Price

Question 1

How important is price for shareholder value?

Answer 1

Price is the most important marketing mix variable for corporate value

Question 2

What is the implication of this price importance?

Answer 2

Price competition can have a devastating effect on probability. So, it makes sense to defend prices rather than to defend volume

Question 3

Which factors are influencing the management of price?

Answer 3

The information revolution is destroying the simplicity of uniform pricing and bringing back individually negotiated prices. With more information available, markets are becoming more price sensitive.

Question 4

What are the major, traditional pricing concepts?


Answer 4

Mark-up pricing (adds a standard markup to manufacturing costs
of product) and target-return pricing (s to set prices in order to balance costs (i.e., achieve break even in costs) or a desired return) .

Question 5

What are the fundamental problems with these pricing concepts?

Answer 5

They ignore demand, they ignore the perceived value of the product to the customer, they ignore the value created by effective marketing and they ignore competition.

Question 6

What are the principles that underline effective pricing?

Answer 6

First principle: Pricing should be based on the value that the product offers to customers, not on its costs of production.
Second principle: Since different customers attach different values to a given product, prices should be customised.
Third principle: Pricing decisions should anticipate the reactions of competitors and their long run objectives in the market.
Fourth principle: Pricing should be integrated with a firm’s broad strategic positioning. That is, prices have to be designed to fit into a firm’s market position strategy.

Question 7

What is the customer surplus?
 (2º principle)

Answer 7

Customer surplus is the difference between the price the customer would be willing to pay for a product and the price the customer actually pays.

Question 8

What is the solution to minimize consumer surplus? (2º principle)


Answer 8

Charge different prices to different customers.

Question 9

In considering price decisions what are the two issues to be consider? (third principle)

Answer 9

1) How will competitors react and what are the subsequent effects on profits?
2) Is there a way of influencing competitors towards less damaging responses?

Question 10

The companies reactions and the ability to shape the responses depend on the nature of the industry, such as?


Answer 10

Number of competitors, differences among competitors, price transparency and any short-term price gains from price cutting.

Question 11

How does cooperation in pricing manifest itself ?

Answer 11

In price signaling - Involves tactics to make transparent what a firm’s objective is. Trust among competitors is created.
In tit-for-tat - Involves matching the competitor’s price moves, thus not undercutting it.

Question 12

What has beens the typical approach to the price-strategy relaionship?


Answer 12

design the product -> determine the costs to make it -> observe the competitor’s prices -> set own prices for the product -> position the product in the target market segment with a brand at the set price.

Question 13

What is a value-based approach to pricing?

Answer 13

position the product in the target market segment with a brand at the set price -> set own prices for the product -> determine the costs to make it -> design the product

Question 14

When does price determines cost?

Answer 14

Price determines cost if shareholder value is to be maximised.

Question 15

What are the typical price segments of a market?


Answer 15

Economic, mid-range and luxury.

Question 16

What is a niche business?


Answer 16

A company that only competes in one of the price segments

Question 17

How do price cuts within and across price segments impact on buying behavior?


Answer 17

Price elasticity within a price segment is normally higher than between brand in different value segments.
Switching that occurs between price segments is not symmetrical.

Question 18

How should a price be set to maximise corporate value?


Answer 18

There are two fundamental decisions required: decide on a price position and decide on a price variation policy.

Question 19

What is a skimming price?


Answer 19

A skimming price is a price set to maximise how much money can be charged for a given product.

Question 20

What are the four conditions under which price skimming yields maximum corporate value?


Answer 20

High barriers to entry, demand is price inelastic, high-value segments and few economies of scale.

Question 21

What is a penetration price?


Answer 21

A penetration price is a price set to maximise sales volume.

Question 22

What are the four conditions under which price penetration yields maximum corporate value?


Answer 22

Low barriers to entry, demand is price elastic, network effects and large economies of scale.

Question 23

Which kinds of price variation exist?


Answer 23

Trade promotions and consumer promotions.

Question 24

Why decide on a policy for price promotions?


Answer 24

The powerful sales effect of promotional pricing will almost guarantee a competitor response. Almost always does promotional pricing eat into regular sales.

Question 25

What should be the policy for price variations with promotional pricing?


Answer 25

Do not start if you can avoid it. Or only use price promotion as an incentive to trial a new product.