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MAR5805: Problems & Methods in Marketing Mgmt > Pricing > Flashcards

Pricing Flashcards

1
Q

What are the two forces that drive commodification?

A

Objective and Subjective Differentiation

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2
Q

More specifically what is Objective Differentiation?

A

Product Innovation and Development to not look like your competitors.

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3
Q

More specifically, what is Subjective Differentiation?

A

The dominant force and dark side that is fostered by a firm. Products are not different amongst competitors but consumers think they are. Not in the best interest of the consumer.

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4
Q

What can have the largest effect on profits?

A

Price

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5
Q

Most firms employ _______ pricing policies.

A

Simplistic (most don’t estimate consumer price elasticity)

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6
Q

Which departments have the most control over pricing?

A

Accounting, Economics, Marketing

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7
Q

From an economic point of view, what usually works out?

A

Laws of Supply & Demand usually workout in the long-term. However short-term prices do not change.

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8
Q

What two reasons cause prices to not change smoothly with supply and demand?

A
  1. Cost-Based Pricing. As noted earlier, simplistic pricing policies that focus internally on costs will not be sensitive to consumer willingness to pay.
  2. The Invisible Handshake. As we will later note, perceived unfairness may suppress price increases – even for a monopolist – if a long-term relationship between the firm and the customer is to be created or maintained.
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9
Q

Many marketing activities involving elasticity can be conducted without knowing what?

A

Its exact value

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10
Q

Accounting can provide essential information related to what for marketing?

A

total costs but also the source of costs.

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11
Q

When it comes to break-even point, price cannot be below what?

A

Variable Costs

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12
Q

Before entering a market what does Porter encourage firms to do?

A

Examine the 5 forces model (outside of competition) so that you are not pushed from left to right on price curve towards your break-even point

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13
Q

Who and what is the focus when using marketing concept to impact price?

A

Consumer; Profit Maximization

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14
Q

What are the two competing perspectives when it comes to pricing?

A

Company and Marketing Perspective

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15
Q

Draw the Company Perspective to pricing

A

Product -> Cost + Product -> Price to Consumer

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16
Q

Draw the Marketing Perspective or “target costing” to pricing

A

Consumer -> Target Price -> Product

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17
Q

Define Expected Value to Customer (EVC)

A

The max a consumer should be willing to pay.
It is the purchase price of the next best alternative +/- the value difference between the next best alternative and your product.

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18
Q

What are the 3 complications to EVC?

A
  1. The Incentive - amount to offer
  2. Identifying Value - difficult to estimate some types of value with precision
  3. Trade-offs - you and your competition have strengths and weaknesses
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19
Q

When setting the incentive, a manager must consider the customer’s:

A
  • ability to pay (at this time)
  • myopia (over-discounting of future savings)
  • uncertainty about the true value
  • ignorance of the true value
  • switching costs/loyalty
  • perceptions of fairness
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20
Q

Which types of value may come into play when estimating the value advantage?

A
  • Economic Value (post-purchase costs)
  • Functional Value (incremental attribute)
  • Experiential Value (customer service; brand attachment; design)
  • Social Value (prestige; reference groups)
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21
Q

Which of the types of value are very difficult to estimate with a reasonable degree of precision?

A

Both Social and Experiential are very difficult to estimate

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22
Q

What is the trade-off equation?

A

Economic Value = Price of Next Best Alternative + Monetary Value of Each Advantage - Monetary Value of Each Disadvantage

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23
Q

What is strongly affected by consumer’s wealth?

A

Price sensitivity

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24
Q

Describe the problem of consumer heterogeneity.

A

How to price a product in a market in which price sensitivity is heterogeneous while appealing to as many consumers as possible

25
Q

What is the general solution to combat consumer heterogeneity?

A

Price Discrimination

26
Q

What are the 5 price discrimination techniques in the world?

A
  1. Price Lining (or “Versioning”)
  2. Second Market Discounting
  3. Sequential Skimming
  4. Periodic Discoutning
  5. Random Discounting
27
Q

Describe Price Lining.

A

Offer different product (quality) variations at different prices. Consumers self-select into the price they are willing to pay. Ex. Airlines charing you for the utility of each seat (aisle, window, etc)

28
Q

Describe Second Market Discounting.

A

Product an unbranded version of the product (perhaps of the same quality) in order to take advantage of unused capacity. It is attractive when production does not increase fixed costs and cannibalization is negligible. Ex. Green Giant and then store made green beans

29
Q

Describe Sequential Skimming

A

Initially price for the least sensitive market, then successively lower the price to attract additional segments. Ex. Sony. Think of stair stepping down prices of TVs

30
Q

Describe Periodic Discouting

A

Price high at the beginning of the period; lower the price at the end of the period to lure consumers who are less “quality-sensitive.” Ex. Clothing – people that are most fashion conscious will buy

31
Q

Describe Random Discounting

A

Price high throughout the period but insert random discounts. It is attractive when the market consists of informed and uninformed consumers. The former will wait for the discount. The latter will buy on need – most often at the high price. Ex. Sales & Coupons

32
Q

What two points does the EVC assume of consumers?

A
  1. Are willing to pay in approximate relation to the utility they receive, and will not pay extra if utility is equivalent across offerings;
  2. Can access relative utility with some accuracy.
33
Q

If brands lack unique value and consumers cannot assess utility objectively and accurately, firms may be tempted to what two actions?

A
  1. Create perceptions of uniqueness;

2. Prevent consumers from discovering the lack of uniqueness.

34
Q

What do firms engage in to enhance utility and avoid commoditization (which is then recaptured in price)?

A

product development

35
Q

When “Manipulating” Perceptions of Uniqueness” firms may rely on what to obscure the comparability of competing offerings?

A

The 4 Ps: Product, Price, Promotion, Place

36
Q

Give examples where firms manipulated perceptions of uniqueness with PRODUCT.

A

Ex. OTC drugs, phone plans

i. Different chemical names for anti-histamine - makes them all unique according to consumers perspective
ii. Phone plans - firms don’t want you to make comparisons across the spectrum - make it complex.

37
Q

Give examples where firms manipulated perceptions of uniqueness with PRICE.

A

Higher Price indicates higher quality.
Ex. Fleischman Gin - low brand alcohol - price rose and demand curve went up. Why? People don’t have much to go on for quality (may be the dark side)

38
Q

What is a Giffen Good?

A

low-income, non-luxury products that defy standard economic and consumer demand theory

39
Q

Give examples where firms manipulated perceptions of uniqueness with PROMOTION (advertising).

A

Are you willing buy a brand you’ve seen advertised or one you haven’t?
Ex. Intel; Nutrasweet both went straight to consumers

40
Q

Give examples where firms manipulated perceptions of uniqueness with PLACE (distribution).

A

We will give each of retailers different model numbers so they don’t have to compete
Ex. branded variants - Why are firms giving stores different numbers/versions? If stores carry the same model then they compete on price. If they have to do that we all lose out on price (supplier and retailer)

41
Q

What four areas does a normal person become irrational with pricing, according to studies by psychologists and behavioral finance?

A
  1. Sunk-Investment Effect
  2. The Value Function
  3. Transaction Utility
  4. Multiple Mental Accounts
42
Q

Describe the Sunk-Investment Effect.

A

The Sunk Investment Effect is the failure to ignore unrecoverable transaction costs when making decisions about future behavior related to that transaction.
Ex. Bar Cover Charge, Declining Stock, Draft Picks: you put $10K in stock, it gets cut in half. If you think it will rebound quickly. But if there is one that will recover faster just go ahead sell and buy new stock. You lost $5k and there is nothing you can do about it

43
Q

Describe the Value Function.

A

people all value a dollar differently in relation to the purchase they are making. One way to raise your iQ: A dollar is a dollar. Doesn’t mean everyone values a dollar in same way, however, that person should value it in every context

44
Q

How do marketers combat the Value Function curve?

A

i. Integrate Losses
Ex. automobile option packages. Bundle to mitigate the pain
ii. Segregate Gains
Ex. toys; infomercials - pay this and you will get the following - then they keep segregating all the things they will give you
iii. Integrate a Smaller Loss with a Larger Gains
Ex. payroll deductions (charity; withholding tax…) - $5000 paycheck and I deduct $10 you don’t notice it
If you don’t have payroll and thus need to ask for $10 - less people will pay for it
iv. Segregate a Small Gain with a Large Loss
Ex. Rebates - buy something expensive - I could just reduce price by amount of rebate. Pose as a gain - but now will give you money back (small gain) on steep part of gain side

45
Q

Describe Acquisition Utility.

A

refers to the value of the good you received relative to the outlay you made to get it. Thus, if you spend $10 for a product that gives you $10 worth of utility, you have made a reasonable and fair exchange.

i. EVC Pricing
ii. Found in a functional rational world where life is good

46
Q

Describe Transaction Utility

A

more psychological and often refers to how a price compares to a reference point rather than its absolute level.

i. The real world. We look at whether a price is good or bad. What is an email worth to you? No one tries to assess utility.
ii. Ex. Anti-aids - $10K per dose people were upset. Next came in a pharma company with $2k and they were praised. What utility do you get from a life-saving drug?

47
Q

Happiness is not just driven by money. What can we control when it comes to happiness?

A

Our reference points

48
Q

These 3 reference points thwart acquisition utility and EVC.

A
  1. Competitor Prices
  2. Seller Costs
  3. Previous Price
49
Q

Describe the competitor prices reference point.

A

In competitive markets, consumers rationally emphasize transaction utility over acquisition utility. When competitor charge different prices, consumers are sympathetic if the price differences reflect inherent quality differences (i.e., direct product costs) but are far less sympathetic if the price differences reflect differences in indirect costs. Ex. Cost of NYC T-Shirt Vs. GNV T-Shirt. People will pay for quality differences but none of the other overhead

50
Q

Describe the seller costs reference point.

A

Consumers believe that vendors are entitled to a “fair” profit. Customers rarely possess accurate knowledge of profitability, but they infer profit. The vendor is deemed unfair if the inferred profit is perceived to be “excessive.” Aside from the problem of defining “excessive,” consumers perceive unfairness because they grossly underestimate the firm’s costs. Consumers anchor on perceived variable material costs. Ex. Pharma – how many of their products fail that they also must pay for? What about R&D? Consumer can’t tell true story

51
Q

Describe the previous price reference point.

A

In dynamic settings, consumers anchor on previous prices without adjusting for increases in the vendor’s costs or market conditions. Ex. Tuition Increase – what is that degree worth to you over your career?

52
Q

How much someone makes is what?

A

No consequence to you

Ex. Fancy Resort and Run-Down grocery store. Why is the fancy resort entitled to more margin than run-down store

53
Q

What 5 ways can enhance high-price attractiveness?

A
  1. Increase the Reference Price
  2. Encourage Favorable Comparisons
  3. Increase the Perceived Vendor Cost
  4. Obscure the Reference Price
  5. Report the Per-Usage Price
54
Q

Describe multiple mental accounts.

A

People tend to allocate expenditures into categories. Each category has its own reference point, and potential expenditures are evaluated within the context of its category.
Ex. People say yes on vacation - but when you buy at home it’s a no - both cases its $30. You use reference points differently and look at dollar different.

55
Q

What three areas must marketing be concerned with when it comes to pricing ethics?

A
  1. Collusion
  2. Price Discrimination
  3. Gouging
56
Q

Rationalize this statement “There is no such thing as Price Gouging”

A

There is just supply and demand. Ex. Snow Shovels

57
Q

What re the four other perspectives outside of the consumers that we should take when it comes to price gouging?

A
  1. The Entrepreneur. In the case of pharma, it seems easy to attack the firm, because the firm is large, impersonal, and profitable. Rather than being a firm, imagine that you are an entrepreneurial biochemist and invented the drug in your basement. How would you feel if regulators constrained your ability to price it?
  2. The CEO. Finance teaches us to maximize shareholder value. If the CEO fails to extract maximum profit, the CEO may be replaced (including the EpiPen CEO).
  3. The Shareholder. Likewise, if you own stock in the firm, how would you want the firm to price the product?
  4. The Taxpayer. We don’t want people to go without medicine. So, rather than limit the price/profit of the drug, how about instituting a national tax to pay for medicine for the needy? People tend to be more generous with other people’s money than with their own.
58
Q

What are the 2 systems of thinking when it comes differentiating between price gouging?

A

System 1 is driven by intuition and emotion; System 2 is more analytic. We all use both, but System 1 often dominates System 2.

MAR5805: Problems & Methods in Marketing Mgmt (10 decks)

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