SM Chapter 6 Flashcards
OBJECTIVES FOR ESTABLISHING
PRICES
Gain Profit
Cover Costs
Build Demand
Develop a User Base
Support Positioning Strategy
Support Competitive Strategy
PRICING STRATEGY STANDS ON
THREE FOUNDATIONS
● cost ● competition ● value to customer
In the pricing tripod, the costs a firm
needs to recover usually sets a
minimum _________, for
a specific service offering,
price, or price floor
customer’s perceived value of the
offering sets a ___________
maximum price, or
price ceiling
Three Main Approaches to Pricing
- Cost-based pricing. 2. Value-based pricing. 3. Competition-based pricing
pricing strategy where businesses set a
selling price based on a product’s production, manufacturing,
and distribution costs.
Cost-based pricing
Typically, they arrive at this figure by adding a markup
percentage to the total cost of making and delivering the
product.
Cost-based pricing
which are services sold at less than full
cost to attract customers,
loss leaders
economic costs a supplier would continue to
incur (at least in the short run) even if no services were sold
fixed cost
These costs are likely to include rent, depreciation, utilities,
taxes, insurance, salaries and wages for managers and long-
term employees, security, and interest payments
fixed cost
refer to the economic costs associated with
serving an additional customer
variable cost
fall in between fixed and variable costs. They
represent expenses that rise or fall in a stepwise fashion as the volume of
business increases or decreases.
Semi-variable cost
difference between the variable cost of selling an extra
unit of service and the money received from the buyer of that service.
contribution
It
goes to cover fixed and semi-variable costs before creating profits
contribution
managers to know at what sales volume a
service will become profitable
breakeven analysis
involves dividing the
total fixed and semi-variable costs by the contribution obtained on each unit
of service.
breakeven analysis
strategy for pricing goods or services
that adjusts the price based on its perceived value rather than
on its historical price.
Value-based pricing
used
to increase revenue by increasing prices without a significant
effect on volume.
Value-based pricing
sum of all perceived benefits (gross value) minus
the sum of all the perceived costs of the service.
net value
The greater the positive
difference between the two, the greater the net value (T or F)
t
the difference between the price customers
pay and the amount they would actually have been willing to pay to obtain
the desired benefits (or “utility”) offered by a specific product
customer surplus
Competing services are then evaluated via comparison of net value (t or f)
t
who proposes four broad expressions of value?
Valarie Zeithaml
four
broad expressions of value:
- Value is a low price.
- Value is whatever I want in a product.
- Value is the quality I get for the price I pay.
- Value is what I get for what I give .
Customers often incur significant
financial costs in searching for,
purchasing, and using the service,
above and beyond the purchase
price paid to the supplier.
related monetary services
reflect the time, effort,
and discomfort associated with the search,
purchase, and use of a service. Like many
customers, you may refer to them collectively
as “effort” or “hassle.”
non monetary cost
four distinct categories of non-
monetary costs:
time, physical, psychological,
and sensory costs.
important in value creation as it ensures better
capacity utilization and reserves capacity for higher-paying segments.
revenue management
also known as yield management
revenue management
involves setting
prices according to predicted demand levels among different market segments.
revenue management
allow customers to
self-segment on the basis of
service characteristics and
willingness to pay.
rate fences
help companies to
restrict lower prices to customers
willing to accept certain restrictions
on their purchase and
consumption experiences
rate fenses
TYPES OF FENCES
physical and non-physical fences
refer to tangible product differences related to the different prices,
such as the seat location in a theater, the size and furnishing of a hotel room, or the
product bundle
physical fences
refer to differences in consumption, transaction, or buyer
characteristics, but the service is basically the same
non physical fences
Issues to Consider When Developing a
Service Pricing Schedule
- How much to charge?
- What basis for pricing?
- Who should collect payment? 4. Where should payment be made?
- When should payment be made?
- How should payment be made?
- How to communicate prices?
