Marketing Mix - Price Flashcards
What is price?
Narrowly, price can be defined as the amount of money charged for a product. A broader definition would be the sum of the values that consumers exchange for the benefit of having
and consuming/using a product.
Influencing factor that have an effect on price
Value of a non-paying customer
A costumer that does not directly buy something can still
generate a value. This happens through possible future transaction revenues, data, attention, network value, co-production, and word-of-mouth.
The 3 major pricing strategies
- Cost-based pricing
- Value-based pricing
- Competition-based pricing
Cost-based pricing
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Long-term perspective (absorption costing)
Here, the dealer’s sales price is made up of the manufacturer’s factory price and the profit markup for the dealer. The manufacture’s price in turn is made up of average variable cost + allocated fixed costs + profit markup for the manufacturer. Minimum price per unit ® minimum of average total costs (includes ALL costs) -
Short-term perspective (direct costing)
Here, the minimum price per unit is the minimum
of average variable costs (includes ONLY variable costs); all prices higher than the average variable costs contribute to the fixed costs (= contribution margin). In the short run, it may be worth for a manufacturer not to eliminate products which do not realize their average total costs, but contribute to the fixed costs. -
Break-even analysis (target profit pricing)
The break-even quantity is the quantity at which total costs equals total revenues for a given price, thus the company doesn’t make any profits or losses at this point. The break-even quantity can be calculated with fixed costs/(selling price – variable costs). The pricing can then be chosen according to the profit we want to achieve. Target profit pricing is designed to find a quantity of goods that covers both our cost and also gives us a profit.
Limitations and advantages of cost-based pricing
Limitations:
- No consideration of demand response on price
- No consideration of competitor’s price availability
- risk of ricing oneself out of the market
Advantages:
- buyers feel it is fair
- relatively easy to use
- traditionally how people are trained to set prices
Value-based pricing
In Value-Based Pricing, the cost-based pricing process is reversed; the target price is set based on customer perceptions of the product value. The targeted value and price then drive decisions about product design, processes needed and what costs can be incurred.
Competition-based pricing
Here, prices and pricing behavior of the competitors in the market are considered; prices are set mainly by looking what competitors are doing or plan to do. This is often too narrowly focused on the competition aspect; company costs and the price- demand relation don’t play a major role in the price setting (price war, prisoner’s dilemma).
Generic new pricing strategies
Price discrimination
- First degree price discrimination (individual price for each customer, price equals customer’s willingness to pay)
- Second degree price discrimination (individual price for different customer segment, costumers decide to which segment they belong)
- Third degree price discrimination (Individual price for different customer segments, costumers cannot decide to which segment they belong, segments are built by objective
and observable criteria)
Price bundling
During price bundling, several products/services are offered for sale as one combined product/service. If the bundling is pure, consumers can only buy the entire bundle or nothing. If the bundle is mixed, consumers are offered a choice between purchasing the entire bundle or purchasing separate parts of the bundle (McDonald’s). Price bundling is very common in imperfectly common product markets (financial services, telecommunications, fast food, etc.).
Psychological Pricing
Here, customers consider prices in relative terms rather than in absolute terms (= reference price, see picture). Framing effects are often used because costumers respond differently to positive and negative framing (early bird benefits vs. late penalties). Another form of
psychological pricing is done with quality signaling (costumers perceive quality changes with respect to the price) and risk signaling (price may contain signaling effects such as risks). Choice bracketing is another form of psychological pricing. It is done in industrial market (costumers prefer making individual choices rather than buying flat-rates).
Flat-rate bias (FRB)
Often occurs in psychological pricing. Refers to the fact that costumers often prefer flat-rates, even though they pay more with flat-rates for the same amount of consumption than with pay-per-use. FRB height is defined as the price difference from the flat rate tariff to the next smaller tariff (i.e. the money wasted by purchasing a higher flat-rate tariff). The flat-rate is explained with the taxi-meter effect (enjoy usage without thinking about cost), the insurance effect (no risk of unexpected high costs), the convenience effect (no concerns with pay-per-use calculations), and the overestimation effect (no benefit).
Prices ending in 9
Represents another way of psychological pricing. A small difference in price – like 9.99$ vs. 10.00$ can lead to a large difference in choice, because costumers often perceive
the difference between 9.99$ and 10.00$ as 1.00$.
Promotion
The promotion mix, or marketing communications mix is defined as the specific blend of advertising, public relations, personal selling, sales promotion, and direct marketing tools that
the company uses to persuasively communicate costumer value, build customer relationships and form brand image.
Evaluating brand success
Communications metrics
Elaboration Likelihood model
The basic distinction for the ELM are high and low
involvement products. Each product category demands different advertising strategies; the main goal is to achieve an enduring change in costumer’s attitude by repeating the promotion and message in the media (increases revenues). An example for high involvement products are iPhones (primary message of advertisement is more relevant, consumers care more about the technical features, it needs to match interests and hobbies). An example for low involvement products is toilet paper (secondary factors become more important here; consumers often pick toilet paper based on the packaging rather than its features)
Evaluation success of promotions on the internet
