Pricing Flashcards
What Is a Price?
the amount of money charged for a product or service, or the sum of all the values that customers exchange for the benefits of having or using the product or service.
What is price? Historically
Historically, price has been the major factor affecting buyer choice. In recent decades, however, nonprice factors have gained increasing importance. Even so, price remains one of the most important elements that determines a firm’s market share and profitability.
Price in the marketing mix
Price is the only element in the marketing mix that produces revenue; all other elements represent costs.
Price is also one of the most flexible marketing mix elements; prices can be changed quickly. Smart managers treat pricing as a key strategic tool for creating customer value and building customer relationships. Prices have a direct impact on a firm’s bottom line.
Major Pricing Strategies
Price floor= no profits below this price
price ceiling= no demand above this price
In setting its price between these two extremes, the company must consider several external and internal factors, including competitors’ strategies and prices, the overall marketing strategy and mix, and the nature of the market and demand.
Value-based pricing
uses the buyers’ perceptions of value rather than the seller’s cost.
- Value-based pricing is customer driven.
- Price is set to match perceived value.
Value-based pricing vs. cost-based pricing
cost-based
(Value-Based Pricing)
Good-value pricing
offering just the right combination of quality and good service at a fair price.
In other cases, good-value pricing has involved redesigning existing brands to offer more quality for a given price or the same quality for less. Some companies even succeed by offering less value but at very low prices.
(Value-Based Pricing)
Everyday low pricing (EDLP)
involves charging a constant everyday low price with few or no temporary price discounts.
(Value-Based Pricing)
High-low pricing
involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items.
(Value-Based Pricing)
Value-added pricing
attaches value-added features and services to differentiate the companies offers and thus their higher prices.
For example, even as careful consumer spending habits remain, some movie theater chains are adding amenities and charging more rather than cutting services to maintain lower admission prices.
Cost-Based Pricing
sets prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for effort and risk.
•Cost-based pricing is product driven.
(Cost-Based Pricing)
Fixed costs
are the costs that do not vary with production or sales level.
- Rent
- Heat
- Interest
- Executive salaries
(Cost-Based Pricing)
Variable costs
vary directly with the level of production.
- Raw materials
- Packaging
Although these costs tend to be the same for each unit produced, they are called variable costs because the total varies directly with the number of units produced.
(Cost-Based Pricing)
Total costs
are the sum of the fixed and variable costs for any given level of production.
(Cost-Based Pricing)
Cost-plus pricing
The simplest pricing method is cost-plus pricing (or markup pricing). Price is calculated by adding a standard markup to the manufacturer’s costs.
Cost-plus pricing adds a standard markup to the cost of the product.
Benefits=
•Sellers are certain about costs.
•Price competition is minimized.
•Buyers feel it is fair
Disadvantages=
•Ignores demand and competitor prices
(Cost-Based Pricing)
Break-even pricing (target return pricing)
setting price to break even on costs or to make a target return.
Competition-based pricing
is setting prices based on competitors’ strategies, costs, prices, and market offerings.
(Other Internal and External Considerations Affecting Price Decisions)
Target costing
starts with an ideal selling price based on consumer value considerations and then targets costs that will ensure that the price is met.
(Organizational Considerations)
•Who should set prices?
•Who can influence prices?
Top management sets the pricing objectives and policies, and it often approves the prices proposed by lower-level management or salespeople.
In industries in which pricing is a key factor (airlines, aerospace, steel, railroads, oil companies), companies often have pricing departments to set the best prices or help others set them.
The Market and Demand
Before setting prices, the marketer must understand the relationship between price and demand for its products.
Both consumer and industrial buyers balance the price of a product or service against the benefits of owning it.
(The Market and Demand)
Analyzing the Price–Demand Relationship
The demand curve shows the number of units the market will buy in a given period at different prices
- Demand and price are inversely related
- Higher price = lower demand
(The Market and Demand)
Price Elasticity of Demand
Price elasticity is a measure of the sensitivity of demand to changes in price.
Inelastic demand is when demand hardly changes with a small change in price.
Elastic demand is when demand changes greatly with a small change in price.
The Economy and Other External Factors
Economic conditions
Reseller’s response to price
Government
Social concerns
(New product Pricing Strategies)
Market-skimming pricing strategy
Market-skimming pricing strategy sets high initial prices to “skim” revenue layers from the market.
- Product quality and image must support the price.
- Buyers must want the product at the price.
(New Product Pricing Strategies)
Market-penetration pricing
involves setting a low price for a new product in order to attract a large number of buyers and a large market share.
(Product Mix Pricing Strategies)
Product Line and Optional Product Pricing
Product line pricing takes into account the cost differences between products in the line, customer evaluations of their features, and competitors’ prices.
Optional productpricing takes into account optional or accessory products along with the main product.
(Product Mix Pricing Strategies)
Captive Product Pricing
sets prices of products that must be used along with the main product.
e. g. coffee with coffee machine
e. g. headphone adapter to iphone
(Product Mix Pricing Strategies)
By-product and Product Bundle Pricing
By-product pricing sets a price for by-products in order to make the main product’s price more competitive.
Product bundle pricing combines several products at a reduced price.
(Price Adjustment Strategies)
Discount and Allowance Pricing
reduces prices to reward customer responses such as making volume purchases, paying early, or promoting the product
(Price Adjustment Strategies)
Segmented Pricing
involves selling a product or service at two or more prices, where thedifference in prices is not based on differences in costs.
(Price Adjustment Strategies)
Psychological Pricing
considers the psychology of
prices and not simply the economics; the price is
used to say something about the product.
Reference prices are prices that buyers carry in their minds and refer to when they look at a given
product.
(Price Adjustment Strategies)
Promotional Pricing
is temporarily pricing products below the list price, and sometimes even below cost, to increase short-run sales.
(Price Adjustment Strategies)
Geographical Pricing
is used for customers in different parts of the country or the world.
(Price Adjustment Strategies)
Dynamic and Internet Pricing
involves adjusting prices continually to meet the characteristics and needs of individual customers and situations.
(Price Adjustment Strategies)
International Pricing
sets prices in a specific country based on many factors. •Economic conditions •Competitive situations •Laws and regulations •Wholesaling and retail systems
(Price Changes)
Initiating Pricing Changes
Price cuts occur due to:
• Excess capacity
• Increased market share
Price increases occur due to:
• Cost inflation
• Increased demand
• Lack of supply
(Price Changes)
Responding to Price Changes
Effective Action Responses:
• Reduce price to match competition • Maintain price but raise the perceived value through communications • Improve quality and increase price • Launch a lower-price “fighting” brand
