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Information Management > marketing lecture 7 (price) > Flashcards

marketing lecture 7 (price) Flashcards

1
Q

price definition

A

the price or other considerations (including other products or services) in exchange for ownership or use of the product or service

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2
Q

factors to consider when setting price

A
  1. consumer’s perception of value
    - price ceiling –> no demand over this price
    - value is what a consumer gets
  2. other internal and external considerations
    - marketing strategies, objectives, and mix
    - nature of market and demand
    - price and product of competitors
  3. product costs
    - price floor –> no profit below this price
    - must generate enough revenue to cover all operations
    - must make profit for the organization
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3
Q

6 steps in setting the price

A
  1. identify pricing objectives and constraints
  2. estimate revenue and demands
  3. determine cost, volume, and profit relationships
  4. select an approximate price level
  5. set list or quoted price
  6. make adjustments to list or quoted price
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4
Q

pricing objectives

A
  • profit
  • sales revenue ($)
  • maket share ($ or %)
  • unit volume (#)
  • survival
  • social responsibility
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5
Q

pricing constraints

A

(factors that limit the price range set by a company) :
- newness of the product (stage in the product life cycle)
- cost of producing and marketing the product
- legal and ethical considerations
- type of competitive market : monopolistic competition, monopoly, perfect competition, oligopoly

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6
Q

why marketers need to determine customer demand

A

when choosing a price, marketers needs to know the demand, which is how much of the product a customer would buy on different price points. By knowing this, they can optimize the price to maximize sales and profits

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7
Q

key factors affecting customer’s willingness to pay

A
  1. preference of a particular product compared to others
    - if a customer has huge preference over a product, they are willing to pay more
  2. convenience of purchasing the product
    - most customers value their time and convenience
  3. money available for the purchase (cash/credit)
    - customers with disposable income or credit are more likely to be willing to spend more
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8
Q

2 types of demand

A
  • elastic demand
  • inelastic demand
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9
Q

elastic demand

A
  • when a small change in price leads to a significant change in quantity demanded
  • customer sensitivity : when a customer is responsive towards price changes
  • e.g. luxurious items or non-essential goods

pricing strategy :
- as customers are sensitive towards price changes, sales or discounts can lead to substantial increase in sales volume
- emphasizing unique features or benefits of the product can justify higher prices, but have to be carefully managed

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10
Q

inelastic demand

A
  • when a change in price leads to a smaller change in quantity demanded
  • customer sensitivity : customers are less responsive towards price change
  • e.g. basic food, gasoline, medical services

pricing strategy :
- businesses can raise price without significantly affecting the quantity demanded. this can lead to increased revenue
- since customers are not responsive towards price change, they can set their price based on the cost plus a desired profit margin

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11
Q

cost concepts

A

variable cost (VC)
total cost (TC)
fixed cost (FC)
unit variable cost (UVC)
contribution margin (CM)

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12
Q

Break even analysis

A
  • a technique that analyzes the relationship between total revenue and total cost
  • break even point (BEP) –> a quantity produced point when the total cost equals the total revenue
  • profit is made when the quantity is beyond BEP
  • knowing the BEP, businesses can determine how many units have to be produced to cover the cost
    BEP = fixed cost / (unit price - unit variable cost)
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13
Q

select an approximate price level approaches

A
  • demand-oriented approaches
  • cost-oriented approaches
  • profit-oriented approaches
  • competition-oriented approaches
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14
Q

demand-oriented approaches

A

when selecting a price level, focuses more on the underlying expected customer taste and preferences rather than the cost, profit, or competition

approaches :
- skimming pricing
- penetration pricing
- prestige pricing
- product line pricing
- odd-even pricing
- product bundle pricing

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15
Q

skimming pricing

A
  • the business set the highest initial price that the customer that really desires the product is willing to pay. Later, when the customer demand is satisfied, the business will lower down the price to attract more price-sensitive segment

this is effective if :
- there is enough prospective customer that is willing to pay the initial high price to make the sales profitable
- customers sees the high price as a sign of high quality

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16
Q

market-skimming pricing

A
  • initial high price for new models
  • gradual price reductions
  • product differentiation
  • maximizing profit
17
Q

penetration pricing

A

set a low initial price to attract immediate appeal to the mass market

preferable conditions :
- many markets are price sensitive
- the low price will scare competitors from entering the market
- unit production cost and marketing cost will decrease as unit volume production increases

18
Q

market-penetration pricing

A
  • low initial pricing
  • rapid market entry
  • scaling economies
  • market share focus
19
Q

prestige pricing

A

use very high pricing so that quality or status concious customers gets attracted to the product and buys it

price says something about the product and a lot of customers use price to judge the product. a lot of customers also perceives that high priced products equals to high quality products

20
Q

product line pricing

A
  • sets different products with different prices in a product line
  • links the products with prices of hi-mod-low
21
Q

odd-even pricing

A
  • a psychological pricing strategy which sets prices just below a round number
  • usually in retail or consumer goods :
    1. retail clothes : more value
    2. restaurant menu : cheaper
    3. subscription services : saves more
22
Q

product bundle pricing

A
  • combine several products with a reduced price
  • combine products customers would not buy individually, on a low enough price that customers would consider buying
23
Q

cost-oriented pricing

A

price is set based on production and marketing costs and then adding enough to cover direct, overhead costs, and profit

24
Q

approaches of cost-oriented pricing

A
  1. standard mark-up pricing
    - adds a consistent percentage or fixed amount to every product
    - cost + (cost x markup percentage)
    - focuses on adding a fixed amount to the cost regardless of cost fluctuations (a simplified approach)
    - usually used in retail settings or consumer goods that can have a consistent markup price easily
  2. cost plus pricing
    - adds a spesific markup price to each product
    - total cost + markup profit margin
    - focuses on making markup price based on production costs which may vary greatly between products
    - used in manufacturing that needs detailed cost accounting
25
Q

profit-oriented pricing

A

target profit pricing : set an annual profit target first and then decide the selling price based on the target profit

calculation :
profit = (total revenue) - (total cost)
profit = (P x Q) - (FC + (UVC x Q))

26
Q

competition oriented pricing

A
  • stress about what the competitors or the market are doing
    approaches :
  • customary pricing
  • above, at, or below market pricing
  • loss leader pricing
27
Q

customary pricing approach

A
  • set the price based on the established norm or standard in the market (movie tickets/ concert tickets)
  • companies usually use this approach when operating in a market with established norm, stable demand, and clear customer expectations
28
Q

above at below market pricing approach

A
  • set the price based on a subjective feel of competitor’s price or marketprice as the benchmark
  • customers usually sees the value of a product based on price comparison with competitors’ similar products
    a. above market price : luxurious brands that wants to maintain exclusivity
    b. at market price : companies that seek direct competition with similar products
    c. below market price : companies that wants to attract price sensitive customers and gain market share
29
Q

loss leader pricing approach

A
  • sells a product with a price significantly below its customary or market cost to generate attention towards its more profitable goods or services
  • goal is to generate traffic, increase sales on more profitable goods, and gain customers’ attention
30
Q

set the list or quoted price

A
  • step 1 to 4 resulted on an approximate price level
  • step 5 is to make a list or quoted price based on the approximate price level
  • regardless of the pricing orientation used, the final price has to consider 3 factors
    a. competitor effects
    b. company effects
    c. customer effects
31
Q

make adjustments to the list or quoted price

A

3 adjusments :
- discounts
- allowances : price reductions that are granted for spesific actions that are beneficial towards the seller
- geographical adjustments : price adjustments associated with the cost of transporting the products or services from the seller to the buyer

32
Q

adjustments reactions

A
  1. price increase
    why :
    - over demand
    - cost inflation

customer reaction :
- company is greedy
- superior quality
- must buy now

competitor reaction :
- company knows the market better
- company wants to be price leader

  1. price decrease
    why :
    - excess capacity
    - boost sales
    - reducing demand
    - achieve lower costs through producing higher volume

customer reaction :
- inferior quality
- newer models coming soon
- price may go down further

competitor reaction :
- company wants to increase demand and reduce price
- company wants more market shares

33
Q

calculate final price

A

list price - (incentives + allowances) + extra fees

Information Management (11 decks)

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