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Marketing > Pricing Models (10) > Flashcards

Pricing Models (10) Flashcards

1
Q

What are the three pricing models that are commonly used as a basis for determining price?

A

cost-based pricing,

market-based pricing,

competitor-based pricing.

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2
Q

What is cost-based pricing?

A

Cost-based pricing is a method in which companies use the cost of a good or service as the basis for determining its final selling price.

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3
Q

Cost-based pricing is a method in which companies use the _____ of a good or service as the basis for determining its final ____ _____.

A

cost, selling price

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4
Q

How is cost-based pricing calculated?

A

by taking the product cost and adding a markup to determine the final price.

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5
Q

Cost- based pricing is calculated by taking the product _____and adding a _____ to determine the final price.

A

cost, markup

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6
Q

a markup is…

A

simply an added percentage or dollar amount added to the cost to determine its selling price.

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7
Q

A markup is simply an added _____ or dollar _____ added to the cost to determine its selling price.

A

percentage, dollar

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8
Q

Markup the difference between…

A

the selling cost and the price

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9
Q

Which model is the simplest, most straightforward method of pricing?

A

cost-based pricing

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10
Q

what is the formula for calculating makup dollar amount?

A

,Markup Dollar Amount Calculation = Selling Price - Cost

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11
Q

What is the formula for calculating markup percentage?

A

Markup Percentage = (Selling Price - Cost) / Cost

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12
Q

Direct- cost pricing (method of cost-based model) calculates…

A

variable costs only

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13
Q

full-cost pricing (method of cost-based model) takes into account…

A

both variable costs and fixed costs

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14
Q

First, to use cost-based pricing, the company calculates the costs to…

A

create a good or to perform a service.

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15
Q

the costs to create a good or service might incldue…

A

raw materials, shipping, labor, overhead

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16
Q

After calculating the cost to create a good or to perform a service, the company…

A

adds the markup percentage or dollar amount to the product cost to determine the selling price

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17
Q

Let’s assume a product cost of $10 and a desired markup of 20%. From this information, we would calculate the final price of the product using the formula…

What would the final price be?

A

Cost + (Markup Percent * Cost) = Price

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18
Q

You can also calculate the markup after you already know the final selling price. In that instance, the markup is calculated as the…

A

difference between the final selling price and the product’s cost. The markup percentage is shown as a ratio or percent of the cost.

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19
Q

What is the profit margin?

A

profit margin is the difference between the final selling price and the product’s cost

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20
Q

How is profit margin shown?

A

it is shown as a ratio or percent of the selling price (and not the product cost)

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21
Q

____ _____ can never exceed 100%, while the ____ _____ can.

A

profit margin, markup percentage

Markup percentage = (Price - cost) / cost

Margin percentage = (Price - cost) / price

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22
Q

what is the formula for markup percentage?

A

Markup percentage = (Price - cost) / cost

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23
Q

What is the formulat for margin percentage?

A

Margin percentage = (Price - cost) / price

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24
Q

What is the difference between markup percentage and profit margin?

A
25
Q

Why is cost based pricing inefficient?

A

Although cost-based pricing is very straightforward, it is often not the most profitable for companies, especially in the services industry. It does not fully take advantage of the available profits from the price that customers are willing to pay.

26
Q

Give an example of an inefficency of cost based pricing?

A

onsider an artist quoting the price for an intricate wall mural that would take her 20 hours to complete. Let’s assume she has a cost of $25 for paint. Not factoring in fixed costs, the total direct cost of mural creation is $25. Here is the calculation for direct-cost pricing with 100 percent markup:

Calculation = $25 + (100% of $25)

= $25 + (1 * $25)

 = $25 + $25

= $50

Even at 100 percent markup, the quote would be $50. This means the artist would essentially be getting paid $2.50 an hour. Common sense would tell the artist that the $50 price doesn’t convey the full value of what is offered and that the customer would likely pay more.

27
Q

ost-based pricing does give a good ____ _____ for a product: the absolute minimum for which a company can sell a product and still break even.

A

price floor

28
Q

what is price floor?

A

the absolute minimum for which a company can sell a product and still break even.

29
Q

A price floor in economics is a minimum price imposed by a government or agency, for a particular product or service. … Common examples of price floors are the minimum wage, the price that employers pay for labor, currently set by the federal government at $7.25 an hour.

A
30
Q

List three pros of cost based pricing?

A

PROS

Easy to calculate and implement

Easy to understand

Considered fair by customers

31
Q

List three cons of cost based pricing?

A

CONS

Difficult to factor in fixed costs to the product’s price

Not ideal for pricing many services

May not be the most profitable method of pricing

32
Q

PROS of Cost based pricing

Easy to…

Easy to…

Considered fair by…

A

calculate and implement

understand

customers

33
Q

CONS of Cost based pricing

Difficult to….

Not ideal for…

May not be the most…

A

factor in fixed costs to the product’s price

pricing many services

profitable method of pricing

34
Q

What is the main pricing factor to determine the price of product or service in market-based pricing?

A

competitors prices

35
Q

With market-based pricing, a company looks to its _______ as the main pricing factor to determine the price of its product or service. A

A

competitors

36
Q

What is market based pricing?

A

when a company looks to its competitors as the main pricing factor to determine the price of its product or service. A

37
Q

For the market-based pricing model, the marketer ______ the competitors in the market

A

research

38
Q

First, for this pricing model, the marketer researches the competitors in the market to determine the following:

A

How competitive is this market?

How many competitors are there?

What are the competitors charging?

How strong is the product offering from the competitors?

How high is demand in the market? Is there too much supply (a buyer’s market), or is there high demand and not enough supply (a seller’s market)?

39
Q

Scenario 1 (Market-based):

There are many competitors in the market.

Almost every competitor charges about the same unit price for its product ($20).

There isn’t much difference among the products (including yours).

There is more supply than demand.

The customers are very price sensitive and purchase based on the best deal they can find.

With this scenario, it probably wouldn’t make sense for you to….

A

charge $40 for your product. It may be a higher profit margin, but you probably wouldn’t sell very many units.

40
Q

Scenario 2 (market-based):

There are two or three competitors in the market.

Two of the companies are charging $20 for the product.

Demand has recently increased for the product and the current supply is insufficient.

Your company has developed a new product feature that is valued by the market.

Your company has been in business for two decades and has strong brand loyalty. Your company has a reputation for producing quality products in the industry.

Customers value high quality in this product, and they are willing to pay a premium for it.

….How should your company price its product?

A

In this scenario, the competitors still are pricing their product at $20, but your company can probably sell its product at a premium above the market price.

41
Q

Another pricing framework is value-based pricing, a method, according to the American Marketing Association, of….

A

setting prices based on the perceived value that the consumer receives from the product or service.

42
Q

What is Value-based pricing?

A

setting prices based on the perceived value that the consumer receives from the product or service.

43
Q

While cost-based pricing strategy starts with the _______(____) at the beginning of the calculation, value-based pricing starts with the _______

A

product, (cost)

customer (what value does the customer receive — or perceive — from the product?)

44
Q

what is the reasoning behind value-based pricing?

A

Part of the reasoning behind value pricing is the difficulty pricing some goods or services using costs alone. Many products are much more valuable to the customer than their costs would indicate. If the company looks at the value the product brings and bases pricing on that, it can result in a higher price, and, therefore, a higher profit, for the company.

45
Q

Give an example of when value-based pricing is effective?

A

For instance, consider the mural painter scenario again. According to cost-based pricing, a famous painter would arrive at perhaps a few hundred dollars as a price to charge for a large piece of art. However, that art piece would provide much more value to the customer because of the skill and / or the reputation of the artist.

Take the street artist Banksy. His graffiti sketches famously sell for millions of dollars — not because of cost — but because those works have high perceived value to the customer. Or consider a skilled photographer with years of experience. He or she might only have expenses of fifty or sixty dollars for a photo shoot. Basing pricing on these costs intuitively seems inaccurate. Value-based pricing takes into account what that experience is worth as a value to the client and charges accordingly. A new product with unique features fits with value pricing as well. Consumers see value in the unique features and are willing to pay more for the product.

46
Q

Value-based pricing likely won’t work well for…

A

common and undifferentiated products or in dumb industries where companies only compete on price.

47
Q

Which pricing model wont work well with common and undifferentiated products or in dumb industries where companies only compete on price?

A

value-based pricing

48
Q

The difficult part about value-based pricing is that it takes _____ and ______.

A

time, research

ou’re essentially determining how much your product or service is worth to a particular type of customer, and that can take time and energy to figure out.

49
Q

For instance, consider a technology firm designing a custom program to help streamline billing for a large corporation. They estimate that the program will save the company $4 million annually in costs. Knowing this value that their program will bring, the technology firm can price according to this information instead of solely on their labor cost of hours spent programming. Some companies have developed spreadsheets and calculations to help streamline the process, but some selling situations may take extensive research.

what pricing model is being used?

A

value-based pricing

50
Q

in value-based pricing, what makes a product or service more valuable to a consumer?

A

The money, time, or other resources that it saves or creates for the customer.

The unique, competitive advantage it creates for a customer.

The expertise with which the service is performed or the product is created. A web designer with decades of experience is able to charge more than a web designer who began his or her training six months ago.

The credibility and dependability of the service provider. This decreases risks, which is valuable. An increase in profit for the customer because of the service (for business to business transactions)

The unique aspects of the product or the service provider.

The importance of the situation for which the service is being hired. It is important to perform the service well, so it is more valuable to have a company with a high-quality service standard.

A situation where service failure would be risky or even catastrophic. The customer values dependable service and is willing to pay more.

51
Q

Which is the typically the most profitable pricing model?

A

valu-based pricing is typically more profitable to the company. Profits are maximized because the product is priced at the full value that customers are willing to pay.

52
Q

When does a pricing system become unfair? (Ethics in value-based pricing)

A

One debate around the value-based pricing system is that it could potentially charge some clients more than others when they receive similar services. For instance, there is the phenomenon known as the “wedding tax,” in which services hired for weddings often cost more than that same service for other events. Although it does seem like taking advantage of a customer to charge more for a certain type of event, that service is more valuable to the customer because of the importance of the event.

Is this ethical to charge more for events such as weddings? Some would argue that weddings do take more effort than a normal event due to the nature of dealing with a high-stress situation. But this is the crux of the debate around value-based pricing: is it fair to charge some more than others for essentially the same product or service?

53
Q

define the phenomenon called “wedding tax”?

A

services hired for weddings often cost more than that same service for other events. c

54
Q

One (ethical) debate around the value-based pricing system is that…

A

it could potentially charge some clients more than others when they receive similar services.

55
Q

What are the two sides of the ethical debate regarding “wedding tax” ?

A

Is this ethical to charge more for events such as weddings?

  1. Yes. Although it does seem like taking advantage of a customer to charge more for a certain type of event, that service is more valuable to the customer because of the importance of the event.Some would argue that weddings do take more effort than a normal event due to the nature of dealing with a high-stress situation.
  2. But this is the crux of the debate around value-based pricing: is it fair to charge some more than others for essentially the same product or service?

No it is inherently unethical and unfair to charge some more than others for essentially the same product or serviece

56
Q

What is a pro of the value-based pricing model?

A

PROS

Can maximize profits

57
Q

what are some CONS of the value-based pricing model?

A

Difficult to calculate full value to consumer

Pricing may be seen as unfair if two customers receive different prices for a similar service

58
Q
A

Marketing (55 decks)

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