Topic 06-Pricing Decisions Flashcards
Definition of price and other names for price
The assignment of value, or the amount the customer must exchange to receive the offering (includes money, goods, services, favors, votes, anything that has value to another party)
Synonyms: Fare, toll, wages, salary, tipy, fee, rate, tariff, worth, pay etc.
Nature of price (4)
1) Subjective
(people think different about the pricing, ex.: purses)
2) Relative?
3) Temporal
-function of time, more likely to pay more when you get food fast)
4) Opportunity Cost
-what do you give up when you by something else? -> saving to buy something else
Objective of pricing (7)
1) To indicate value (more then it is)
2) Enter or exit markets
- lower the price in the end
3) Realize a specific ROI (return on investment)
4) Boost market growth
- if lower prices is the only way to gain more customers
5) Increase market share
6) Position the product or create certain image
- e.g.: Supreme
7) Differentiate from competeting brands and so on
Price theorie
Price is equilibrium of supply and demand
Factors/Determinants of price 1
1) Product Costs, Price floor (no profits below this price)
2) Competitors and other external factors (competitors´strategies and prices, nature of maeket and demand)
2) Consumer perceptions of value - Price ceiling (no demand below this price
Why should I lower the prices when I loose money?
To get the customers in the store
ex.: have something in the store, selled below production costs->will lure customers in store->they will buy something else; amazon marketplace
Factors/Determinants of price 2 (9)
1) Internal factors
- Top management & organizational considerations
- overall marketing strategy & objectives
- costs
2) External factors
- Economy
- Nature of market and demand
- Customers - buyers, resellers, government, etc
- Competition
- Social Concerns
- Governmental influences
Top Management and Organizational Consideration
1) Company objectives
- long term vs. short term
2) Company size
- small -> may be top-down prizes (boss)
- medium or large -> divisions and department might
- Yield management in certain businesses (e.g. airlines)
Overall Marketing strategy and objectives (5)
1) Coordinating with other P´s
2) Revenue consideration
3) Overall strategy consideration (PLC stage, skimming, penetrating?)
4) Positioning considerations
5) Positioning might also be non price related
What is Cost Consideration?
Prices based on the costs of producing, distibuting and selling the product plus a fair rate of return for effort and risk
Types of costs (3)
1) Fixed costs (overhead); e.g.: insurances, rent
2) Variable cost; e.g.: food, gas, resources, travel expenses
3) Total costs (fixed+variable)
Types of cost based pricing (2)
1) Cost plus pricing
cost plus targeted profit
-e.g: produce product for 1$, sell for 1,5$ to make 0,50 cent profit
2) Breake-even pricing (not making any profit)
Definition Break-even point
The point were total revenue is equal to total costs (fixed + variable). All revenue after that is profit.
Economy´s impact on pricing (3)
1) Economic phase (Boom, recession,..)
2) inflation
3) Intrest rates
What can marketers do against economical influences? (5)
1) Cut prices
2) Offer discounts
3) Focus on more affordable items in the product mixes
4) Redefine value proposition (e.g. create bundles->more value, customer saves money)
5) Focus on non-price attributes
Nature of the Marketing & Demand (luxury vs. normal products)
1) Normal Products
- the demand increases when price decreases
- the demand decreases when the price increases
- (linear) (not priceworthy)
2) Luxury products:
- when price is to high, demand decreases
- when price is to low, demand increases
- customers want to spend much money for the product (status) but have their limits
- e.g.: Gucci bag, jewelery)
Price elasticity of demand (2)
1) Inelastic demand
- when price changes the demand changes little (essential products; e.g.: medicine, electricity, water)
2) Elastic demand
- when price changes the demand will change strongly (not essential products e.g: FMCG candy bars->can buy another one)
Of course there are intermediaries!
Calculation price elasticity of demand
1) Percantage change of price and demand
2) demand change percantage/price change percantage
3) = elasticity (not in excam)
Customer based facors
- Based on buyers perceptions of value rather than on the seller´s one
- Price is considered before the marketing program is set
Types of value-based pricing (customer based) (2)
1) Good-value pricing
- right combination of quality and service at a fair price (in terms relation between price and customer value)
- mainly used for less-expensive products e.g. MC donalds 1$ menu items
- e.g. Ryanair
2) Value-added pricing
- attaching value-added features to differentiate product and charge higher prices (price is justified in customers´ eyes (e.g. Lufthansa)
Competition basesd factors (4)
1) Price leadership strategy (one company sets price, others do so too, e.g. if MCDonalds 0,50 cent Burger, Burgerking would do so
2) Lure coustomers in your store by selling products under value
3) Customary pricing (customers are used to price): Less volume but same price (to look as attractive as other products)
4) Dumping price
Types of competition (4)
1) Pure competition
- no company has huge market power and can influence the pricing, apart from reality, hard to achieve (e.g. ebay, many people offer the same product)
2) Monopolistic competition
- many companys offer a comparable product
- but they differentiate, which means every company has a monoply on its own product (e.g. books, many comparable of same genre but not similar content)
3) Oligopolistic competition
- big parts of the market get dominatet by a few companies; e.g mobile communication companies in Germany, T-Mobile, Vodafone; Telefónica or Airbus and Boeing
3) Pure monoply
- the whole market gets served by one company, no competitiors; eg. Deutsche Bahn)
Social Concerns (5)
Pricing for society´s good
Price breaks-
1) For economically disadvantaged individual customers (e.g. presciption of medications)
2) For a class of customers (e.g. rent controlled appartments)
3) Class of diseases
4) For staples/basic food (e.g. milk, bread..)
5) Lower prices for less developed countries
Governmental influence on pricing (7)
• Through taxes, tariffs and duties, etc.
• Through control of supply
○ Buying products from the market
○ Selling products to the market
• Through setting interest rates (Zinsen)
• Through provision of subsidies or not
• Through price controls - price floors and price ceilings
• Through regulations-e.g. food safety
• Through allowing or disallowing competition-ex.: legal monoplies
- Cost plus (Pricing strategies and tactics)
Total costs + profits
e.g. home constructuring
- Skimming price (new products) + good situations (5) (Pricing strategies and tactics)
Setting a higher price to skim revenues layer by layer from the segments willing to pay the high price
-> fewer but profitable sales
1) Inelastic demand
2) Superior product
3) Legal protection of product
4) Technological breakthrough
5) Limited production
- market penetration pricing (Pricing strategies and tactics)
Setting a low price to attract a large number of buyers and a large market share
e.g. Chromebook, discount stores
- Prestige Pricing (Pricing strategies and tactics)
Very expensive products. Targetet coustomer group doesn´t care about pricing. But the quality has to be high
- Psychological or odd-even princing (Pricing strategies and tactics)
99,99 instead 100 looks like way less
Psychological tricks to lure customer into buying
- Price lining (Pricing strategies and tactics)
Offering a cheaper basic product but offer also a better services or more functions which are priced only a bit higher
e.g. Fuel, Plus, V-Power; car wash
- Unit pricing
Give price per kilo or liter to make the product comparable.
- duty in Germany
- can be missused to confuse the customer (some pricing per 100 gramm, som per kilo)
- Customary pricing
Change the size and value not the product. The customers can´t recognize the change.
- Yield management pricing based on demand
Different prices for different seats or places. unsold seats are losts so they want to fill them.
e.g. hotels, plane, stadiums
- Every-Day-Low-Price (EDLP)
Keep the prices always low in the store. The customers will always to your store cause they don´t need to compare.
-evens out demand
- Price bundling
Bundle up products to create more value for the customer. (e.g. fast food)
- Captive pricing
Low prices for the core product but higher prices on the captive products
-e.g. razors and their blades; printers and catridges
- Trial pricing, limited pricing or one time pricing
You get a free trial period or just a little trial price. After that the customer wants to keep the product.
- espacially online
- e.g. netflix, goat simulator
- many people forget trial period, debit mandat
14.Dynamic pricing
Constant adjusting of prices to respond to changing demand, every time a different price
-e.g. stock market, car sharing
- Reference or list prices
Prices to help customers evaluate offering prices (cheap beside expansive product)
-MSRP (manufacture suggested retail prices), gets often reduced and used to trick customers
Reasons for Price increases (4)
- Inflationary market conditions (every price increases)
- Increase in demand over supply (e.g. prices for masks)
- Repositioning the brand and its image (not FMCG, more hotels and so on)
- Reduction or lack of competition (
reasons price decreases (4)
- Excess capacity (use the complete capacity, more demand)
- Falling market share, competitive pressures (to capture the market share)
- Want market dominance through lower prices (ALDI wants to be cheaper then Walmart)
- Recessionary market conditions (e.g. pandemic)
Example pharma industry
Prices increase until other companies can produce the same medicine (monoplies)
Responses to price changes (buyer´s perspective)
1) Price increase
- product is more exclusive or better
- company is being greedy
2) Price cut
- brand wants better deal on exclusive product
- Quality reduction
- image has tarnished
Responses to price changes (competitiors perspective)
Price cut:
- grab larger market share
- doing poorly, boost sales
- might or might not follow suit
- company wants whole industry to inrease total demand
Legal issues in pricing (5)
- Bait and switch pricing (illegal)
- Price discrimination
- different prices for different customers (generally illegal)
- allowed for students or ages, only pushing a certain group - Price fixing (cartels)
- price agreements (BASF vitamin-cartel) - Predatory pricing
- pricing low to undercut or kill competition - Surge pricing
- no increase in emergency situations(e.g. Hurricane Harvey, water)
