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Marketing > Price Management > Flashcards

Price Management Flashcards

1
Q

Which conditions facilitate a penetration pricing strategy?

A
  1. High market growth
  2. Low market share
  3. High “Economies of Scale”
  4. Low barriers for market entry
  5. High price elasticity of demand
  6. Network effect (critical mass)
  7. Long product lifecycle
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2
Q

Which conditions facilitate a skimming pricing strategy?

A
  1. Low market growth
  2. High market share
  3. Low “Economies of Scale”
  4. Barriers for market entry
  5. Low price elasticity of
    demand
  6. Clear defined market segments
  7. Short product
    lifecycles
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3
Q

Under what conditions is the relative change in demand relative to the relative change in price (=price elasticity of demand) typically low?

A

The price elasticity is typically low when…

  1. …the product is quite unique in the market.
  2. …customers have only limited knowledge of substitute products.
  3. …it is difficult for customers to compare the quality of different substitute products.
  4. …the price of the product is low relative to the income of customers.
  5. …the purchase price for the product is low in proportion to overall costs of product usage over product’s life cycle.
  6. …customers associate product with high quality, prestige, and exclusivity.
  7. …customers have bought products from same company before and there are certain barriers to switching to a competitor.
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4
Q

What can a company do to avoid price wars with competitors?

A

A. Signaling and communication

  1. Communication strategic intention
  2. Communication of a potential competitive advantage (e.g. less costs)
  3. Communicating the risks of a price war to competitor, customers, stakeholders

B. Non-price instruments

  1. Reducing the price sensitivity (e.g. product adjustments, branding, additional services, individual solutions)
  2. Seeking market niches

C. Price camouflage

  1. Keeping visible prices stable and changing non-visible elements
  2. Establishing a complex price structures (e.g. bundling)
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5
Q

Why is pricing so important?

A

COS

π = Revenue - costs

Revenue = QUANTITY * PRICE

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6
Q

Price is ___

A

only marketing mix element with direct impact on revenue

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7
Q

Importance of price management

A
  1. Tendencies of saturation of consumption
  2. Assimilation of product quality
  3. Globalisation
  4. Transparency of price
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8
Q

Price Management

Characteristics

A
  1. Fast implementation
  2. Hardly reversible
  3. Major impact
  4. Fast impact
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9
Q

Price Management

Pricing Decisions

A
  1. Enforcement of prices
  2. Generic new product pricing
  3. Pricing the product portfolio
  4. Price changes of products
  5. Price differentiation
  6. Design/structure of discount and bonus systems
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10
Q

What are the two pricing strategies?

A
  1. Penetration strategy

2. Skimming strategy

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11
Q

Price Management

Penetration strategy

A

Strategy:

  1. Low price to achieve high diffusion and maximize market share
  2. Higher sales volume → lower unit costs (cf. experience curve model)
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12
Q

What are the conditions for a penetration strategy?

A
  1. Consumers are price-sensitive
  2. Costs (production, distribution) fall
    with experience
  3. Low price discourages competition
Example
MS Explorer (free)
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13
Q

Price Management

Skimming strategy

A
  1. Strategy:

• Initial high price to maximize current unit profit

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14
Q

What are the conditions for a skimming price strategy?

A 
Conditions:
1. Enough consumers who are price- insensitive to create sufficient high initial demand (high willingness to pay)
2. High quality signal
3. Not excessive small-value unit
costs
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15
Q

Which conditions facilitate a penetration or skimming strategy?

A
  1. Demand
  2. Competition
  3. Costs
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16
Q

Individual demand function

A
  1. Yes/No case

2. Variable quantity case

17
Q

Demand function types

A
  1. Linear

2. Multiplicative

18
Q

Price elasticity of demand

A

CHANGE IN DEMAND

OVER

CHANGE IN PRICE

19
Q

Pricing differentiation: forms of implementation

A
  1. Demographic
  2. Geographical
  3. Temporal
  4. Benefit based
  5. Quantity based
20
Q

Evaluation international price differentiation

A
  1. Benefits
    •Selling the product/service at the willingness to pay
  2. Risks
    (if customers find out.
  • Dissatisfied customers
  • Reduced reference price
  • Grey market imports
21
Q

Forms of discounts

A
  1. Functional
  2. Quantity
  3. Discount conditioned by time
  4. Aggregated rebate
22
Q

Price Management

Economic vs. behavioural approach

A

Economic

Incentive to buy = consumers’ maximal price – actual price

Consumers buy when this incentive to buy > 0
How good is the deal that I am getting?

Behavioural

Consideration of psychological variables

Incentive to buy = consumers’ perceived benefit – perceived costs

Consumers buy when this incentive to buy > 0

How fair is the deal that I am getting?

23
Q

Price Management

Economic approach

A

Economic

Incentive to buy = consumers’ maximal price – actual price

Consumers buy when this incentive to buy > 0

How good is the deal that I am getting?

24
Q

Price Management

Behavioural approach

A

Behavioural

Consideration of psychological variables

Incentive to buy = consumers’ perceived benefit – perceived costs
Consumers buy when this incentive to buy > 0
How fair is the deal that I am getting?

25
Q

Consumer’s willing to pay

A
  • Consumers’ willingness to pay is driven not only by economic utility of transaction (perceived value – price) but also by the psychological utility
  • Psychological utility is also influenced by consumers’ perception of fairness
26
Q

Price management, behavioural approach

Consumers consider both…:

A
  1. the absolute “economic utility” from the transaction (perceived value – actual price) and
  2. the relative incentive to enter the transaction [(perceived value – actual price) / actual price]
27
Q

What is reference price model?

A

Reference price is each price, in relation to which another price is judged.

28
Q

Types of reference price:

A 
1. External reference price
• Specific buying situation
• Based on observed prices in
buying environment • Examples:
• Price of similar products of same or other providers
• Price recommendations on packaging
• Special offer signs
2. Internal reference price
 • Based on memorized price concepts
• Examples:
• Paid in past (price history) • Paid by someone else
• Own willingness to pay
• Perceived as fair
29
Q

How do consumers judge reasonability of price according to reference price model?

A
  1. Sensory memory: Objective price
  2. Long term memory: reference price

Both contribute ti short term memory which gives the judgement of price reasonability

30
Q

Prospect Theory (Kahneman/Tversky)

Draw curve

A

Slide 48

31
Q

Prospect Theory – Implications for price decisions

A
  1.  Customers are loss aversive:
    They react stronger to an increase in price relative to their reference price than to a reduction of the same absolute value
    → Stronger reaction to “losses”: current price > reference price → Weaker reaction to “gains”: current price < reference price
  2. Applications:
    • Price promotion (risk of a “new” reference price)
    • Framing effect (bundling negative (v(x1+x2) > v(x1) + v(x2); unbundling positive features (v(x1+x2) < v(x1) + v(x2))
    • Endowment effect (products we own are more valued than identical products that we do not own)
32
Q

A behavioural approach – Signalling effects

A

Price signals
Quality
Prestige

Marketing (7 decks)

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