marketing lecture 7 (price) Flashcards
price definition
the price or other considerations (including other products or services) in exchange for ownership or use of the product or service
factors to consider when setting price
- consumer’s perception of value
- price ceiling –> no demand over this price
- value is what a consumer gets - other internal and external considerations
- marketing strategies, objectives, and mix
- nature of market and demand
- price and product of competitors - product costs
- price floor –> no profit below this price
- must generate enough revenue to cover all operations
- must make profit for the organization
6 steps in setting the price
- identify pricing objectives and constraints
- estimate revenue and demands
- determine cost, volume, and profit relationships
- select an approximate price level
- set list or quoted price
- make adjustments to list or quoted price
pricing objectives
- profit
- sales revenue ($)
- maket share ($ or %)
- unit volume (#)
- survival
- social responsibility
pricing constraints
(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
why marketers need to determine customer demand
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
key factors affecting customer’s willingness to pay
- preference of a particular product compared to others
- if a customer has huge preference over a product, they are willing to pay more - convenience of purchasing the product
- most customers value their time and convenience - money available for the purchase (cash/credit)
- customers with disposable income or credit are more likely to be willing to spend more
2 types of demand
- elastic demand
- inelastic demand
elastic demand
- 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
inelastic demand
- 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
cost concepts
variable cost (VC)
total cost (TC)
fixed cost (FC)
unit variable cost (UVC)
contribution margin (CM)
Break even analysis
- 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)
select an approximate price level approaches
- demand-oriented approaches
- cost-oriented approaches
- profit-oriented approaches
- competition-oriented approaches
demand-oriented approaches
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
skimming pricing
- 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
market-skimming pricing
- initial high price for new models
- gradual price reductions
- product differentiation
- maximizing profit
penetration pricing
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
market-penetration pricing
- low initial pricing
- rapid market entry
- scaling economies
- market share focus
prestige pricing
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
product line pricing
- sets different products with different prices in a product line
- links the products with prices of hi-mod-low
odd-even pricing
- 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
product bundle pricing
- combine several products with a reduced price
- combine products customers would not buy individually, on a low enough price that customers would consider buying
cost-oriented pricing
price is set based on production and marketing costs and then adding enough to cover direct, overhead costs, and profit
approaches of cost-oriented pricing
- 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 - 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
