Pricing Flashcards
Pricing Concepts Pricing Strategies
Price Setting
The determination of a product’s/service’s price
- Prices are instrumental, if not the most important factor in a buyer decision.
- Price perception – Humans are irrational by nature and their preferences (obviously) play a big part in decisions.
- Stated Price & Market Price must be noted
The company can select a price based on:
- Customer’s demand curve
- Cost function
- Competitor’s prices
Price Setting Methods
- Markup pricing
- Target-Return pricing
The Six Step Systematic Approach
- Selecting the Pricing objective
- Determining / Estimating Demand – evaluating the demand of the market and the psycology of consumer.
- Estimating Costs
- Analyzing Competitors Costs, Prices and Offers
- Selecting a Pricing Method
- Selecting the Final Price
Situations for Price Setting
- Survival
- Maximizing Current Profits
- Maximum Market Share
- Maximum Market Skimming
- Product-quality correlation
When does price setting occur?
- Product Development Stage – When the company develops a new product
- Introduction – A new market or geographical area, a new distribution channel
- Bid Proposal – When the company enters bids on new contract of work. When giving price quotas
Who sets prices?
Small Businesses: Owners set prices
Large Corporations: Product line managers, as well as top management set prices
“Given the current situation, do I need a higher or lower price? “
Increasing price could lead to higher profits…
VS
Lowering the price could lead to more customers which leads to higher revenues…
Requires knowledge of cost & demand fuctions, which in reality are difficult to estimate…
Reference Price
The price that consumers anticipate paying or consider reasonable to pay for particular good or service
- Consumers have a fairly good knowledge of product price ranges, not specific prices
- When they examine prices – they employ reference prices as a benchmark.
Types of Reference Prices
- Fair / reasonable price
- Average price – (What consumer usually pays, despite reasonability)
- Typical price – (Not sure what is different between average and typical…)
- Last price paid
- Upper-bound price – (Highest price ever paid at some point)
- Lower-bound price – (Lowest price ever paid at some point)
- Competitor prices – (Marketers can take advantage of this)
- Expected future price – (What could be in the future?)
- Usual discounted price – (Sale price can eventually turn into actual price)
Consumer Response to Price Setting
Consumers can be surprised by Reference price (price judgement), which can have a positive or negative response.
Unpleasant surprise (odds of lowering number of consumers increase)
Vs.
Pleasant surprise (odds of Increase number of consumers increase)
Price Manipulation
The attempt or act to change the price of an offering/product/service with the intent to maximize profits
Don’t confuse with market manipulation (Illegal)
Price Setting Situations
Survival
- Based on Market Circumstances
- Overcapacity
- Intense competition
- Changing consumer wants
- Price is lowered significantly, to increase sales enough to keep the business going
- The company accepts short-term losses in order to stay in business in the long term
- This short run objective also aimed to add long run value
Price Setting Situations
Maximizing Current Profits
Set a price to maximize CURRENT profits
- Marketers estimate the demand/costs for alternative prices and must choose prices that:
- Maximize current profit, cash flow and Rate of return on investment (ROI)
- Risking long term performance, Ignoring other marketing variables (Scarifying customer relationships,Legal restraints on price and Competitors reactions)
High Price:
- Inelastic demand – consumers willing to pay higher prices for product
- Few/no alternatives (customer clock-in)
Low Price
- Stronger customers (bargaining power)
- Low switching costs
Price Setting Situations
Maximum Market Share
% of the brand sales of the overall category sale
- Marketers set the lowest price possible
- Assumption: the market is price sensitive
- A market-penetration pricing strategy
Supporting conditions
- A highly price sensitive market and a low price stimulated market growth
- Production and distribution costs fall with accumulated production experience
- A fixed cost structure
- A low price discourages competition – both actual and potential.
Price Setting Goals
Maximum Market Skimming
“Skimming the cream” off the top of the market
-
Price Skimming
- A firm charges the highest possible product price at first
- Demand of the first segment of customers is satisfied
- Lower price over time -> attracts more price sensitive segment.
-
Helps recover initial costs quickly before:
- Competition lowers market price
- Shrinks the company’s margins
Examples: Iphones, bluetooth headphones
Price Setting Situations
Product-quality leadership (Correlation)
“Affordable Luxuries”
- High perceived quality, taste and status
- A price just high enough not to be out of reach
Examples: Companies such as Starbucks, Victoria’s Secret, Hilton, BMW….
Price Sensitivity
Price sensitivity can be defined as the degree to which consumers’ behaviors are affected by the price of the product or service.
Price sensitivity is also known as price elasticity of demand
Market Penetration
Increase market share
Price Skimming
Charging the highest possible price at first, but then lowers the price overtime
Factors That Effect Price Sensitivity
- Unique Value Effect
- Substitute awareness effect
- Difficult comparison effect
- Total expenditure effect
- End-benefit effect
- Shared cost effect
- Sunk investment effect
- Price-quality effect
- Inventory effect
(Factors)
Unique Value Effect
- The most important determinant of PS
- Unique features and benefits compared to competing products
- Lowers price sensitivity
- Raise willingness to pay
- To prove uniqueness
- Provide hard facts
- Solid testimonials for other customers
- Hands-on trial use
(Factors)
Substitute Value Effect
- Connects PS with awareness of alternatives
- Unawareness or lack of alternatives - Fall in PS
- Awareness enhancing tools:
- Recommendation engines + mobile apps
- Inform about:
- Retailers that carry the product
- Available brands
- Substitute solutions
- Alternative service providers
- Advertising increases awareness
(Factors)
Difficult comparison effect
- Difficulty to compare substitutes – Fall in PS
- Complexity grows with:
- Countless/complex features
- Unfamiliarity with terminology/jargon
- Lack of explination
-
Comparison shopping engines help this (like websites or supermarkets):
- Facilitate instantaneous comparison
- Increases PS
(Factors)
Total expenditure effect
- Expenditure = Amount of cash spent
- Expenditure for a product – Increases PS
-
Larger % of budget
- Increases significance of purchase
- Attention to shopping for the best price
(Factors)
End-benefit effect
- Higher End overall benefit decreases price sensitivity
- Especially important in B2B marketing
Example: Meat suppliers selling to steak houses
- Meat cost are important factor, sensitivity to meat price is high
- When meat is sold to Delis / coffee shops: Meat cost is minimal, compared to other dishes. Sensitivity is Low
(Factors)
Shared cost effect
- Sharing Cost with someone else -> Fall in PS
- Spending someone else’s money:
- Price conscious falls
- Price sensitivity falls
-
Employees travelling on company business:
- Pay for a lot of services, less sensitive to price paid due to budget
-
Price discrimination against business travelers
- Airlines, hotels, car rental companies
(Factors)
Sunk investment effect
- A sunk cost/investment is a cost that an entity has incurred, and which it can no longer recover.
- A Sunk investment cannot be undone
- Purchasing products in conjunction with products already bought lowers price sensitivity
- Buyers lessen implications of additional costs due to sunk costs
- Tv screen buyers is less sensitive to a price of a matching soundbar
- Cross selling / upselling – Encouraging customers who buy a product to buy a complementary product
(Factors)
Price-quality effect
- Importance of quality escalates – Price sensitivity falls
- Brands with high quality reputation
- Can charge higher price
- More wiggle room for manipulation
Example: Paying more for best doctors, paying more for medicine and life saving items
(Factors)
Inventory effect
Ease of product storage = Increase of Price sensitivity
- Harder to stimulate demand by lowering price
- Closer match between time of purchase and consumption is required
Example: Perishable vs. nonperishable products
- Discounting canned foods/wine (non-perishable) Prompts purchase in large quantitie sbut not consumed for a long time
- Discounting fruits and fresh produce (perishable) will not have same effect
Methods to Measure Demand Curves
Surveys
Market/Price Experiments
Statistical Analysis
(Methods to Measure Demand)
Survey
How many units will be consumed at different prices
Sample consumers from target audience
Downsides: Consumers understate purchase intentions at higher prices to discourage companies from increasing prices, Exaggerations or Unwillingness to participate.
(Methods to Measure Demand)
Market/Price Experiments
Real Experiment: Marketers vary market product price in attempt to keep othermarket conditions stable and to account for changes in other conditions
Downsides: Market conditions are not fully controlled
Controlled Lab Experiments:
- Consumers shop in virtual store in which researchers vary product prices and package
- Observe effects of purchasing decisions
Downsides: May not capture actual behavior and Biased as participants are aware of being monitored
(Methods)
Statistical Analysis
Seeking relationships between prices, sales and other factors based on emperical data:
Data type/research design:
- Longitudinal – Same sample recorded over time
- Cross-Sectional – different people, same time
- Construct an appropriate Q=f(P) model
- Use proper statistical techniques
- Control for various demand-influencing factors:
- Competitors response (difficult to predict and account for)
- Changing other aspects of marketing program – harder to isolate price effect
Estimating Costs
Type of Costs
-
Fixed Costs (FC)
- Aka – overhead
- Do not vary with production level or sales revenue
- Payment for rent, utilities, interest, and salaries
- Incurred by the company regardless of output
-
Variable costs (VC)
- Vary directly with the level of production
- Levi’s: each pair of jeans produced incurs costs of:
- Fabric
- Buttons
- Rivets
- Back yoke
- Packaging
-
Average Total Cost
- Equals Total Costs divided by Quantity
The Three C’s Model
Used in evaluating prices to costs
- Customer’s demand curve
- Cost function
- Competitor’s prices
(Price Setting Method)
Markup Pricing
Markup = desired return on sale value
- Adding a standard markup charge to product’s cost
- The most elementary pricing method
- Markups are likely to be higher on:
- Season items (to cover the risk of not selling)
- Specialty items (wedding gown, antiques, artwork)
- Slower-moving items (not shipped in a long time)
- Highly depreciated items with high storage and handling costs (fresh foods: sprouts, strawberries)
Examples:
Construction companies submit job bids by Estimating the total project cost and adding a standard markup for profit
Jewelry retailers evaluate jobs and add prices (Figure shown below)
(Price Setting Method)
Target-Return pricing
The firm determines the price that yields its target rate of return on investment (ROI)
- ROI is a ratio used to calculate the profit an investor receives in relation his invest capital.
- Example:* Public utility companies
Break Even Point
The Break-Even Point (BEP) is the price point at which the sales revenue is equal to the costs, generating zero profit. … Therefore, there is no profit nor any loss.
Price Discrimination
Price discrimination is a microeconomic pricing strategy where identical or largely similar goods or services are transacted at different prices by the same provider in different markets.
Uniform Pricing
When firms sell their products in more than one market, they may either charge the same price across markets (uniform pricing)
