Marketing Mix: Price

Question 1

What are the four pricing approaches?

Answer 1

1) Cost-oriented approach

2) Demand-oriented approach

3) Competitor-oriented approach

4) Value-oriented approach

Question 2

What is the cost-oriented approach?

Answer 2

Works on the basis that most important element in pricing offering is cost of productions.
- If a company can make a set amount above what the production costs are, it earns a profit.

One variation is mark-up pricing (used in retail).

Question 3

What is the demand-oriented approach?

Answer 3

A company sets prices according to how much customers will pay.
- Determined by analysis of company’s past sales and factors affecting those sales.

Question 4

What is the competitor-oriented approach?

Answer 4

A company sets prices based on the prices of its competitors, the so-called ‘going rate’.
- This is also called ‘me-too’ pricing.

Question 5

What is the value-oriented approach?

Answer 5

Works on the basis of what differential value customers are likely to perceive, what the price of the next best alternative is, or what customers’ expectations of a ‘fair’ price are, and similar.

Question 6

What are the four pricing strategies?

Answer 6

1) Premium pricing

2) Penetration pricing

3) Economy pricing

4) Price skimming

Question 7

What is premium pricing?

Answer 7

Focuses on pricing an offering to indicate its distinctiveness in the marketplace.
- Typical for high-end brands.
- Consumers can associate high prices with high quality.

Question 8

What is penetration pricing?

Answer 8

Where the price is set low relative to the competition to gain market share.

Question 9

What is economy pricing?

Answer 9

Where the prices are set at the bare minimum to attract price sensitive customers.

Question 10

What is price skimming?

Answer 10

When the price is initially set high, then lowered in sequential steps.
- This strategy is frequently used for the launch of new offerings.

Is used to gain max revenue from different consumer segments.
- Typically used for new offerings when no competitor can offer similar value.

Example:
- Innovators are willing not only to take risks but to pay high prices for new offerings and experiences.
- Early adopters may pay slightly lower but still high
- Early majory - price will now be lower - those willing to pay higher prices from before are already moving on.
- So, the company can charge highest price at peak of demand across different market segments.

Question 11

What is differentiated pricing / price discrimination?

Answer 11

Price discrimination occurs when a company sells a product or service at two or more prices that do not reflect a proportional difference in costs.

Question 12

What are the three degrees of price discrimination?

Answer 12

1) First-degree price discrimination

2) Second-degree price discrimination

3) Third-degree price discrimination

Question 13

What is first-degree price discrimination?

Answer 13

In first-degree price discrimination, the seller charges a separate price to each customer depending of the intensity of their demand.
- Prices may vary in different geographic locations or distribution channels.

For example: A bottle of water may cost 50p in the supermarket, but cost £1 from street venders

This may be considered controversial, and has attracted the attention of policymakers.

Question 14

What is second-degree price discrimination?

Answer 14

In second-degree price discrimination, the seller charges less to buyers of large volumes.

For example:
- Trade promotions when large supermarkets are offered better price deals as they can buy in bulk.
- For consumers - can take the form of 3-for-2 promotions (3 products for the price of 2) OR such as, Netflix charging different prices for different subscription lengths.

Question 15

What is third-degree price discrimination?

Answer 15

In third-degree discrimination, the seller chargers different amounts to different classes of buyers, depending on the channel, location, time, customer segment, etc.

For example: Amazon charge different rates depending on whether the customer is a student or not.

Question 16

What are the five pricing tactics?

Answer 16

1) List pricing

2) Promotional pricing

3) Segmentation pricing

4) Pay what you want pricing

5) Loss-leader pricing

Question 17

When can pricing tactics be beneficial?

Answer 17

Depending on the company’s approach to price discrimination and strategy, pricing tactics can be adopted either temporarily or permanently, as a differentiating point.

Question 18

What is list pricing?

Answer 18

An unsophisticated approach to pricing, where a single price is set for a product or service.
- Typical for university fees - a single price set with no price discrimination.

Question 19

What is promotional pricing?

Answer 19

Temporarily reducing of price below the standard price for a period of time (for example, to raise awareness).
- Typically use for new products with low awareness levels.
- Or for seasonal products.

Based on second-degree and third-degree price discrimination.

Question 20

What is segmentation pricing?

Answer 20

Varying prices are set for different groups of customers.

Based on second-degree and third-degree price discrimination.

Question 21

What is pay what you want pricing?

Answer 21

Says it in the name - is self-explanatory.
- Street performers and buskers use pay what you want pricing.
- Also sometimes seen in restaurants to bring people in.

Question 22

What is loss-leader pricing?

Answer 22

The price is set at a lower level than the actual cost incurred to produce it to attract sales in other categories.
- Is typical for certain categories of products that are essential or popular during certain times - e.g. turkey for Christmas, or roses for Valentines day.

When advertised at lower loss price, it attracts customers to retailers that can compensate the loss with sales made on other items that the customers are buying at regular prices.

E.g., lower price on roses may attract buyers to the supermarket that is offering these low prices, where other products in high demand are sold at regular prices.

Question 23

What are reference prices?

Answer 23

When examining products, consumers often employ reference prices, comparing an observed price to an internal reference price they remember or an external frame reference, such as, a posted “regular retail price”.

Customers perceptions of prices depend on their perceptions of reference prices.

Question 24

What are the reference prices consumers typically use?

Answer 24

1) “Fair price”

2) Typical Price, Usual Discount Price, or Last Price Paid

3) Upper-Bound Price and Lower-Bound Price
- Most consumers find it easier to interpret reference prices based on price intervals (upper and lower bound prices)
- They may not remember how much they bought a box of cereal for the other day but will probably remember the price range.

4) Historical Competitor Prices

5) Expected Future Price
- Demand for product may change if future prices are expected to rise.