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Marketing > Price > Flashcards

Price Flashcards

1
Q

What is price?

A

The sum of all the values that customers give up in order to gain the benefits of having or using a product or service.

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2
Q

Why is pricing important?

A

Pricing is the only (out of the 4ps) place where you can capture value from the customers and only element that produces revenue and is most flexible.

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3
Q

What is opportunity cost?

A

The value of something that is given up to obtain something else

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4
Q

Price planning 6 steps?

A
  1. Set pricing objectives
  2. Examine environment
  3. Estimate demand
  4. Determine costs
  5. Pricing strategy
  6. Pricing tactics
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5
Q

What are pricing objectives in step 1?

A

These must support the broader objectives of the firm, such as maximizing shareholder value, as well as its overall marketing objectives, such as increasing market share.

  • Profit
  • sales
  • competitive
  • customer satisfaction
  • image enhancement
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6
Q

What are profit objectives?

A

Often a firm’s overall objectives relate to a certain level of profit it hopes to realize.
The focus is on a target level of profit growth or a desired net profit margin.
A profit objective is important to firms that believe profit is what motivates shareholders and bankers to invest in a company.

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7
Q

What are Sales or Market Share Objectives?

A

Lowering prices is not always necessary to increase market share. If a company’s product has a competitive advantage, keeping the price at the same level as other firms may satisfy sales objectives.

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8
Q

What are competitive effect objectives?

A

Sometimes strategists design the pricing plan to dilute the competition’s marketing efforts. In these cases, a firm may deliberately try to pre-empt or reduce the impact of a rival’s pricing changes.

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9
Q

What are Customer Satisfaction Objectives?

A

Many quality-focused firms believe that profits result from making customer satisfaction the primary objective. These firms believe that by focusing solely on short-term profits, a company loses sight of keeping customers for the long term.

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10
Q

What are Image Enhancement Objectives

A

Consumers often use price to make inferences about the quality of a product. In fact, marketers know that price is often an important means of communicating not only quality but also image to prospective customers.

Particularly important with prestige products (or luxury products), which have a high price and appeal to status-conscious consumers.

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11
Q

What is step 2, to examine the environment?

A

Looking into competition, marketing strategy and mix, the economy, Gov regulations, consumer trends, international differences.

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12
Q

What is Perfect competition?

A
  • no barriers to entry or exit
  • perfect knowledge
  • lots of sellers
  • homogenous product
  • no single buyer or seller has much effect on the going market price.
  • marketing research, product development, pricing, advertising, and sales promotion play little or no role.
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13
Q

what is Monopolistic competition?

A
  • more realistic
  • large number of sellers but can differentiate product e.g. computer industry
  • Trade over a range of prices rather than a single market price
  • A range of prices occurs because sellers can differentiate their offers to buyers.
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14
Q

What is an Oligopoly?

A
  • 2 or 3 / 4 sellers
  • have to think very carefully about what competitors will do in response to any price changes.
  • Highly sensitive to each other’s pricing and marketing strategies.
  • There are few sellers because it is difficult for new sellers to enter the market.
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15
Q

What is a Pure monopoly?

A
  • The market consists of one seller. The seller may be a government monopoly, a private regulated monopoly, or a private unregulated monopoly.
  • Government or regulated monopoly - illegal to compete with them.
  • Unregulated monopoly - e.g. google
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16
Q

What is examined in the marketing strategy and mix?

A
  • Before setting price, the company must decide on its overall marketing strategy for the product or service.
  • Pricing strategy is largely determined by decisions on market positioning.
  • Price decisions must be coordinated with product design, distribution, and promotion decisions to form a consistent and effective integrated marketing mix program.
  • Companies often position their products on price and then tailor other marketing mix decisions to the prices they want to charge.
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17
Q

What is examined in the economy?

A
  • Business cycle - booming put up prices, downturn cut prices
  • Inflation - have to be increasing prices all the time if in inflationary situation e.g. Poundland keep constant price, couldn’t adjust that year on year so did other things like 241. First, inflation gets customers used to price increases. They may remain insensitive to price increases, even when inflation goes away, allowing marketers to make real price increases. In periods of recession, inflation may cause marketers to lower prices and temporarily sacrifice profits in order to maintain sales levels. Economic conditions can have a strong impact on the firm’s pricing strategies.
  • Broad economic trends tend to direct pricing strategies e.g. economic growth, and consumer confidence all help to determine whether one pricing strategy or another will succeed, interest rates
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18
Q

What government regulations are looked at?

A
  • Regulatory costs e.g. regulations increase costs of production e.g. emission caps
  • Regulations on prices e.g. price floor or ceiling
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19
Q

What consumer trends are examined?

A
  • Culture
  • demographics
  • Peoples taste’s change, think about how to best capture value and keep people excited about product, if people aren’t excited maybe dump it in bad stage of product life cycle, if they are excited need to think about how to price it.
  • Tastes are different in diff countries, charge diff price strategies in diff countries.
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20
Q

How is demand estimated in step 3?

A
  • Demand refers to customers’ desires for a product. How much of a product are they willing to buy at any given price price
    1. Marketers predict total demand first by identifying the number of buyers or potential buyers for their product and then multiplying that estimate by the average amount each member of the target market is likely to purchase.
    2. Predict what the company’s market share is likely to be. The company’s estimated demand is then its share of the whole market. Such projections need to take into consideration other factors that might affect demand, such as new competitors entering the market, the state of the economy, and changing customer tastes.
  1. look at demand/types of products
  2. look at PED
  3. look at subs/complements
  4. look at psychology of pricing
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21
Q

What does demand curve show?

A

Shows the quantity of a product that customers will buy in a market during a period at various prices if all other factors remain the same.

  • In a monopoly, the demand curve shows the total market demand resulting from different prices.
  • If the company faces competition, its demand at different prices will depend on whether competitors’ prices stay constant or change with the company’s own prices.
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22
Q

What is a normal good?

A

The demand curve for most goods slopes downward and to the right. As the price of the product goes up, the number of units that customers are willing to buy goes down. If prices decrease, customers will buy more, inversely related.

For example, if the price of bananas goes up, customers will probably buy fewer of them.

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23
Q

What is a prestige product?

A

People desire a product more as it increases in price, so the demand curve slopes upward as price signals quality.

For prestige products such as luxury cars or jewellery, a price hike may actually result in an increase in the quantity consumers demand because they see the product as more valuable.

If the firm increases the price too much, making the product unaffordable for all but a few buyers, demand will begin to decrease.

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24
Q

What does shift in demand show?

A

Upward shift - price of substitutes goes up, means more likely to buy yours if cheaper. Opposite to complementary goods. An upward shift in the demand curve means that at any given price, demand is greater than before the shift occurs. Demand curves may also shift downward.

  • limitation that the demand curves we have shown assume that all factors other than price stay the same. However, what if they do not? Any of these things could cause an upward shift of the demand curve.
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25
Q

What is PED?

A

The sensitivity of demand to changes in price.

  • Marketers also need to know how their customers are likely to react to a price change. In particular, it is critical to understand whether a change in price will have a large or a small impact on demand.
26
Q

What is elastic demand?

A

V elastic if change in price really affects demand curve,

  • changes in price and in total revenues work in opposite directions. If the price is increased, revenues decrease. If the price is decreased, total revenues increase.
27
Q

What is inelastic demand?

A

change price a lot an doesn’t affect demand.

  • More likely to occur in monopoly or monopolistic competition
  • a change in price results in little or no change in demand. When demand is inelastic, price and revenue changes are in the same direction; that is, increases in price result in increases in total revenue, while decreases in price result in decreases in total revenue.
28
Q

What factors affect elasticity?

A
  • the availability of substitute goods or services. If a product has a close substitute, its demand will be elastic; that is, a change in price will result in a change in demand, as consumers move to buy the substitute product.
  • Marketers of products with close substitutes are less likely to compete on price because they recognize that doing so could result in less profit as consumers switch from one brand to another.
  • cross-elasticity of demand: When products are substitutes for each other, an increase in the price of one will increase the demand for the other. For example, if the price of bananas goes up, consumers may instead buy more strawberries, blueberries, or apples.
  • When products are complements-that is, when one product is essential to the use of a second-an increase in the price of one decreases the demand for the second.
29
Q

When to be price sensitive?

A

If demand is elastic, sellers will consider lowering their prices. A lower price will produce more total revenue.

30
Q

When not to be price sensitive?

A

Buyers are less price sensitive when the product they are buying is unique or when it is high in quality, prestige, or exclusiveness; when substitute products are hard to find or when they cannot easily compare the quality of substitutes; and when the total expenditure for a product is low relative to their income or when the cost is shared by another party.

31
Q

What is PED formula?

A

Percentage change in quantity demanded/percentage change in price

32
Q

Psychology of price types?

A
  • Reference prices
  • Price fairness
  • Price-qaulity inference
33
Q

What are reference prices?

A
  • Formed by noting current prices, remembering past prices, or assessing the buying situation.
  • When people comparing prices

e. g. Just noticeable difference - price change that may not be noticeable won’t matter, but even a small price change may make a difference so need to test it.
e. g. Diminishing sensitivity to larger changes - difference between 1 pound to 1.10 or 1.20, if you’re going to make a change you may as well make it a big one, this would need product adjustments to match price

34
Q

What is price fairness?

A
  • Often consumers base their perceptions of price on what they perceive to be the customary or fair price.
  • When the price of a product is above or sometimes even when it is below what consumers expect they are less willing to purchase the product.
  • Making consumers angry, consumers may start saying mean things about company online, e.g. shortage of shovel, so increase price, even though people really need them for shovel snow, so keep same price as normal so people don’t get angry.
35
Q

What is price-qaultiy inference?

A
  • price higher than something else, price indicates quality. - If consumers are unable to judge the quality of a product through examination or prior experience, they usually will assume that the higher-price product is the higher-quality product.
36
Q

What is done in step 4 to determine costs?

A
  1. cost curves
  2. learning curves
  • to making sure the price will cover costs. Before marketers can determine price, they must understand the relationship of cost, demand, and revenue for their product.
  • look into their fixed and variable costs and so total costs for a given level of production.
37
Q

What is average fixed costs?

A

Average fixed cost is the fixed cost per unit produced, that is, the total fixed costs divided by the number of units produced. Although total fixed costs remain the same no matter how many units are produced, the average fixed cost will decrease as the number of units produced increases. As we produce more and more units, average fixed costs go down, and so does the price we must charge to cover fixed costs. In the long term, total fixed costs may change

38
Q

What happens when more products are produced?

A
  • both average fixed costs and average variable costs may decrease. Average total costs may decrease, too, up to a point.
  • As output continues to increase, average variable costs may start to increase. These variable costs ultimately rise faster than average fixed costs decline, resulting in an increase to average total cost.
  • As total cost fluctuates with differing levels of production, the price that producers have to charge to cover those costs changes accordingly.
  • Therefore, marketers need to calculate the minimum price necessary to cover all costs-the break-even price.
39
Q

What is a cost curve graph?

A
  • Y axis is cost per unit, x is quantity produced.
  • Have to diffuse fix costs over however many months you are producing.
  • When it curves up this is diseconomies of scale, eventually everyone working as fast as they can and can’t keep up so would have to hire more people to keep the same marginal benefit.
  • LR curve buy more factories and staff to keep curve slopping downward but can still curve and increase their average costs if they just get too big.
  • To price wisely, management needs to know how its costs vary with different levels of production.
40
Q

What is learning curve?

A
  • Cost per unit over time.
  • Y axis cost per unit, X axis accumulated production.
  • If new entrants, probably aren’t best at producing yet, but as you get increasingly large amounts of experience you get better and producing and cost per unit goes down.
  • Average cost tends to fall with accumulated production experience.
  • This drop in the average cost with accumulated production experience is called the experience curve (or the learning curve).
41
Q

What are the pricing strategies in step 5?

A
  1. Cost- based pricing
  2. Value-based pricing
  3. Competition based pricing
42
Q

What are the steps in cost-based pricing?

A
  1. Design good product
  2. Determine product costs
  3. Set price based on costs
  4. Convince buyers of products value
43
Q

Advantage/Disadvantage of cost-based strategies?

A

+ cost-based strategies because they are simple to calculate and relatively risk free. They promise that the price will at least cover the costs the company incurs in producing and marketing the product.

  • They do not consider such factors as the nature of the target market, demand, competition, the product life cycle, and the product’s image.
  • The calculations for setting the price may be simple and straightforward but accurate cost estimating may prove difficult.
44
Q

Types of cost-based strategies?

A
  • The simplest pricing method is cost-plus (mark-up) pricing, adding a standard mark-up to the cost of the product.
  • Keystoning is a retail pricing strategy in which the retailer doubles the cost of the item (100 percent mark-up) to determine the price.
  • Break even pricing
45
Q

What is MSRP?

A

A manufacturer’s suggested retail price (MSRP), is the price that the manufacturer sets as the appropriate price for the end consumer to pay

46
Q

What is Vertical integration?

A

Combining of manufacturing operations with channels of distribution under a single ownership to reduce costs and increase profits.

47
Q

What is break-even pricing?

A
  • Another cost-oriented pricing approach is break-even pricing
  • The firm tries to determine the price at which it will break even or make the target profit it is seeking.
  • Where lines intercept; revenue equals costs.
  • Marginal cost is smaller than how much you are charging for unit.
  • it doesn’t provide an easy answer for pricing decisions. It provides answers about how many units the firm must sell to break even and to make a profit, but without knowing whether demand will equal the quantity at that price, companies can make big mistakes. It is, therefore, useful for marketers to estimate the demand for their product and then perform a marginal analysis.
48
Q

Steps in Value-based pricing

A
  1. Assess customer needs and value perception
  2. Set price to match customer perceived value
  3. determine costs that can be incurred
  4. Design product to deliver desired value at target price.
49
Q

Types of Value-based pricing?

A
  1. good-value pricing - offering just the right combination of quality and good service at a fair price. e.g. Everyday low pricing (EDLP) involves charging a constant, everyday low price with few or no temporary price discounts or High-low pricing involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items.
  2. value-added pricing - attaching value so adding features and services to differentiate their offers and thus support higher prices.
50
Q

What is competitor based pricing?

A
  • Competition-based pricing involves setting prices based on competitors’ strategies, costs, prices, and market offerings.
  • Consumers may look to competitor prices as “reference points e.g. price leadership strategy
51
Q

What are the price tactics categorised into in step 6?

A
  1. Introducing new products
  2. price changes
  3. Price segmentation
  4. product mix pricing
  5. Promotions and discounts
  6. Distribution-based pricing
52
Q

What are tactics for a new product?

A
  1. Skimming price- tech companies often do, high premium price at first to gain the excited consumers, with the intention of reducing it in future in response to marketing pressure. If a product is highly desirable and it offers unique benefits, demand is price inelastic during the introductory stage of the product life cycle, allowing a company to recover research-and-development and promotion costs. When rival products enter the market, the price is lowered in order for the firm to remain competitive.
  2. Penetration price - low price to sell more and prevent other competitors from gaining market share e.g search engines don’t even charge a price to search. One reason marketers use penetration pricing is to discourage competitors from entering the market. The firm first out with a new product has an important advantage.
  3. Trial price - Start at low price to get large consumer base and eventual goal is to increase price and if you have not a lot of foreseeable competitors.
53
Q

Tactics to changing price?

A
  • cut prices (excess capacity, strong price competition, weak economy or otherwise sluggish demand, stage in PLC, play for competitive advantage, competitors has new innovation that you don’t)
  • raise prices (inflation, over demand, competitions, if component price goes up). Should be supported by company communications telling customers why prices are being increased.
54
Q

Reactions to price changes?

A

Buyer Reactions to Price Changes
- Customers do not always interpret price changes in a straightforward way. A price change, especially a drop in price, can adversely affect how consumers view the brand.

Competitor Reactions to Price Changes
- Competitors are most likely to react when the number of firms involved is small, when the product is uniform, and when the buyers are well informed about products and prices.

Responding to Price Changes

  • improve quality and increase price
  • launch a low-price item or another brand
  • reduce its price to match the competitor’s price.
  • maintain its price but raise the perceived value of its offer
55
Q

Price tactics using segmentation?

A
  • the company sells a product or service at two or more prices, even though the difference in price is not based on differences in costs.
  • product-form pricing, different versions of the product are priced differently but not according to differences in their costs.
  • location pricing, a company charges different prices for different locations, even though the cost of offering each location is the same.
  • Using time-based pricing, a firm varies its prices by the season, the month, the day, and even the hour e.g. during lunch deals or more expensive when people come.
56
Q

What are price segmentation strategies?

A
  1. Yield management pricing is a pricing strategy used by airlines, hotels, and cruise lines. Firms charge different prices to different customers in order to manage capacity while maximizing revenue.
  2. Peak load pricing is a pricing plan that sets prices higher during periods with higher demand. Surge pricing is a pricing plan that raises prices of a product as demand goes up and lowers it as demand slides.
  3. Bottom of the pyramid pricing is innovative pricing that will appeal to consumers with the lowest incomes by brands that wish to get a foothold in bottom of the pyramid countries.
57
Q

Types of product mix pricing tactics?

A
  1. Product Line Pricing - management must determine the price steps to set between the various products in a line.
  2. Optional-Product Pricing - offering to sell optional or accessory products along with the main product.
  3. Captive-Product Pricing - products that must be used along with a main product are using captive-product pricing. E.g. printer cheap but ink expensive.
  4. Product Bundle Pricing - sellers often combine several of their products and offer the bundle at a reduced price.
  5. Decoy pricing
    e. g. attraction effect - unattractive decoy to make you choose the other more expensive option, and make it seem better, this usually only works when numerical values are used.
    e. g. compromise effect - add a more expensive product to a line a products makes the normal product price seem cheaper.
58
Q

Discount tactics?

A
  1. Cash discount
  2. Quantity discount
  3. Functional discount (trade discount) is offered by the seller to trade-channel members who perform certain functions, such as selling, storing, and record keeping.
  4. Seasonal discount is a price reduction to buyers who buy merchandise or services out of season.
  5. Trade-in allowances are price reductions given for turning in an old item when buying a new one.
  6. Promotional allowances are payments or price reductions to reward dealers for participating in advertising and sales support
59
Q

What are distribution-based tactics?

A
  1. Geographical Pricing - A company also must decide how to price its products for customers located in different parts of the country or world.
  2. FOB-origin pricing is a practice that means the goods are placed free on board (hence, FOB) a carrier. At that point the title and responsibility pass to the customer, who pays the freight from the factory to the destination. Free on Board, company responsible for putting product into truck but then customer has to pay for shipping.
  3. Uniform-delivered pricing is the opposite of FOB pricing. Here, the company charges the same price plus freight to all customers, regardless of their location. The freight charge is set at the average freight cost.
  4. Zone pricing falls between FOB-origin pricing and uniform-delivered pricing. The company sets up two or more zones. All customers within a given zone pay a single total price; the more distant the zone, the higher the price.
  5. Freight-absorption pricing - the seller absorbs all or part of the actual freight charges in order to get the desired business.
60
Q

Other pricing tactics?

A
  1. Loss leader pricing - Some retailers advertise items at very low prices or even below cost and are glad to sell them at that price because they know that once in the store, customers may buy other items at regular prices.
  2. Odd-Even Pricing - prices ending in 99 rather than 00 lead to increased sales.
  3. International pricing
  4. Internet price discrimination is an Internet pricing strategy that charges different prices to different customers for the same product.

Marketing (9 decks)

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