Lecture 10 Price Flashcards
Define price
The amount of money charged for a product or service, or the sum of all the values that customers exchange for the benefits of having or using the product or service
What happens at a price floor?
There are no profits below this price
What is the price floor based on?
Product costs
What happens at a price ceiling?
There is no demand above this price
What is the price ceiling based on?
Consumer perceptions of value
What other factors can influence price?
Competition and other external factors such as:
- competitors’ strategies and prices
- marketing strategy, objectives and mix
- nature of the market and demand
What does value-based driving use the perception’s of?
This uses the buyers’ perception of value rather than the seller’s cost
How is value-based pricing driven?
Value-based pricing is customer driven
How is cost-based pricing driven?
Cost-based pricing is product driven
In value-based pricing what is the price set to match?
Price is set to match perceived value
What are the stages in cost based pricing?
Design a good product
Determine product costs
Set price based on cost
Convince buyers of product’s value
What are the stages in value based pricing?
Assess customer needs and value perceptions
Set target price to match customer-perceived value
Determine costs that can be incurred
Design a product to deliver desired value at target price
What are the 4 main customer value-based pricing strategies?
Good-value pricing
Everyday low pricing (EDLP)
High-low pricing
Value-added pricing
What is good-value pricing?
Offering just the right combination of quality and good service at a fair price
What is EDLP?
This involves charging a constant everyday low price with few or no temporary discounts
What is high-low pricing?
This involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items
What is value added pricing?
This attaches value-added features and services to differentiate the company’s offers and thus their higher prices
Define cost based pricing
This sets prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for effort and risk
What are fixed costs?
Costs that do not vary with production or sales level
Give 4 examples of fixed costs
Rent
Heat
Interest
Executive salaries
What are variable costs?
Costs that vary directly with the level of production
Give 2 examples of variable costs
Raw materials
Packaging
What are total costs?
These are the sum of the fixed and variable costs for any given level of production
What does cost plus pricing do?
Adds a standard mark up to the cost of the product
What are the benefits of cost plus pricing?
Sellers are certain about costs
Price competition is minimised
Buyers feel it is fair
What is a disadvantage of cost plus pricing?
Ignores demand and competitor prices
What is break-even pricing?
This is also known as target return pricing and involves setting a price to break even on costs or make a target return
Define competition based pricing
This is setting prices based on competitors’ strategies, costs, prices and market offerings
What is target costing?
This starts with an ideal selling price based on consumer value considerations and then targets costs that will ensure that the price is met
What are two organisational considerations to make when considering price?
Who should set prices?
Who can influence prices?
What relationship is important when setting prices?
The relationship between price and demand
What are the 4 main types of market?
Pure competition
Monopolistic competition
Oligopolistic competition
Pure monopoly
What does the demand curve show?
The number of units the market will buy in a given period at different prices
How are demand and price related?
They are inversely related
Higher price = lower demand
Define price elasticity
This is a measure of the sensitivity of demand to changes in price
What is inelastic demand?
This is when demand hardly changes with a small change in price
What is elastic demand?
This is when demand changes greatly with a small change in price
