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Pricing > Pricing > Flashcards

Pricing Flashcards

1
Q

Prius example and housing example

A
  • Price is an expression of value
  • Price reflects the advantages and disadvantages of products and their scarcity
  • Value=convenience & time saving
  • houses near schools sold at a higher price
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2
Q

Pricing power

*2007 printer example

A

Not only about pricing but your product has to be differentiated

  • less competition = higher price
  • in perfect competition firms are price takers
  • marketing can allow a firm to secure monopoly power and hence be able to set prices
    1. Invest in innovation to help differentiate from competitors
    2. Branding (Renova)
    3. Exclusivity (Louis Vuitton)
    4. Control distribution channels (supplier lithium batteries)
    5. Government setting prices (trains)
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3
Q

Price manipulation

A

-can change amount people have to pay for or the amount of product you give to people
Quantity of money received by the seller/Quantity of goods or services received by the buyer

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4
Q

How to increase margins without being noticed

A

Margin = price - cost
Starbucks example
Costa fair trade example

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5
Q

When free is a possibility do we pay?

A

-support the firm
-reciprocity: give something, so feel obliged to give something back
-provide value
Radiohead Rainbow album example

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6
Q

Price is the only element in the marketing mix that has a direct impact on revenue

A

-changing price can impact revenue without a change in quantity
-price increase = quantity (+demand) decrease
-price decrease = quantity (+demand) increase
R=PXQ

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7
Q

Prius example and housing example

A
  • Price is an expression of value
  • Price reflects the advantages and disadvantages of products and their scarcity
  • Value=convenience & time saving
  • houses near schools sold at a higher price
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8
Q

Pricing power

*2007 printer example

A

Not only about pricing but your product has to be differentiated

  • in perfect competition firms are price takers
  • marketing can allow a firm to secure monopoly power and hence be able to set prices
    1. Invest in innovation to help differentiate from competitors
    2. Branding (Renova)
    3. Exclusivity (Louis Vuitton)
    4. Control distribution channels (supplier lithium batteries)
    5. Government setting prices (trains)
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9
Q

Price manipulation

A

-can change amount people have to pay for or the amount of product you give to people
Quantity of money received by the seller/Quantity of goods or services received by the buyer

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10
Q

How to increase margins without being noticed

A

Margin = price - cost
Starbucks example
Costa fair trade example

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11
Q

When free is a possibility do we pay?

A

-support the firm
-reciprocity: give something, so feel obliged to give something back
-provide value
Radiohead Rainbow album example

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12
Q

Price is the only element in the marketing mix that has a direct impact on revenue

A

-changing price can impact revenue without a change in quantity
-price increase = quantity (+demand) decrease
-price decrease = quantity (+demand) increase
R=PXQ

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13
Q

Setting prices: Cost-plus pricing

A

Markup: Price = (1+m) X Average Cost
Markdown: Price = (1-m) X Average Cost
m = percentage markup over cost
Average Cost = (total variable costs + total fixed costs)\Quantity
-Quantity is a function of marketing mix (product price place…etc)

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14
Q

Making a loss

A
  • Aren’t providing the market with the value you thought
  • Price is too high to consider a price cut (increase in quantity - if goes up a little you still make a loss, but if goes up a lot you are better off)
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15
Q

For and against cost-plus pricing

A

For:
-simplicity: easy to use, manage and implement; necessary where prices must be set repeatedly
-easily justifiable: based on hard cost data; easy to sell to top management
-can aid tacit collusion: supermarket retailers set similar prices as they get similar prices from suppliers
-sometimes required by government: forced by contractors to use markup pricing
Against:
-forgets that profit depends on how the market reacts to price (e.g. How much they value products, how you communicate value) –> market and demand conditions seem irrelevant
-circular: price is function of average cost, average cost is a function of quantity, quantity is a function of price - price changes volume and volume changes average cost
-average costs are not the recant costs for pricing decisions: only incremental and avoidable costs are relevant –> pricing decisions should never be based in costs that are truly fixed costs (shirt-run vs. long-run)
-relevant costs: inventory, opportunity (money today not the same as money in the future)
-incremental costs: flyers, insurance, warehouse etc.
-consider adequate time horizon, variable cost is more long-term P=(1+m)XVC

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16
Q

Monopoly producer (single producer): determining the demand curve (classical approach)

A
  • Price vs. Quantity: demand curve (how much in units the quantity will change in the market due to one change in price), marginal cost curve, marginal revenue curve, profit, consumer surplus (money left on the table - willing to pay more/elastic demand), no man’s land ( lost opportunity - price too high/Inelastic demand)
  • No man’s land: contribution margin = (Price - Marginal Cost) X Quantity
  • monopolists always operate on the elastic side of the of the demand curve
  • when launching a product that has not been on the market before, market research is required - sort willingness to pay and assume each value is a price and write the quantities, then calculate contribution
  • -> contribution: get a sense of demand responsiveness to price within a limited price-quantity range, but price depends on demand, not only internal factors (need to understand price elasticity of the market)
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17
Q

Elasticity

A
  • used to measure the degree of market response
  • elasticity of -1.2 means that a price increase of 1% will lead to a reduction of quantity sold of 1.2%
  • elasticity is always negative
  • conceptually: the degree of responsiveness of sales volume to a change in price
  • verbally: percentage change in sales volume divided by percentage change in price
  • mathematically: %Q/%P
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18
Q

Price increase is best when the market is…

A

Inelastic

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19
Q

Price cut is best when the market is…

A

Elastic

20
Q

Price elasticity patterns

A
  • Own-price sales elasticities average from -2.0 to -2.5
  • Consumer products -2.6
  • Consumer and industrial products -2.5
  • Question price elasticities smaller than 1 or greater than 5 for brands in established product categories
  • Price response often inflated by other variables (e.g. Coupon, promotion, ad)
21
Q

True price elasticity

A

Price increase
-if the TRUE elasticity is less than the REQUIRED one the firm will be better off
-if the TRUE elasticity is greater than the REQUIRED one the firm will be worse off
Price decrease
-if the TRUE elasticity is less than the REQUIRED one the firm will be worse off
-if the TRUE elasticity is greater than the required one the firm will be better off

22
Q

Iso-profit formula/ incremental break even

A

%Volume= - %changePrice / %Gross margin + %changePrice

  • for price increase, we want the maximum acceptable decrease in sales
  • for price decrease, we want the minimum needed increase in sales
  • need to compare to market response to price
23
Q

Product life cycle population segmentation

A

-innovators
-early adopters
-early majority
-late majority
-laggards
Used to describe product class which have the longest life cycle and product form which tend to have the standard PLC shape. It should not be used to describe brands which can quickly change due to competitive attacks and responses, or style, fashion or fads which enter and are adopted quickly and decline fast

24
Q

For and against the product life cycle

A

For:
-simple
-some face validity
-allows managers to look beyond current marketing situation
-provide insights about what marketing actions are most appropriate at each point in time
-help develop good marketing strategies for different stages of the PLC
Against:
-Trouble identifying which stage of the PLC the product is in
-Difficult to forecast the sales level,length of each stage, and shape of the PLC
-Strategy is both cause and effect of the PLC
-Immutable or something the company can change?
-Often used at the wrong level of analysis

25
Q

Strategy for each stage of the PLC

A

Introduction: skimming - sell to inelastic buyers
-set high price initially and lower the price over time
-better with differentiation and quality/image effects, low substitution/elasticity, capacity constraints
-short-term cash flow even without fast diffusion
Growth: penetration - grow market share
-offer low price relative to competitors’ in order to attract customers from competitors
-better with absolute cost advantage and elastic demand, economies of scale or experience and network effects
-may discourage new entrants
-easy to match and may lead to price wars
Maturity: stability - preserve price stability

26
Q

Determining elasticities

A

-conduct experiments I test markets or online (a/b testing)
-price experiment: price differently in two stores know price and quantity differences - can do over time (arc elasticities)
-arc elasticities: take the difference in price we implement in the market either across groups or for a group over time, and check the difference in quantity they’re going to buy before and after the price change
Against: –> can use historical data
-cannot account for other things happening at the same time (hold things constant e.g. change in marketing action, competition pricing, competition price matching, cannot deft mine how good values are (e.g. error in the estimate)

27
Q

Historical data

A
  • very high validity (relies on behaviour of real customers under real market conditions
  • price elasticities can be estimated while controlling for other factors e.g. promotional activity and competition
28
Q

Assume there is a linear relationship, elasticity is….

A

eii = a1 X Pi/Qi
a1 = coefficient price
-for each increase in dollar in price, I am going to sell [coefficient price] units
-t Stat should be negative (as price increases quantity will decrease) and should be greater than 2 (significant, if not, no impact on the brand)
-can get better results by including marketing variables (impact demand), and include competitive effects (price and competitor marketing actions)which allows us to compute cross-effect (how actions of others impact sales)

29
Q

When demand is not linear…

A

Curvilinear models:

  • Semi-log model: eii = a1 X Pi
  • Log-log model: eii = a1
  • price coefficient is the direct elasticity
  • to choose model R square shows which model fits the data best (the higher the value of R square the better)
30
Q

Cross-price elasticity

A

eij = %changeQi(us)/%changePj(them)
If my competitor increases price by 1% what will happen to the quantity I sell?
-if my competitor lowers the price by 1% I observe a decline in sales by [elasticity %], but if my competitor raises the price by 1% I observe an increase in sales by [elasticity %]
-should be positive (if competitor raises price I look like a better option)

31
Q

Value based pricing: economic value to the customer (EVC)

A

Value based pricing is a principle and a price-setting mechanism that states that differences in prices across customers and changes of prices over time should reflect differences or changes in the value of the product or service provided to customers
-goal to create value, demonstrate the value of the offer, and extract customer surplus

32
Q

How calculate EVC

A
  • customer value provides a ceiling for how high we can price a product
    1. Identify the cost of the competitive product or best available substitute process (i.e. benchmarks or reference value)
    2. Identify all factors that differentiate the new product from the revenue product or substitute process
    3. Determine the economic value to the customer of the differentiating factors
    4. Sum the reference value and the differentiation value to determine the total economic value to the customer
33
Q

EVC risk

A
  • usually price lower than EVC for new product (encourage customers to switch)
  • perceived value not the same as EVC - customers may not believe claim of firms (have to communicate value)
  • benchmark against competitors
34
Q

How to implement price discrimination

A

Segment the market (consumer responsiveness to price, demand, cost to serve customers)
-go for high margin, low quantity, or low margin, high quantity
-two price points as one segment values the product more than the other –> repackage emphasising how the product adds value to each segment
E.g. Neutrogena
Different channels, different sales periods charge different price
-by creating different products we extract more value (charge more to those who already buy the product and are willing to pay more -extract customer surplus, and charge less to those who do not buy our product because it is too expensive
-only few segments are needed to capture most of the gain from price discrimination

35
Q

Types of price discrimination

A
  1. First degree: consumers pay willingness to pay - overcharge each person the maximum they are willing to pay
  2. Second degree: customers self select different price points (sellers offer the same product and pricing to all customers and price customisation is achieved through the choices customers make e.g. promotions, product-line pricing)
  3. Third degree: sellers actively select the price points for different customers or segments (different prices for different customers e.g. Targeted pricing - students and seniors pay different prices)
    E.g. geographic location, previous behaviour, demographics
36
Q

Arbitrage

A

Buy cheap in one market and sell higher in another

37
Q

Why not customise price

A
  • avoid added costs of price administration: analysis and administration
  • avoid leakage/arbitrage: gray market, e.g. Pharma trading
  • protect from fairness affect: e.g. Amazon pricing products differently at different moments
  • avoid delegating pricing authority to sales force: reward based on margins
  • avoid appeal to a segment of buyers who place a premium on low price: less price sensitive consumers accept fixed prices vs. discounts
  • avoid risk of competitive reaction and a downward price-profit path: price war
  • avoid confusion: internally and externally
38
Q

When to initiate a price cut?

A
  • exploit a significant cost advantage versus competition in a market that is price elastic
  • when there are long-term impact in markets with habit formation
  • Response to new entry, new industry supply
  • build cubs tactical volume in a new segment with part willingness-to-pay
  • adjust pricing to long-run profit-max level (cut costs to attract customers)
  • need long run outlook to acquire customers and build market share, highly loyal customers, network externalities, economies of scale and experience, reposition value proposition for new segment
39
Q

Monopoly form pricing

A

MR = MC to maximise short-run profitability
In terms of contribution margin:
CM% =(P - MC) / P
-markup pricing if use marginal cost it is better because average costs includes costs that are not relevant
In an elastic market your mar-up will be slightly lower, in an inelastic market you markup will be high
-margin is function of elasticity (CM%): if elasticity is higher gross margin will be smaller, if elasticity is smaller gross margin will be bigger
-we are able to set markups as a function of the elasticity of the market and remove market cost and use marginal cost (variable cost) –> pricing close to optimum

40
Q

Gartner hype cycle

A

If you oversell your product you will get fast adoption in the beginning as consumers have high expectations and therefore willing to pay a high price, but if the product does not work as expected they talk about the fault of the product and stop using the service (bug drop in sales and adoption).
-have to match expectation with price

41
Q

Manage for uncertainty

A
  • outsource risk
  • diversify
  • encourage loyalty
42
Q

Product bundling

A

Packaging products together and offering a single price - typically lower than buying the products separately
-bundle to reach new markets e.g. newspaper on airplanes
-products that compliment each other give more value
-get rid of stock
-spillover effect (good image)
-cost efficient - offer many products at once
The idea is to transfer consumer surplus from one product to another, and accomplish price discrimination by capturing a customers money left on the table in the form of an increased willingness to buy a second product.
-works best when different customer segments have negatively correlated willingness to pay across the products to be bundled

43
Q

Unbundling

A

E.g. Airline industry

  • cheaper fares
  • serve customers that initially rent served
  • increase demand
44
Q

Types of bundling

A
  1. Pure price bundling: only the bundled product offering is available - no a la carte e.g Windows
  2. Mixed price bundling: both the bundled offering and the separate products are available to purchase e.g. McDonalds value meals, MS Office
45
Q

Freemium

A

Get basic service for free and pay to get premium - want to upgrade you to a more sophisticated version e.g. LinkedIn, New York Times, Dropbox

  • attempt to cross-sell or up sell
  • works by: selling advertising, get epilepsy to adopt premium, sell information of people’s profiles
46
Q

How does the freemium model work?

A
  • adoption at a minimal cost or no momentary cost
  • adequate when a. Business has low marginal cost
  • users become a product evangelist: organically or due to incentives (e.g. Dropbox gives users more free storage when they get their friend to sign up), the promotion of the product, allows new ventures to scale up quickly
  • there is fast significant adoption of the free service (referral system etc.), but also a portion of users who upgrade (bring in revenue)
  • conversion rate average 2% to 5% coupled with high volume (the smaller the market being targeted the higher the conversion rate should be)
47
Q

Conversion life cycle

A

Customers that sign up later for a service tend to value the service least (profitability of first customers higher).

  • expect a decline of conversion rate over time
  • need to engage in continuous innovation

Pricing (1 decks)

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