Pricing strategies Flashcards
What is a price?
the amount of money charged for a product or service, the sum of all the values that customers exchange for the benefits of having / using the product or service - Kotler
What are the three major pricing strategies?
1) Customer value based pricing
2) Cost - based pricing
3) Competition based pricing
Explain how customer based pricing works and what is included
- uses buyers perceptions of value as key to pricing, price is considered along with all the other marketing mix variables before the marketing programme is set.
- 1) Asses customer needs and value perceptions
2) set target price to match customer perceived value
3) Determine costs that can be incurred
4) Design product to deliver desired value at target price
Good value pricing - Offering just the right combination of quality and good service at a fair price - includes either introducing a less expensive version of established brand named products, eg Maccies saver menu OR redesigning existing brands to offer more equality for a given price
Value added pricing - Attaching value added features and services to differentiate a company’s offers and charging higher prices - rather than cutting prices to match competitors, they attach value added features and services so their product is differentiated and their higher prices are supported.
Explain how cost based pricing works
Setting prices based of the costs of producing distributing and selling the product plus a fair rate of return for effort and risk.
1) Design a good product
2) determine product costs
3) set price based on costs
4) convince buyers of products value
Types of costs:
Fixed: does not vary with production / sales level. eg rent
Variable: Vary directly with the level of production. EG commission pay
(page 296 European book last 2 subheadings)
Method one:
Cost plus pricing - adding a standard mark up to the cost of the product.
Unit cost = VC + FC/Unit sales
the company then adds a mark up to this unit cost.
mark up price = unit cost/(1-desired return on sales)
- this method ignores demand and competitor prices so doesn’t likely lead to the best price for consumers
Method 2:
Break even analysis and target profit pricing
setting price to break even on the costs of making and marketing a product or setting price to make a target return
- uses break even chart showing total cost and total revenue expected at different sales volume levels.
- break even volume = FC/(Price - VC)
- as price increases, break even volume decreases however so does demand for the product, so must have a trustworthy trade off between lower break even but getting enough demand for the product by not making the price too high.
Explain how competition based pricing works
setting prices based on competitors strategies, prices costs and marketing offerings. Kotler
the company should consider the following:
1) how does the companies market offering compare with competitors in terms of customer value? - helps to gage whether they can charge a higher price
2) how strong are the current competitors? what are their current pricing strategies? - looking for gaps in the market
What is meant by internal factors also affecting the price decisions of a company?
Marketing strategy, marketing objectives and marketing mix.
- Pricing strategy largely determined by decisions on marketing positioning and a marketing strategy decided first.
- price decisions must be coordinated with product design, distribution and promotion decisions to form a consistent and and effective integrated marketing mix programme. decisions made for other marketing mix variables may effect pricing, eg decision to position product in high performance quality rather than average.
What is target costing?
pricing that starts with an ideal selling price, then target costs will ensure that the price is met.
reverses the usual process of first designing the product, determining its cost and then asking can we sell it for that?
it instead starts on an ideal selling price based on consumer value considerations and then ensures that price will be met.
What is meant. by external factors affecting pricing decisions?
The nature of the market and demand.
1) type of market
pure competition - trading uniform commodity eg wheat, no single buyer or seller has an effect on the going market price. research, product development pricing and advertising have little role, so the sellers do not spend much time on marketing strategy.
monopolistic competition - many buyers and sellers trading over a range of prices rather than single market price because sellers can differentiate their offers to buyers.
oligopolistic - few sellers who are highly sensitive to each others pricing and marketing strategies.
Pure monopoly - one seller. depending on whom that seller ie government, private regulated or non regulated company) is, pricing is handled differently.
2) Understanding the price demand relationship
Demand curve for a product shows the number of units the market will buy in a given time period at different prices that might be charged. normal case, the higher the price, the lower the demand.
3) Price elasticity of demand
how responsive demand will be to a change in price. Inelastic - demand hardly changes when a small change in price
elastic - demand changes greatly with a small change in price.
4) the economy
boom or recession, inflation or deflation can affect pricing strategies because they affect how consumers spend their money too.
What are the new product pricing strategies?
market skimming and market penetration
what is market skimming
setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price. the company makes fewer. but more profitable sales.
- makes sense under certain conditions: quality and image of the product must represent the high price, and enough buyers must want it to buy it at that price. competitors should not be able to enter the market easily undercutting their price. costs of producing smaller vol cannot be so high they cancel the advantage of charging more.
- can create higher profit margins overall and a high initial price may offset later price reductions for new consumers.
What is market penetration
setting a low price for a new product to attract a larger number of buyers and a large market share.
- high sales of volume results in falling costs, allowing companies to cut prices even further. conditions must be met:
- market must be highly price sensitive so that low prices support market growth. production and distribution costs must decrease as sales volume increases. low price must help keep out competition and the company must maintain its low price position to avoid having a temporary advantage.
What are the product mix pricing strategies?
The strategy for setting a products price often has to be changed when the product is part of a product mix.
1) Product line pricing
2) optional product pricing
3) captive product pricing
4) by product pricing
5) product bundle pricing
Explain product line pricing
setting price steps between products in product line based on cost differences, customer perceptions and competitors prices.
when deciding prices the company should account for differences in customer perceptions of the value of different features.
Explain optional product pricing
Setting price for optional or accessible products along with the main product. eg fridge and optional ice maker.
can be tricky. companies must decide which items to include in the base price and which items to offer as an option.
explain captive product pricing
setting price for products that must be used along a main product. EG dell produce inexpensive printers but you have to purchase their ink which is expensive.
must be careful and find the right balance between the main product and the captive product prices.
