Pricing

Question 1

Internal method of pricing

Answer 1

• Cost plus/target pricing
• A simple way to arrive at a sales price by adding a mark-up to the cost of a product.
• Need to determine the break-even price/total price, which is the sum of all the expenses involved in creating a product (determine objective based on the scenario)
• Need to determine the target/profit goal
• Applies to product and services
• Drawbacks: ignores price strategies of competitors and role of customers

Question 2

External methods of pricing

Answer 2

Competition based
Consumer demand based
Auction based
Value based

Question 3

Competition based pricing

Answer 3

deciding how much to charge depending on what the competition charges.

Question 4

Head on pricing

Answer 4

Charge exactly the same price as competitor

Question 5

Differential pricing

Answer 5

decision to lower or increase the price vs. competition based on strategic objectives

Question 6

Competition based pricing advantages

Answer 6

intuitive appeal about how consumers might think

Question 7

Competition based pricing disadvantages

Answer 7

does not take into account competitors’ internal cost structures (some competitors may have much higher efficiencies to lower price even further). Most times, you don’t know how competition can set prices.

Question 8

Consumer demand based pricing

Answer 8

• Charge as much as the “market will bear” - start with charging a certain price, adjust as you go along.
• Success depends on the ability of marketers to analyse the demand
• This type of pricing can be seen in the hospitality and travel industries. For instance, airlines during the period of low demand charge less rates as compared to the period of high demand.

Question 9

Auction based pricing

Answer 9

Prices are determined by bidding customers

• English (ascending): one seller, many buyers
• Dutch (descending): one buyer, many sellers
• Sealed bid: participants don’t know each others’ bid

Question 10

Auction based pricing advantages

Answer 10

Real time price discovery

Question 11

Auction based pricing disadvantages

Answer 11

May alienate customers, can be risky

Question 12

Value based pricing

Answer 12

the method of setting a price by which a company calculates and tries to earn the differentiated worth of its product for a particular customer segment when compared to its competitor

Question 13

Value based pricing considerations

Answer 13

• Focus on a single segment
• Compare with next best alternative: ask the question - “what would this segment buy if my product wasn’t available?” Value based pricing methodology not suitable for truly new products
• Understand differentiated worth: which product features are unique, that is differentiated, from the competitor’s offering.
• Place a dollar amount on the differentiation.

Question 14

Best solution to pricing method

Answer 14

• Mixed methods: taking into account both external (macro environment, competitors and customers) and internal factors
• Setting the price point: use various methods and sources of information together to arrive at a final pricing strategy, your final number

Question 15

Price premium purpose

Answer 15

To evaluate pricing in the context of market competition

Question 16

Benchmark price can be

Answer 16

• Price of a specified competitor: simple price by competitor.
• Average price paid: unit sales weighted average of competitor prices
  Average price charged: unweighted average of competitor prices.
  Average price displayed: average weighted to distribution (numeric, PCV, ACV)

Question 17

Average price paid

Answer 17

• Requires knowledge of ales or shares of each competitor

- Changes in unit prices/ shares will affect the average price paid

Question 18

Average price charged

Answer 18

• Requires knowledge of prices and not the shares of each competitor; hence not impacted by changes in unit shares
• Captures how brand compares to prices set by competitors without regard to brands share; hence all competitors are weighted equally.

Question 19

Average price displayed

Answer 19

• Managers who seek a benchmark that captures differences in the scale and strength of brands’ distribution might weight each brand’s price in proportion to a numerical measure of distribution
• Typical measures of distribution strength include numeric distribution, ACV (%) and PCV (%).
• Sum of weighted prices of each brand to be divided by the total weighting for the average price.

Question 20

Price premium problems

Answer 20

• Competitors: who are they? Should we include own price, just leading competitors, all?
• Should we use manufacturer, distributor or retail prices?
• Prices can be calculated net (discounts, rebates, coupons deducted) or gross

Question 21

Role of demand curves and price elasticity

Answer 21

• The purpose of these metrics is to bring consumer information into the pricing process
• This group of metrics is based on microeconomic theory
• The theoretical models need to be estimated by empirical measurements

Question 22

Price Elasticity of Demand

Answer 22

• PED measures the responsiveness of demand after a change in a product’s own price. Expressed as a ratio percentage % change in quantity for a small % change in a price.
• In markets that are unresponsive to price changes, demand is inelastic
• If minor price changes have a major impact on demand, we say demand is elastic
• Elasticity becomes more negative - as price increases.
• Elasticity varies not only between different goods, but also along the demand curve for any specific good using a straight-line demand curve.
• PED will go from infinity to zero with unit elasticity in the middle

Question 23

Price elasticity of demand purpose

Answer 23

to understand market responsiveness to a small change in price

Question 24

Price elasticity of demand considerations

Answer 24

• PED will almost always be a negative number indicating that when prices increases, the quantity demand is expected to decline and vice versa.
• When demand is linear, elasticity changes with price

Question 25

Perfectly Elastic Demand/Infinite Price Elasticity

Answer 25

In perfectly elastic demand, a small rise in price results in fall in demand to zero, while a small fall in price causes increase in demand to infinity. Change in market supply will not lead to any change in price.

Question 26

Unitary Elastic Demand

Answer 26

When the change in demand produces proportionate change in the price of the product

Question 27

Perfectly Inelastic Demand

Answer 27

A perfectly inelastic demand is one when there is no change produced in the demand of a product with change in its price.

Question 28

Implications

Answer 28

• When we analysepriceelasticities we’re concerned with their absolute value, so we ignore the negative value.
• The number itself is just a means to an end.
• The key is to understand of demand to price
  • If PED > 1 then Demand is Price Elastic (Demand is sensitive to price changes)
  • If PED = 1 then Demand is Unit Elastic
  • If PED < 1 then Demand is Price Inelastic (Demand is not sensitive to price changes)
• We always ignore the negative sign when analysingpriceelasticity, so PED is always positive.

Question 29

Price Elasticity of Demand problems

Answer 29

Is the data reliable? Can be obtained through:

• Conjoint analyses: the most reliable, still, since a form of experiment, external validity issues
• Consumer surveys about reservation prices and percent good value, problem of self-report
• Second price auctions (where people tend to bid their reservation price), is it applicable to all categories?
• Observed changes in sales and prices over time, as with any time-series modeling, any outside confounding factors influencing data?