Price Flashcards
- Cost Plus
○ Rare to put something lower than cost price e.g. buy one get one free (but for a reason)
○ ‘plus’ cost to manufacture plus to make a profit
○ 40% profit margin- Unilever
○ Firm centric- doesn’t take into account the market
○ Either too cheap or too expensive
○ Danger of under/overpricing
Cost-plus pricing
- The product costs plus a margin decided on by the firm
This is a firm-centric view and does not take into account market ability or willingness to pay
Fixed cost
costs that do not change with an increase or decrease in the amount of goods or services produced.
They need to be paid by a company whether or not there is any related business activity.
An example of a fixed cost would be a company’s lease on a building.
Variable cost
a cost which vary with the output i.e. the number of items produced or services offered.
A true variable cost will vary in exact proportion with the output. Put in other words, as the revenue increases, variable cost also increases.
Economies of scale
produce more faster, unit cost goes down
Mass customisation
- Reduces impact of economies of scale
- Insides of swatch watches are standardized and produced in volume
- Cases are tailored in different colours and styles to target different consumer preferences
- Looks like variety + customisation, but all mass produced
Competition-based pricing
- Based on the prices of comparable competitive products
- Marketers take into account whether they are undercutting or charging a premium in relation to their competitors
○ How to justify premium if there is one - If you pay too much attention, cartels and price fixing may occur
- Marketers take into account whether they are undercutting or charging a premium in relation to their competitors
Market-oriented pricing
- Assesses the benefit being offered to the customer and determines the “price” that they will pay for this.
Ideal method of price determination
- quality
- demand
- cost
- competition
- life cycle
- sales channels
- government
- features
Economic Value to the Customer - EVC
- Deciding value to a customer and figuring out how to price as a result
E.g.
Government/Regulatory Price Controls
Price Ceiling
○ eg: pharmaceutical price caps by government or WHO
• Price Floor
○ eg: to avoid price dumping
○ eg: for energy providers, foreign investors, or on costs
○ eg: minimum wage legislation
Pricing Methods
- Market Penetration = lower price to larger number of customers
- Market Skimming = higher price to smaller number of customers
Market Penetration Pricing
- Works on the basis that high volume x low margin can generate the same / similar profit to low volume x high margin.
- This is a Ford rather than a Ferrari pricing strategy
- McDonalds would be a good example of a market penetration pricing
strategy
- Penetration pricing can also be used in some other specific situations
eg:
○ to enter a market and create visibility
○ to create trial of products
to attack competitors
Variable Pricing
- Begins with the concept of differentiation
- Think of the example of theatres; seats in different parts of the theatre, for different shows with greater and lesser demand and on different days
- Why do you pay more for some seats than others?
E.g. theatre seats
Dynamic Pricing
- This then leads us to the idea of dynamic pricing
- Dynamic pricing is changing prices in real time
- This is often done using an algorithm or using AI but can involve human judgement
- This might be based on:
○ Supply and demand
○ Inventory
Price Bundling
- Different prices at which consumers “value” different products
- Bundling evens out the variability and makes the package of different products
○ (eg: Microsoft Office, Cable TV etc nearer to a mean value)
