Sem 2 - Pricing Flashcards
what is a price?
the amount of money charged for a product or a service, the sum of all the values that customers give up to gain the benefits of having or using a product or a service
the value the customer places on the product
what are they willing to give in order to gain something else
what is a price ceiling and price floor?
price floor: no profits are made below this price, product costs
Price ceiling: no demand above this price, customer perceptions of value
what are the major pricing strategies?
- cost based pricing
- customer value based pricing
- competition based pricing
what is cost based pricing?
selling prices based on the costs for producing, distributing and selling the product plus a fair role for the effort and risk
- design product
- determine product costs
- set price based on costs
- convince buyers of product value
what are the types of costs involved in cost based pricing?
- fixed costs (overheads) = do not vary with production or sales level
- variable costs = costs that vary directly with th level of production
- total costs = the sum of the fixed and variable costs for any given level of production
how can you decide how far to raise the price above the price floor in cost based pricing?
there are two methods
- cost plus pricing
- break even analysis and target profit pricing
what is the cost plus pricing method?
involves adding a standard mark up to unit cost
unit cost = variable cost + fixed costs / unit sales
- company adds a desired mark up up to the unit cost
- other companies in a supply chain will also add a mark up, so will consumers be willing to pay the end price?
what is th equation for cost plus pricing?
unit cost = variable cost + fixed costs / unit sales
what is the second method for cost based pricing?
break even analysis and target profit pricing
what is break even analysis and targeted profit pricing?
setting price to break even on the cost of making and marketing a product or setting price to make a target return
- uses a break even chart
- work out how many units we need to sell to break even
- if volume is unlikely a price increase is necessary
what is customer value based pricing?
uses buyers perceptions of value, not the sellers cost, as the key to pricing
focuses on the price ceiling, not the floor
- assess customer needs and value perceptions - set target price to match customer perceived value - determine costs that can be incurred - design to deliver desired value at target price
- two types of value based pricing: good value pricing and value added pricing
what are the two methods used in customer value based pricing?
good value pricing
value added pricing
what is good value pricinc?
offering value for money that makes customers feel they are getting a fair deal
high/low price
everyday low pricing (EDLP)
what is added pricing?
attaching value added features and services to differentiate a company’s offers a d charging higher prices
augmented product: service wuaty, warranties
loyalty schemes
added value justifies the price
what is wrong with customer based values?
measuring the value customer will attach ro product is not a simple task
values are subjective
what is competition based pricing?
setting prices based on competitors, strategies, prices, costs and market strategies
- how does the companies market offering compare with competitors offerings in terms of customer value
- how strong are the competitors and what are their price straggles
what other factors influence out pricing strategy and decison?
internal and external factors
what are internal factors that affect price?
- marketing strategy
- marketing objectives
- marketing mix
(will your price be consistent with other products, are you trying t start a more exclusive product line)
what are the types of external factors that affect pricing?
- market type
- elasticity of demand
economy
what are the types of markets?
- pure competition = many firms, homogenous parodic, sellers have little influence over price
- monopolistic comp = many firms, differentiated product, can influence price via marketing strategy less influence by competitor prices
- oligopolistic competition = few forms, differentiated products, highly sensitive to competitors pricing strategies
- pure monopoly = one elle, unique product, no substitutes
what is elastic of demand
how sensitive is demand o changes in price
- if demand hardly changes with a small change in price = inelastic
- if demand changes greatly we say the demand is elastic
when are buyers less price sensitive?
- product is unique
- product high in quality
- substitute products are hard to find
- cannot easily compare the quality of substitutes
- expenditure on the product is low compared to income
why is th economy an external factor when it comes to pricing?
what happens in an economic downturn?
- consumers cut back on unessary expenditure (marginal propensity to consume)
- companies cut prices to increase demand
- emphasise more affordable items in product mixes
- justifying higher prices
what are the new product strategies?
market skimming
market penetration
