Price Flashcards
What are the six steps to price planning?
1) Select pricing objective
2) Determine demand
3) Estimate costs
4) Evaluate pricing environment
5) Select pricing method
6) Choose tactics and price
What are the 5 key pricing objectives?
1) Sales or Market Share
2) Profit
3) Competitive Effect
4) Customer Satisfaction
5) Image Enhancement
What are the three key metrics to measure market share?
1)Sales or Revenue Market Share
-The revenue market share measures the percentage of sales accounted for by that firm within the product category.
-Sales or Revenue Market Share = Firm Sales / Total Market Sales
2) Volume Market Share
-Volume market share measures the percentage of units accounted for by that firm within the product category
-Volume Market Share = Firm Units Sold / Total Market Units Sold
3) Customer Market Share
-Customer market share measures the percentage of customers the firm has relative to total customers within the
product category
-Customer Market Share = Firm Customers / Total Customers
What are the two product pricing strategies for new products?
1) Market skimming pricing. Setting a high price for new products to skim maximum revenues from each layer of the marekt from segments willing to pay a higher price. Over time, they may introduce cheaper products to capture more of the market.
2) Market-penetration pricing. Involves setting a low price for a new product, which quickly increases sales volume. Market penetration pricing is especially helpful with economies of scale where producing more goods lowers the cost.
Why can the demand curve often be an inverted c?
It’s because people often assume that cheap products don’t work as well.
What does unit cost measure? What is it’s formula?
-Unit cost measures the cost to produce, distribute, and sell one unit of product, and includes fixed and variable costs.
-Unit Cost = Variable Cost + (Fixed Costs / Unit Sales)
What does unit contribution measure? What is it’s formula?
-Unit contirbution measures how much profit is made on each additional good sold.
-Unit Contribution = Revenue per unit – Variable Costs per unit
What does contribution margin measure? What is it’s formula?
-Unit contribution measures how much of our fixed costs we are paying down with each sale–and after that, what our profit margin is.
-Contribution margin measures our unit contribution as a percentage of sales. So a higher number is better.
-Contribution Margin = Unit Contribution / Revenue per Unit
What are the five elements of the pricing environment to look at?
1) Economic Factors
-Boom vs Recession
-Inflation vs Deflation
-Exchange rates
2) Competitive Factors
-Competitor Pricing
-Market Pricing
-Promotional Offers
3) Channel Concerns
-Different distribution partners (retailers, wholesalers, e-commerce platforms) require specific pricing strategies to be profitable
-Supply Chain and Logistics Costs
-Direct vs Indirect Sales. Selling direct to consumers allows for lower prices.
4) Consumer Trends
-Price sensitivity
-Brand perception
-Personalization and customization
5) Governmental Concerns
-Taxation and Tariffs
-Price Regulations
-Consumer Protection Laws
-Subsidies&Incentives
What are the three models of customer value based pricing?
1) Value Pricing: Quality and good service at a fairly low price. Often priced lower than competitors. E.g. Costco
2) Everyday Low Pricing (EDLP)
-Everyday low price, which means few sales or discounts
3) Perceived Value Pricing
-Attach value-added features and services to differentiate a company’s offerings.
-This often results in higher prices.
-It is especially common for goods that people don’t regularly purchase.
-E.g. reclining chairs VIP experience for movies.
What are the two forms of cost-based pricing?
1) Markup pricing
-Charging a standard markup on whatever the costs are
2) Break-even or target return pricing
What is the difference between margin and markup?
-Margin is calculated based on the selling price. Margin=Profit/Selling Price
-Markup is calculated based on the cost. Markup=Profit/What we purchase from the seller.
What is target-return pricing?
Break even pricing
What is the formula for break-even volume?
-Break even volume is the number of units you need to produce and sell to cover total fixed costs, or at least break even.
-Break-even Volume=Fixed Costs/Unit Contribution
What is the formula for profit impact?
Profit Impact=Revenue-Variable Costs-Fixed Costs
or
Profit=(Unit Contribution*Units Sold)-Fixed Costs
What is the one way to do competition based pricing?
The one way to do competition based pricing is to do going rate pricing. That involves setting prices based on competitors’ strategies, costs, prices, and offerings. We will ask 2 questions: 1) how do customers perceive the value of our offerings vs. competitors’ offerings; 2) how strong are current competitors and what are their pricing strategies?
What are the five ways to implement product mix pricing?
1) Product Line Pricing: Setting prices across entire product line. E.g. elite wash, super wash, deluxe wash, and regular wash.
2) Optional Product Pricing: Pricing optional accessory products sold with the main product. E.g. Offering a bunch of add ons to car rentals
3) Captive Product Pricing: Pricing products that must be used with the main product. E.g. selling a cheap printer with expensive ink, or a cheap Nespresso machine with expensive pods.
4) By-Product Pricing: Pricing low-value by-products to get rid of them. E.g. Intermarche inglorious fruits.
5) Product Bundle Pricing: Pricing bundles of products sold together.
What is two-part pricing?
Fixed fees plus variable fees. E.g. phone plans with overage fees
What are the seven price adjustment strategies?
1) Discount and Allowance: Reduce prices to reward customer responses, e.g. paying early or buying in bulk.
2) Segmented: Adjust prices for different customers, products, or locations. e.g. economy class, business class, first class. Or different rental prices for different months.
3) Psychological: Price as a sign of quality. E.g. buying the most expensive bottle of wine because you don’t know.
4) Promotional: Temporarily reducing prices to increase short-run sales
5) Geographical: Adjust prices by geographic location of customers
6) Dynamic: Adjust prices to continually meet the characteristics and needs of individual customers and situations.
7) International: Adjusting prices in that nation based off willingness to pay.
How does psychological pricing affect buying decisions?
-People negotiate less from precise numbers vs round numbers.
-Prices that end in “9” are thought of as being at a discount or at a bargain. A lot of places will have their initial price at a round number, and then add the “9” for the bargain to encourage purchases.
What are the various ways we may experience price?
Price is not just a number on a tag. It comes in many forms and performs many functions, whether it’s called rent, tuition, fares, fees, rates, tolls, or commissions.
What is the sharing economy?
Consumers share bikes, cars, clothes, couches, apartments, tools, and skills so they extract more value from what they already own.
What are reference prices?
Comparing an observed price to an internal reference price they remember or an external frame of reference such as a posted “regular retail price.”
What are price-quality inferences?
Consumers using price as an indicator of quality. It’s especially common with ego-sensitive products such as perfumes, cars, and designer clothing.
