Final - 05 Price Policy Flashcards
define price
The amount of money charged for a product or service; the sum of the values that customers exchange for the benefits of having or using the product or service
or…. The Sum of the values that Consumers exchange for the Benefits of having or using a Product or Service
what are the major pricing approaches?
three major pricing strategies:
1 -customer value-based pricing,
2 - cost based pricing, and
3 - competition-based pricing.
describe the major pricing strategy of customer value based pricing.
VALUE-BASED PRICING = Setting the price based on buyers’ perceptions of value, rather than on the Seller’s cost. Value-based pricing means that the marketer cannot design a
product and marketing program and then set the price. Price is considered along with all other marketing mix variables before the marketing program is set
– two types of value-based pricing:
1 — Good-value pricing Offering 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.
does price represent a revenue or cost?
Price is the only element in the marketing mix that produces revenue; all other elements represent costs.
what is good value pricing under the value based pricing strategy?
Good-value pricing = Offering the right combination of quality and good service at a fair price
—> In many cases, this has involved introducing less-expensive versions of established, brand-name products. To meet tougher economic times and more frugal consumer spending habits, fast-food restaurants such as Taco Bell and McDonald’s offer value meals and dollar menu items
what is Value-Added pricing under the value based pricing strategy?
Value-added pricing = Attaching value-added features and services to differentiate a company’s offers and charging higher prices.
Rather than cutting prices to match competitors, they attach value-added features and services to differentiate their offers and thus support higher prices. ex wholefoods
- Firstly, they add siginificant value on the customers grocery shopping experience.
- Secondly, The Whole Foods Market believes in its customers as their “evangelists”. They offer extraordinary customer service and exceptional customer experience, because they beileve that their customers are going to “give back” to them by spreading the good words of the Whole Foods Market.
describe the major pricing strategy of Cost-Based Pricing
COST-BASED PRICING →
Cost based pricing is one the method of determining the selling price of a product by the company, wherein the price of a product is determined by adding a profit element (percentage) in addition to the cost of making the product. It uses manufacturing costs of the product as its basis for coming to the final selling price of the product. Either a fixed amount or a percentage of the total product manufacturing cost is added as profit to the cost of the product to arrive at its selling price.
Adding a standard markup to the cost of the Product Popular method in certain markets – Specially Services (e.g. Advertising Agencies’ popular “15%” in the 80’s) gonz
— Whereas customer-value perceptions set the price ceiling, costs set the floor for the price that the company can charge.
- – Cost-based pricing involves setting prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for its effort and risk.
- 2 types of cost based pricing = 1) cost-plus pricing 2) break even pricing
– example : Some companies, such as Ryanair and Walmart, work to become the “low-cost producers” in their industries. Companies with lower costs can set lower prices that result in smaller margins but greater sales and profits
define fixed costs (types of costs)
Fixed costs (overhead) - Costs that do not vary with production or sales level.
For example, a company
must pay each month’s bills for rent, heat, interest, and executive salaries—whatever
the company’s output.
define variable costs (types of costs)
Variable costs - costs that vary directly with the level of production.
Each PC produced by HP involves a cost of computer chips, wires, plastic, packaging, and other inputs. Although these costs tend to be the same for each unit produced, they are called variable
costs because the total varies with the number of units produced.
define total costs (types of costs)
Total costs are the sum of the fixed and variable costs for any given level of production.
Management wants to charge a price that will at least cover the total production costs at a given level of production.
what is the significance of knowing the Costs at Different Levels of Production when using Cost-Based Pricing
To price wisely, management needs to know how its costs vary with different levels of production.
what are the positives and negatives of the major pricing strategy of Cost-Based Pricing
On the negative side ** Ignores Demand *** Ignores Competition ****Not likely to lead to the best price
On the positive side
- Simple
- ** Minimizes Competition, when system is generalized
- *** Popular (seen as “fair” to seller and buyer by many people)
define the experience curve (learning curve)
Experience curve (learning curve) - The drop in the average per-unit production cost that comes with accumulated production experience.
— If a downward-sloping experience curve exists, this is highly significant for the company. Not only will the company’s unit production cost fall, but it will fall faster if the company makes and sells more during a given time period
describe the cost based pricing approach of cost plus pricing.
The simplest pricing method is cost-plus pricing (or markup pricing)—adding a standard
markup to the cost of the product. Construction companies, for example, submit job bids by estimating the total project cost and adding a standard markup for profit
example: The manufacturer would charge dealers $20 per toaster and make a profit of $4 per unit. The dealers, in turn, will mark up the toaster. If dealers want to earn 50 percent on the sales
price, they will mark up the toaster to $40 ($20 50% of $40). This number is equivalent to a markup on cost of 100 percent ($20/$20).
describe the cost based pricing approach of breakeven analysis / target profit pricing.
Setting price to break even on the costs of making and marketing a product or setting price to make a target return.
