Price Management Flashcards
Which conditions facilitate a penetration pricing strategy?
- High market growth
- Low market share
- High “Economies of Scale”
- Low barriers for market entry
- High price elasticity of demand
- Network effect (critical mass)
- Long product lifecycle
Which conditions facilitate a skimming pricing strategy?
- Low market growth
- High market share
- Low “Economies of Scale”
- Barriers for market entry
- Low price elasticity of
demand - Clear defined market segments
- Short product
lifecycles
Under what conditions is the relative change in demand relative to the relative change in price (=price elasticity of demand) typically low?
The price elasticity is typically low when…
- …the product is quite unique in the market.
- …customers have only limited knowledge of substitute products.
- …it is difficult for customers to compare the quality of different substitute products.
- …the price of the product is low relative to the income of customers.
- …the purchase price for the product is low in proportion to overall costs of product usage over product’s life cycle.
- …customers associate product with high quality, prestige, and exclusivity.
- …customers have bought products from same company before and there are certain barriers to switching to a competitor.
What can a company do to avoid price wars with competitors?
A. Signaling and communication
- Communication strategic intention
- Communication of a potential competitive advantage (e.g. less costs)
- Communicating the risks of a price war to competitor, customers, stakeholders
B. Non-price instruments
- Reducing the price sensitivity (e.g. product adjustments, branding, additional services, individual solutions)
- Seeking market niches
C. Price camouflage
- Keeping visible prices stable and changing non-visible elements
- Establishing a complex price structures (e.g. bundling)
Why is pricing so important?
COS
π = Revenue - costs
Revenue = QUANTITY * PRICE
Price is ___
only marketing mix element with direct impact on revenue
Importance of price management
- Tendencies of saturation of consumption
- Assimilation of product quality
- Globalisation
- Transparency of price
Price Management
Characteristics
- Fast implementation
- Hardly reversible
- Major impact
- Fast impact
Price Management
Pricing Decisions
- Enforcement of prices
- Generic new product pricing
- Pricing the product portfolio
- Price changes of products
- Price differentiation
- Design/structure of discount and bonus systems
What are the two pricing strategies?
- Penetration strategy
2. Skimming strategy
Price Management
Penetration strategy
Strategy:
- Low price to achieve high diffusion and maximize market share
- Higher sales volume → lower unit costs (cf. experience curve model)
What are the conditions for a penetration strategy?
- Consumers are price-sensitive
- Costs (production, distribution) fall
with experience - Low price discourages competition
Example MS Explorer (free)
Price Management
Skimming strategy
- Strategy:
• Initial high price to maximize current unit profit
What are the conditions for a skimming price strategy?
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
Which conditions facilitate a penetration or skimming strategy?
- Demand
- Competition
- Costs
Individual demand function
- Yes/No case
2. Variable quantity case
Demand function types
- Linear
2. Multiplicative
Price elasticity of demand
CHANGE IN DEMAND
OVER
CHANGE IN PRICE
Pricing differentiation: forms of implementation
- Demographic
- Geographical
- Temporal
- Benefit based
- Quantity based
Evaluation international price differentiation
- Benefits
•Selling the product/service at the willingness to pay - Risks
(if customers find out.
- Dissatisfied customers
- Reduced reference price
- Grey market imports
Forms of discounts
- Functional
- Quantity
- Discount conditioned by time
- Aggregated rebate
Price Management
Economic vs. behavioural approach
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?
Price Management
Economic approach
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?
Price Management
Behavioural approach
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?
Consumer’s willing to pay
- 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
Price management, behavioural approach
Consumers consider both…:
- the absolute “economic utility” from the transaction (perceived value – actual price) and
- the relative incentive to enter the transaction [(perceived value – actual price) / actual price]
What is reference price model?
Reference price is each price, in relation to which another price is judged.
Types of reference price:
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
How do consumers judge reasonability of price according to reference price model?
- Sensory memory: Objective price
- Long term memory: reference price
Both contribute ti short term memory which gives the judgement of price reasonability
Prospect Theory (Kahneman/Tversky)
Draw curve
Slide 48
Prospect Theory – Implications for price decisions
- 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 - 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)
A behavioural approach – Signalling effects
Price signals
Quality
Prestige
