L8

Question 1

Describe the 4 determinants of price?

Answer 1

1) Production cost: Fixed cost and variable cost
- Mark-up is simple.
- Makes sense not to sell the product for less than the cost.

2) Costumer Value
- Perceived value
- Need

3) Competitors Prices
4) Strategy

Question 2

What is the role of Marketing Strategy in Pricing?

Answer 2

Affects price in a following ways:

1) The strategic prominence of price is reflected in the company’s POSITIONING - premium or generic product.
- When price is not strategically prominent, it is a background variable
- When price is strategically prominent, it is a lead variable (typically low price, “First Price”)

2) Segments - commoditised or differentiated

Question 3

Describe the relationship between perceived value, cost and price.

Answer 3

Perceived value > price > variable cost
Price > perceived value > variable cost
Price > variable cost > perceived value

=> price will be always higher than cost

Question 4

What are 4 factors affecting pricing?

Answer 4

1) Product Life Cycle (intro, growth, maturity, decline)
2) category conditions,
3) reference price,
4) perceived quality

Question 5

What are the 5 Pricing Strategies?

Answer 5

1) Penetration pricing
Most of the value is given to customer
Often used as entry strategy for new product
Useful for discouraging competitive entry
Objective is to keep or build market share
+ Appropriate strategy when volume-cost relationship has been achieved through experience or economies of scale
- Limitation: difficult to increase prices as consumers do not accept price increases as easily as price decreases

2) Investment pricing
Pricing demands a specific return on investments
Ignores competitors and customer value
+ Applicable when the product is a monopoly
- Has limited usefulness

3) Pricing for stability
Typically used with industrial customers
Industrial customers prefer stable prices from suppliers so as to be able to make projections of their own costs e.g. telephone rates for businesses
The user will rather pay a slightly higher price above average than deal with fluctuations

4) Skimming
Opposite of penetration, high initial price for a product or service at first, then lowers the price over time. Allows to recover sunk costs quickly before competition steps in and lowers the market price.
Reasonable objective when there is little chance of competition in the near future
When fixed costs are low and costs are associated with each individual unit e.g. consulting services, customized furniture.
+ Appropriate when there is a strong price and perceived quality relationship

5) Competitive pricing
Pricing at industry average
May be necessary in industries with high fixed costs as company has little options to recover costs through prices e.g. airlines
+ Appropriate for undifferentiated products- customers are not convinced that brands are significantly different

Question 6

What are the 7 Pricing Tactics?

Answer 6

1) Product Line Pricing - VW
2) Price Bundling - McDonalds
3) Complementary Pricing - razor & blade
4) Value Pricing - Ikea
5) Everyday Low Price - Rema 1000
6) Price Discrimination - Different prices to different segments or markets for Nordea mortgage loans, Norwegian local flights UNDER 25
7) Second market discounting
8) Hidden Price Increases - Butter pack from 200 to 180 g.

Question 7

How to find the right price? 3 steps

Answer 7

1) Test in a small market
2) Test different prices in 3-5 different markets (or lab or in DM)
3) Test customer value and willingness to Pay (WTP)