sellers benefit from time value of money. They can invest money or avoid borrowing money + paying interest on it
define allowances
ads or listing allowances (additional price reductions) offered in return for specific behaviours
define listing allowance
fee paid to retailers to get new products into stores or to gain more or better shelf space
2 points to allowances
1) Advertising allowances offered to retailers if they agree to features manufacturer’s product in their ads and promotional efforts
2) Large listing allowances could be considered bribery and put small manufacturers that can’t afford allowances at competitive disadvantage
define quantity discounts
providing reduced price according to amount purchased
define cumulative quantity discount
discount based on amount purchased over specified period and usually involves several transactions
define noncumulative quantity discount
discount based on amount purchased in single order
3 points to quantity discounts
1) The more the buyer purchases, the higher the discount and the greater the value
2) cumulative quantity discount - Encourages resellers to maintain current supplier because cost to switch is discount
3) noncumulative quantity discount - Provides incentive to purchase more goods immediately
define uniform delivered
shipper charges one rate, no matter where buyer is located
define geographic pricing
different prices charged depending on geographical delivery area
1 point to uniform delivered
Makes things simple for buyer and seller
1 point to geographic pricing
Can be advantageous for shipper because reflects actual shipping charges more closely than uniform delivered
how to prices fluctuate
Prices tend to fluctuate naturally and respond to varying market conditions
what do firms often engage in
Firms often engage in pricing practices that can unfairly reduce competition or harm consumers through fraud + deception
laws for pricing
Laws for this can be poorly enforced and difficult to prove
4 types of legal + ethical issues of pricing
1) deceptive or illegal price ads
2) predatory pricing
3) price discrimination
4) price fixing
3 points to deceptive or illegal price ads
1) It is always illegal and unethical to lie is ads, a certain amount of puffery is allowed
2) Price ads should never deceive consumers to point of causing harm
3) example: advertising regular price and sale price but regular price is fake
3 types of deceptive or illegal price ads
1) deceptive reference price
2) loss leader pricing
3) bait and switch
2 points to deceptive reference price
1) If reference point has been inflated or fake, ads are deceptive and may cause harm to consumer
2) Competition bureau determines regular price by using 1 of 2 tests
2 tests by competitive bureau to determine if we have deceptive reference price
1) volume test - substantial quantity of products were sold at price noted or higher
2) time test - necessitates products being sold at regular price for substantial period of time
define loss leader pricing
takes tactic of leader pricing one step further by lowering price below store’s cost
1 point to loss leader pricing
Example: buy one get one free
define bait and switch
deceptive practice of luring customers in store with very low advertised price on an item (bait) only to aggressively pressure them into purchasing a high priced item (switch) by disparaging the low priced item, comparing it unfavourably with higher priced model, or professing an inadequate supply of lower priced item
1 point to bait and switch
Laws for this are difficult to enforce because salespeople are always trying to get customers to trade up without deliberately baiting them, key to proving this centers on intent of seller, which is difficult to prove
define predatory pricing
practice of setting very low price for 1+ of its products with intent of driving its competition out of business
2 points to predatory pricing
1) Illegal under competition act - constraints free trade and unfair competition
2) Need to demonstrate intent - that firm intended to drive out competition or prevent competitors from entering, and must prove firm charged prices lower than its avg cost
define price discrimination
practice of selling same product to different resellers or to ultimate consumer at different prices
4 points to price discrimination
1) Not all forms are illegal under competition act
2) Usually large firms will receive lower prices
3) Quantity discounts must be available to all customers and not be structured so that they favour certain buyers over others
4) Competition act requires firms to demonstrate price discounts don’t restrict competition
define price fixing
colluding with other firms to control prices
2 types of price fixing
1) horizontal price fixing
2) vertical price fixing
define horizontal price fixing
occurs when competitors that produce + sell competing products collude or work together to control prices, effectively taking price out of decision process for consumers
1 point to horizontal price fixing
This is illegal and reduces competition
define vertical price fixing
occurs when parties at different levels of same marketing channel collude to control prices passed to consumers
define manufacturer’s suggested retail price
manufacturers encourage retailers to sell their merchandise at specific price
2 points to vertical price fixing
1) MSRPS used by manufacturer to reduce retail price competition among retailers, simulate retailers to provide complementary services and support manufacturer merchandise
2) Manufacturers enforce MSRP by withholding benefit like cooperative ads or reducing to deliver goods to non complying retailers
