Pricing Concepts Flashcards
Characteristics of Pricing
- Pricing decisions determine types of customers and competitors a firm attracts
- A single pricing error can nullify all other marketing mix activities
- price affects quantity sold and hence profit
Pricing Objectives
consistent with a firm’s overall marketing objectives, which are:
- enhance brand image
- providing customer value
- obtaining an adequate ROI or cash flow
- maintaining price stability in an industry or market
Pricing Factors
- Demand for an offering (= price ceiling)
- costs, especially variable costs (= price floor), must be covered at least to avoid a unit loss
- consumer value perceptions and price sensitivity (= maximum price charged)
- government regulations such as predatory pricing
- life-cycle stage of offering (greater price discretion earlier than later in the life-cycle)
- profit margin of marketing channel members
- price differentials of a firm’s offerings to maintain perceived value differences among buyers
Pricing as an Indicator of Value
- consumer pair price with perceived benefits derived from an offering to determine value
- value = perceived benefits / price
- price influences consumers’ perception of quality and ultimately value
- price affects perception of prestige (if price rises, so does demand)
Pricing as an Indicator of Value: Reference value
- consumers determine value by judging the worth and desirability of an offering relative to substitutes
- comparing the costs and benefits of substitutes items gives rise to a ‘reference value’
- store brands 20% higher than manufacturers brands causes consumers to view the lower price as indicator for lower quality
Steps in Setting the Price Policy
1) Selecting the Pricing Objective
2) Determining Demand
3) Estimating Costs
4) Analyzing Competitors’ Costs, Prices and Offers
5) Selecting a Pricing Method
6) Selecting the Final Price
Step 1: Selecting the Pricing Objective
- Survival
- Maximum current profit
- Maximum market share
- Maximum market skimming
- Product-quality leadership
Step 2: Determining Demand
- Price Sensitivity
- Estimating demand curves (surveys, experiments, statistical analysis)
- price elasticity of demand
Price Elasticity of Demand (E)
- how responsive consumer demand is to changes in an offering’s price
E = percentage change in quantity demanded / percentage change in price
Elastic Demand
- E > 1
- small price reduction leads to large increase in quantity purchased
Inelastic Demand
- E < 1
- small price reduction leads to small increase in quantity purchased
- basic goods (milk, bread..)
Price Elasticity Demand Factors
- the more substitutes and/or uses for an offering, the greater the elasticity
- higher ratio of offering price to buyer’s income, the greater the price elasticity
Factors reducing price sensitivity
- product image, quality or prestige
- product is distinctive
- buyers are less aware of substitutes
- product is used in conjunction with assets previously bought
- expenditure is small to buyer’s total income or total cost of the end product
Step 3: Estimating Costs
- fixed, variable, total, average cost
- accumulated production (learning curve, cost per unit decreases with higher production levels)
- target costing: Cost = Price - Target Profit Margin
Step 4: Analyzing Competitor’s Prices
- firm must take competitor’s costs, prices & reactions into account
- value-priced competitors (price set based on customer’s believe of how much the product is worth)
