Pricing (week 9+10)

Question 1

Price

Answer 1

The sum of all the values customers give up to gain the benefits of having or using a product or service

Question 2

Opportunity cost

Answer 2

Value of something you DIDN’T do – the “trade off”

Question 3

Six Steps in Pricing Process

Answer 3

1. Develop pricing objectives
2. Estimate demand
3. Determine costs
4. Evaluate pricing environment
5. Choose pricing strategy
6. Develop pricing tactics

Question 4

1. Develop pricing objectives

Answer 4

Profit-related objectives
Sales-related objective
Competition-related objective
Customer-related objective
Additional: image enhancement

Question 5

Profit-related (PO)

Answer 5

Focus MAINLY on maximizing profit margins (industries like tech, pharma, have highest margins, 5-7%)

Question 6

Sales-related (PO)

Answer 6

Market share objective (% of overall sales made by your products compared to sales made by all products)

Question 7

Competition-related (PO)

Answer 7

Can use price to compete – i.e. lower your price to compete
“Market leader” – sets the price in the industry for other competitors (i.e. Tide)
Airlines → big on set price and follow

Question 8

Customer-related (PO)

Answer 8

Make it easy for the customer
- “Dead net pricing” – includes ALL promotions and final discounts → bottom line price
- Lots of negotiation
- Value proposition: why a customer should buy your product/service

Question 9

2. Estimate demand

Answer 9

Price elasticity of demand: how demand reacts to changes in price

Inelastic demand: minimal changes in quantity from change in price (more necessities) → gas, electricity

Elastic demand: high changes in quantity from change in price → luxuries

Cross elasticity: change in demand of one product stimulates change in demand for other products (i.e. if we don’t drive as much, tire demand goes down, oil change company demand goes down)

Question 10

7 Pricing Strategies

Answer 10

• Cost plus/markup pricing
• Price floor
• Demand/market based
• Target costing
• Yield management
• Price leadership
• Value of Everyday Low Pricing

Question 11

Cost plus/markup pricing (PS)

Answer 11

-Adding a standard markup to the cost
of the product.
Add up all your costs to make the product, then add an additional “markup” amount to arrive at the price.
CHALLENGE: costs are always changing, so it is hard to price based on cost.
Who is it used by? : agencies and retailers

Question 12

Price floor (PS)

Answer 12

• Sell products at prices that are enough to cover variable costs
• Keep workforce employed – not looking to even make profit, just to cover marginal costs
• Just make enough to keep operating

Question 13

Demand/market based (PS)

Answer 13

• Adjusting prices continually to meet needs/demands of individual customers + situations
  Customer demand determines the price of a product or service
  i.e. hotels charge more on weekdays, when there is higher demand

Question 14

Target costing (PS)

Answer 14

-Setting price based on buyers’ perceptions of value rather than on sellers’ cost
Research to find the best appropriate price first based on competitors, industry → establish price first and build the product within those parameters
(top down)
(consumer focused)

Question 15

Yield management (PS)

Answer 15

Manage capacity, maximize revenue → charge different customers different prices. Prices are moving targets.
Variable pricing strategy based on understanding and anticipating consumer behavior to maximize revenue from a time limited resource
Airlines do this a lot – ticket prices go up closer and closer to the flight date.
(efficiency focused)
(managing yield/risk of costs)

Question 16

Price leadership (PS)

Answer 16

“Follow the leader”
One company (usually market leader) sets the price and others follow (raise/match the price set by the leader)
But collusion is ILLEGAL, can’t discuss with other businesses)

Question 17

Value of everyday low pricing (PS)

Answer 17

ALWAYS be cheaper than competitors (i.e. Walmart)

Question 18

Pricing Strategies for New Products

Answer 18

1. Market skimming pricing
2. Penetration pricing
3. Initial / trial pricing

Question 19

Market skimming pricing (NP)

Answer 19

Set initially high prices, and drop them over time. Skim the maximum amount of revenue from various segments of the market.
- Product’s quality and image must be able to justify the high price
- Enough buyers must want to purchase the product at that price

Question 20

Penetration pricing (NP)

Answer 20

Set a low initial price, to penetrate the market quickly and deeply; attract a large number of buyers quickly and win a large market share.
- High sales volume = falling costs, allows companies to cut prices even further
- KEEP PRICES LOW to block competition out

Question 21

Initial / trial pricing (NP)

Answer 21

Introductory “low” price for predetermined time to minimize consumer “risk” (but plan to increase the price)
- Go in with low prices, knowing you will raise them
I.e. streaming services

Question 22

Pricing environment (layer 1)

Answer 22

-Costs
-Objectives
-Organizational tactics
-Marketing mix
-Product differentiation

Question 23

Pricing environment (layer 2)

Answer 23

-Suppliers
-Buyers
-Demand
-Economic confidence
-Government
-Competition (new offerings, ads, substitutions)

Question 24

Price fixing (Ill P)

Answer 24

Companies collude/work together to use prices to control supply and demand — ILLEGAL

Question 25

Predatory pricing (Ill P)

Answer 25

Selling below cost with the intention of punishing a competitor or gaining higher long-run profits by
putting competitors out of business.

Question 26

Loss leader (Ill P)

Answer 26

Pricing strategy where a product is sold at a price below its market cost to stimulate other sales of more profitable goods or services.

Question 27

Bait and switch (Ill P)

Answer 27

The merchant “baits” the customer by advertising a product or service at a low price; then when the customer goes to purchase the item, they discover that it is unavailable, and the merchant pressures them instead to purchase a similar but more expensive product (“switching”).

Question 28

Segmented pricing

Answer 28

Selling a product or service at two or
more prices, where the difference in
prices is not based on differences in
costs.