Price Flashcards
Price cellings
Customer perceptions of the product’s value set the ceiling for its price.
If customers perceive that the product’s price is greater than its value, they will not buy the product.
too high noone buys
price floor
product costs set the floor for a product’s price.
If the company prices the product below its costs, the company’s profits will suffer.
Factors influencing price include 5
- consumer perceptions,
- product costs,
- competitors’ strategies and prices,
- marketing strategy,
- and market demand.
three major pricing strategies:
customer value-based pricing, cost-based pricing, and competition-based pricing.
Customer value-based pricing
uses buyers’ perceptions of value as the key to pricing.
Value-based pricing means that the marketer cannot design a product and marketing program and then set the price. Price is considered along with all other marketing mix variables before the marketing program is set.
Value-Based Pricing vs. Cost-Based Pricing:
- Cost-Based Pricing:
- Product-driven approach.
- Price determined by covering costs plus a target profit.
- Marketing **emphasizes value at that price **to justify purchase.
- Too high a price leads to lower markups or reduced sales.
- Value-Based Pricing:
Consumer-needs-driven approach.
Begins with understanding customer needs and value perceptions.
Sets** target price **based on perceived value.
Decisions on **costs **and product design follow targeted value and price.
wo types of value-based pricing:
good-value pricing and value-added pricing.
some ways to measure perceived value
surveys, market research, and experiments to gauge perceived value.
Good-Value Pricing Strategy
Offers quality and service at a fair price, meeting consumer value expectations.
4 Good-value pricing approaches
- introduce less-expensive versions of established brand name products or new lower-price lines
- redesign existing brands to offer more quality for a given price or the same quality for less or even more value for less
- Every-day low pricing (for retail): charging a constant, everyday low price with few or no temporary price discounts.
- high low pricing: charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items.
value-added pricing
attaching value-added features and services to differentiate a company’s offers and charging higher prices
Cost-based pricing
setting prices based on the costs of producing, distributing, and selling the product plus a fair rate of return for the company’s effort and risk.
Fixed costs/overhead
costs that do not vary with production or sales level.
variable costs
vary directly with the level of production
total cost
the sum of the fixed and variable costs for any given level of production
Cost-Plus Pricing Strategy (or markup pricing)
Adding a standard markup to the product cost.
Competition-based pricing
setting prices based on competitors’ strategies, costs, prices, and market offerings.
2 Things to assess competitor’s pricing strategies
- How does the company’s offering compare in terms of customer value against competitors?
- How strong are current competitors, and what pricing strategies do they employ? (weaker competitors charging higher price -> charge low for dominance/lower-price dominant competitors -> target unserved niches with higher value offerings)
Marketing strategy and price alignment
- Price determination follows the overall marketing strategy for a product or service.
- A well-defined target market and positioning guide the marketing mix strategy, including price decisions.
Price help to accomplish company objectives in 6 ways:
- set prices to attract new customers or profitably retain existing ones
- set prices low to prevent competition from entry
- set prices at competitors’ levels to stabilize market
- keep price to keep the loyalty and support of resellers/avoid goverment intervention
- reduced temporarily to create excitement for brand
- one product may be priced to help the sales of other products in the company’sline
target costing
pricing that starts with an ideal selling price (based on customer vale consideration), then targets costs that will ensure that the price is met
Nonprice position
deemphasize price
not to charge the lowest price but rather to differentiate the marketing offer to make it worth a higher price
Pricing decision maker in small companies
Top management
Pricing decision maker in large companies
divisional or product managers
3 pricing decision makersin industrial markets
- top management sets the pricing objectives and policies
- proposed by lower-level management or salespeople
- salespeople may be allowed to negotiate with customers within certain price ranges
Pricing in Different Types of Markets
Pure Competition 3
- Market Structure: Involves numerous buyers and sellers trading in uniform commodities like wheat or financial securities.
- Price Influence: No individual buyer or seller significantly impacts the market price.
- Marketing Role: Minimal to no role for marketing strategies due to uniformity and lack of differentiation in the market.
Monopolistic Competition 3
- Market structure: Comprises numerous buyers and sellers dealing across a range of prices, not a single market price.
- Differentiation Potential: Sellers differentiate their offers to buyers, offering varied products or services.
- Marketing Strategies: Focus on differentiation using branding, advertising, and personal selling, aiming to set offers apart.
Oligopolistic Competition
- Market Structure: Few large sellers dominate the market.
- Competitive Dynamics: Sellers closely monitor and respond to competitors’ pricing strategies and marketing moves.
- Marketing Tools: Price becomes a significant tool; sellers offer discounts, upgrades, and special prices to attract customers.
- Example: In Canada’s cable/satellite TV market, major providers compete by offering discounts and special deals to entice subscribers away from rivals.
3 Types of monopolies
- Government Monopoly: Controlled by the government (e.g., Canada Post).
- Regulated Private Monopoly: Privately owned but regulated by authorities (e.g., power companies).
- Unregulated Private Monopoly: Not regulated by external authorities (e.g., De Beers in the diamond market).
Pure Monopoly
- Market structure: one seller controls the market
-Pricing Approach: Pricing strategies differ based on the type of monopoly and its regulations or lack thereof.
Demand Curve
Illustrates the relationship between the price of a product and the quantity demanded by consumers.
: Consumers may buy less if the price is higher, especially if their budgets are limited.
Demand curve in monopoly
the curve shows total market demand at various prices.
curve demand for competitive markets
demand varies based on competitors’ price changes.
Price Elasticity of Demand
Measures the responsiveness of demand to price changes.
Elastic demand: Quantity demanded changes significantly with price adjustments.
Inelastic demand: Quantity demanded remains relatively stable despite price changes.
Pricing based on elasticity
Elastic demand encourages price reduction for increased total revenue if additional costs don’t exceed the revenue.
why firm avoid pricing strategies that turn their products into commodities
increased consumer price sensitivity from factors like deregulation and easy price comparisons through technology.
Economic Factors in Pricing Decisions (examples and effect)
Economic conditions like recession, inflation, interest rates influence consumer spending, perceptions of value, and company costs.
PRICE Responses to Economic Realities 2
- Price reduction: cut prices and offer discounts to stimulate sales >< reduced margins and potential brand devaluation in the longrun
- Value redefinition: redefining ‘value’ in their offerings (introduce price tiers, lower-priced and premium lines catering to diverse customer segments)
Other external factors impacting price (3)
- Reseller: Prices should enable resellers to earn fair profits and incentivize support for effective product selling.
- Government regulations, laws, policies
- Ethical, cultural or social implications of pricing decisions
2 strategies for pricing new products
market-skimming pricing and market-penetration pricing.
Market-skimming pricing
Skimming the maximum revenue from different market segments by starting with high initial prices and gradually lowering them.
Apple frequently adopts this approach with its iPhone, iPad, and Mac,
4 Conditions for sucess with market-skimming
- Quality and Image: Product must justify the higher price with quality and brand image.
- Demand: Enough buyers willing to pay the high initial price.
- Costs: Production costs for smaller volumes shouldn’t nullify the advantage of higher prices.
- Competition: Competitors should not easily undercut the high price to enter the market.
Market-penetration pricing
Quickly enter and capture a large market share by setting a low initial price.
3 COnditions for sucess with market-penetration
- Price Sensitivity: Market highly sensitive to price changes, allowing a low price to drive market growth.
- Costs: Decreasing production and distribution costs as sales volume increases.
- Competitive Advantage: Low price deters competition, maintaining the strategy’s effectiveness.
Product mix pricing strategy
the firm looks for a set of prices that maximizes its profits on the total product mix.
5 product mix pricing situations
- product line pricing
- optional-product pricing
- captive-product pricing
- by-product pricing
- bundle-pricing
Product Line Pricing
Setting price variations between products within a product line based on perceived value and cost differences.
Optional-product pricing
Setting prices for optional or additional products or features alongside the main product.
(Car manufacturers offering navigation systems, premium entertainment systems, and other add-ons as optional upgrades.)
Captive-Product Pricing:
Setting a low price for a main product (game consoles) while maintaining high markups on the essential supplies or complementary products (video games) that must be continuously purchased.
captive product pricing challenges
Finding the right balance between the main-product and captive-product prices.
(Overpricing captive products might lead to consumer resentment and the potential loss of market share to lower-priced competitors.)
captive product pricing in Service
two-part pricing. For example, amusement parks charge a fixed fee for entry and additional fees for food and in-park features.
By-Product Pricing
: Selling or utilizing by-products generated from the production process to offset disposal costs and enhance the competitiveness of the main product’s price.
Product Bundle Pricing:
Offering multiple products or services together as a bundle at a reduced price compared to purchasing each item individually.
bundle pricing impact
Encourages customers to buy additional items they might not have considered individually by providing perceived value in the bundle’s reduced price.
7 price adjustment strategies
- discount and allowance pricing
- segmented pricing
- psychological pricing
- promotional pricing
- geographical pricing
- dynamic pricing
- international pricing
Discount and allowance pricing
Reducing prices to reward customer responses such as volume purchases, paying early, or promoting the product
Segmented pricing
Adjusting prices to allow for differences in customers, products, or locations
Psychological pricing
Adjusting prices for psychological effect
Promotional pricing
temporarily reducing prices to spur short-run sales
geographical pricing
Adjusting prices to account for the geographic location of customers
Dynamic pricing
Adjusting prices continually to meet the characteristics and needs of individual customers and situations
International pricing
Adjusting prices for international markets
discount
a straight reduction in price on purchases during a stated period of time or of larger quantities
cash discount
price reduction to buyers who pay bills early
quantity discount
price reduction to buyers who buy large volume
functional/trade discount
offered to trade channel members who perform selling/storing/record keeping
seasonal discount
price reduction to buyers who buy merchandise or services out of season
allowances
promotional money paid by manufacturers to retailers in return for an agreement to feature the manufacturers’ products in some way
trade-in allowance
price reductions given for turning in an old-item when buying a new one
promotional allowance
payments or price reductions that rewards dealers for participating advertising and sales-support programs
customer-segment pricing
different customers pay different prices for the same product or service. (student discount)
product-form pricing (in segment pricing)
different versions of the product are priced differently but not according to differences in their costs (seats on planes)
location-based pricing
different prices for different locations, even though the cost of offering each location is the same.
(For instance, theatres vary their seat prices because of audience preferences for certain locations.)
time-based pricing
varies its price by the season, the month, the day, and even the hour.
4 Conditions for effective segmented pricing
- segmentable market (segments must show different degrees of demand)
- costs of segmenting and reaching the market cannot exceed the extra revenue obtained from the price difference
- be legal
- reflect real differences in customers’ perceived value
caution for lower-priced segment
do not treat them like second-class citizen
why psychological pricing
most of us simply assume that higher price means more value (when there’re no knowledge)
reference prices
prices that buyers carry in their minds that refer to when looking at a given product
Promotional pricing forms 6+ 1benefit
- discounts
- special-event pricing (holiday)
- limited-time offers (flash sales)
- cash rebates when buy within a specified time
- low-interest financing
- longer warranties/free maintenance
=> help move customers over humps in buying decision process
3 negative effects of promotional pricing
- Buyer Wear-Out and Confusion: Constant exposure to promotions can exhaust consumers and create confusion among various price points, affecting their buying decisions.
- Erosion of Brand Value: Frequent discounts might reduce the perceived value of a brand, undermining its premium image or quality perception among consumers.
- Creation of Deal-Prone Customers: Regular promotions might condition consumers to wait for discounts before making purchases, impacting regular sales at regular prices.
1 vs 1 FREE-ON-BOARD(FOB) ORIGIN PRICING
- places the responsibility of shipping costs on the customer, ensuring fairness as each customer pays for their freight.
- disadvantage distant customers due to higher shipping costs.
pro and con of Uniform-Delivered Pricing
Offering the same price plus average freight to all customers might simplify pricing but might lead to dissatisfaction among local customers paying higher than actual shipping costs.
Zone Pricing pro and con
Creating pricing zones based on geographical distance allows for differential pricing. >< customers within the same zone might feel unfairly charged if their shipping distances vary widely.
basing-point pricing 2 vs 1
use a specific city as a basing point for calculating freight costs for all customers
=> standardize price + remove competition based on freight
>< create dispute if chosen basing point is not favourablr for all customers
freight-absorption pricing (def + 2 benefits)
seller absorbs all or part of the actual freight charges to get the desired business
- used for market penetration + hold on to increasingly competitive markets
5 types of geographical pricing
- FOB origin
- uniform-delivered
- zone pricing
- basing-point pricing
- freight-absorption
fixed-price policy
setting one price for all buyers
2 advantages of dynamic pricing
- optimize sales according to changes in demand, costs, competitors pricing, adjusting what they charge for specific items on a daily, hourly, or even continuous basis. (especially in sercive)
- adjust price and personalize offers to customers
2 risks of dynamic pricing
- trigger margin-eroding price wars
- damage customer relationships (resent at unfair price or price gouging)
The major
factors influencing the price one can charge in a foreign market are
(1) the costs of production, shipping if required, and taxes and duties if applicable;
and (2) what the
market will bear.
3 signs to cut prices
- excess capacity and need to move goods more quickly
- slowed demand
- as a strategic move to attemtp to dominate the market
2 signs to increase prices
- to increase profits (if inelastic)
- to reduce demand
competitor reaction to or pricing
If a competitor reacts at all, it means they are
paying attention to your product, which is noteworthy in and of itself. The most
noteworthy competitor response, one that means your product is causing them concern, is
the launching of a fighter brand.
predatory pricing
selling below cost or at a loss for the sole
purpose of driving a competitor out of business.
Bait-and-switch pricing
advertised at a certain price
and no mention of limited quantities is made, the seller must give the consumer a rain
check if they run out of the advertised product.
Price discrimination:
granting any price-related advantage to
a purchaser which is not made available to competing purchasers of like quantity and
quality
