Pricing

Question 1

Why is pricing so hard?

Answer 1

Comparison: Quick online price checking.
Competition: Fast response from competition on price.
Variability: 1 on 5 products are sold on promotions; these changes heavily depend on category and country.
Subjective: Every consumer is different.

Question 2

What is the definition of pricing strategies?

Answer 2

Reasoned choice from a set of alternative prices to achieve a certain objective within a planning period.

Question 3

What factors affect pricing decisions?

Answer 3

Internal: Marketing mix, marketing objectives, costs.
External: Competitors, environment, nature of the market.

Question 4

Name 3 different pricing strategies for individual brands.

Answer 4

Competitive-based.
Value-based.
Cost-based.

Question 5

What is the different sell price between target pricing and cost-plus pricing? Let’s say:
Variable cost: 8
Fixed costs: 10.000
Expected unit sales: 30.000

Answer 5

Target pricing: Strategy where the cost of a product is specified by target profit/revenue.
Cost-up pricing: Adding a standard mark-up, calculate price by X% based on the cost price.

Question 6

What are the advantages and disadvantages of cost-based pricing?

Answer 6

Advantage: Price will always be higher than the costs.
Disadvantage: Price changes demand, therefore you cannot calculate price from expected unit sales. Also, you don’t consider competitors with this strategy.

Question 7

How do you calculate price elasticity?

Answer 7

% change in demand brand / % change in price brand.

Question 8

What is value-based pricing?

Answer 8

With value-based pricing you let customers pay the price that they are willing to pay for it.
It is a more profitable pricing strategy than cost-based pricing.
Determined by price elasticity.
Recommended for: emotional products, branded products, niche brands, scarce products.

Question 9

What is competitive pricing, and what is the big disadvantage of using this?

Answer 9

= setting prices based on how competitors price rather than on cost or demand
You can sell products at a loss If you keep undercutting your competitors.

Question 10

What is the relationship between value-based, cost-bast, and competitor-based pricing?

Answer 10

Value based (customer) provides a ceiling above which a marketer should not price.
Competitor provides a benchmark against which to evaluate price.
Cost based provides a price ‘floor’ below which a marketer should not price.

Question 11

What are price skimming and penetration pricing?

Answer 11

Both are pricing strategies for new products.
Skimming: initial high price for innovation and progressively lower the price to skim each segment willing to pay the price. (Iphone).
Penetration: Initial low price for innovation to attract a large customer base to build sales quickly. Benefit from learning and experience curve.

Question 12

When do you use skimming prices?

Answer 12

• Demand is somewhat priced inelastic.
• There are different price segments.
• The offering is unique enough to be protected from competition by patent, copyright, or trade secret.
• Product or marketing costs are unknown.
• A capacity constraint in producing the product or providing the service exists.

Question 13

When do you use penetration pricing?

Answer 13

• Demand is more price elastic.
• The offering is not unique or protected by patents, copyrights, pr trade secrets.
• Competitors are expected to enter the market quickly.
• There are no distinct and separate price-market segments.
• Large savings in products and marketing costs if a large sales volume can be generated.
• The main objective is to obtain a large market share.

Question 14

Why would consumers pay positive prices voluntarily with the PWYW strategy?

Answer 14

• Feelings of fairness and reciprocity.
• Altruism.
• Loyalty to the seller.
• Post consumption satisfaction.
• Social pressure.
• Threat that seller will go back to fixed prices.
  The price they are willing to pay is even higher when the price is associated with a charity.

Question 15

When would you use the PWYW strategy?

Answer 15

Lower priced products.
Repeated transactions (relationship between seller and buyer).
Payments in public
To stimulate complementary product sales.
As a promotional tool (alternative to free samples).
In relation to charity donation.

Question 16

What is yield pricing?

Answer 16

Pricing strategy where the price for a product change with demand. For instance, Airlines seats

Question 17

What are the different pricing strategies for product lines?

Answer 17

Substitution.

Complements.

Question 18

What are the different product line price strategies? (Substitutes method).

Answer 18

Premium pricing
Image pricing: Pricing is higher as the brand is perceived as high quality / expensive. Consumers want to pay higher.
Freemiums: Big upcoming strategy where the product line is free with some premium features behind a paywall. For instance, Spotify.

Question 19

What are the different product line price strategies? (Complements method).

Answer 19

Price bundling -> practice of selling two or more different products (or services) in a fixed proportion and at an explicit or implicit price.
Captive pricing -> used to set price for products that are used together, price main product = low, but high mark-ups on the supplies.
Two-part tariffs -> price of product or service contains 2 part: fixed lump-sum access fee & per unit charge
e.g., Golf clubs, health clubs, mobile phone contracts.
Loss leadership -> product sold at low price (at or below cost) to stimulate sales of other (profitable) products
e.g., used by retailers to generate store traffic. You sell products at a loss to sell other products associated with it.

Question 20

What is the criteria for using Yield pricing?

Answer 20

Fluctuating demand
Perishable product
Capacity constraint
Consumers w/ different willingness to pay for same offering

Question 21

What are the different product line price strategies? (Substitutes method).

Answer 21

Premium pricing
Image pricing: Pricing is higher as the brand is perceived as high quality / expensive. Consumers want to pay higher.
Freemiums: Big upcoming strategy where the product line is free with some premium features behind a paywall. For instance, Spotify.

Question 22

What are the two price adjustments strategies?

Answer 22

Structural price changes.

Price promotions.

Question 23

What are the psychological aspects of pricing?

Answer 23

Price-quality inferences.
99-Pricing.
Reference pricing.
Price framing.

Question 24

When do consumers rely more on price-quality inferences?

Answer 24

1. Greater uncertainty surrounding product quality
2. Customers purchase product infrequently
3. Consumers are new
4. Products are complex
5. Product quality not constant over time
6. Low involvement products
7. Consumer age(+), education(-), & income(+)

Question 25

What are the reasons for 99-prices sales advantage?

Answer 25

Underestimation mechanism (=level effect):  most attention to left digits in price and hence, round down 99 prices
Association mechanism (=image effect): associate 99 price with a sale or price discount

Question 26

What is reference pricing?

Answer 26

• Consumers rely on other prices to evaluate a brands price
• Memory based reference (MBR)  internal e.g., price promotion -20%
• Stimulus based reference (SBR)  external e.g., NB <> PL price, competitor pricing
• Kalyanaram & Winer (1995, MktSc):
 Reference prices have a consistent and significant impact on consumer demand
 Frequent promotions lower consumers’ internal reference price
 Asymmetry: consumers react more strongly to price increases than to price decreases

Question 27

What is Price framing?

Answer 27

Price framing: how the offer is communicated to the consumer.
With no or minor changes to actual price…