Topic 7 - Price

Question 1

price

Answer 1

s the amount of money charged for a product or service. More broadly, price is the sum of all the values that customers give up in order to gain the benefits of having or using a product or service.

Question 2

three main pricing strategies

Answer 2

(1) customer value-based pricing,
(2) cost-based pricing and
(3) competition-based pricing.

Question 3

Customer value-based pricing

Answer 3

uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing. Value-based pricing means that the marketer cannot design a product and marketing program and then set the price. Price is considered along with the other marketing mix variables before the marketing program is set.

Question 4

two types of value-based pricing:

Answer 4

good-value pricing and value-added pricing

Question 5

good-value pricing

Answer 5

Offering just the right combination of quality and good service that customers want at a fair price.

Question 6

Value-added pricing

Answer 6

companies attach value-added features and services to differentiate their offers and thus support higher prices

Question 7

Cost-based pricing

Answer 7

involves setting prices based on the costs for producing, distributing and selling the product, plus a fair rate of return for the company’s effort and risk

Question 8

Competition-based pricing

Answer 8

involves setting prices based on competitors’ strategies, costs, prices and market offerings. Consumers will base their judgments of a product’s value on the prices that competitors charge for similar products.

Question 9

Effective, customer-oriented pricing involves

Answer 9

understanding how much value consumers place on the benefits they receive from the product and setting a price that captures that value.

Question 10

A company’s costs take two forms:

Answer 10

Fixed costs AND Variable costs

Management wants to charge a price that will at least cover the total production costs at a given level of production.
The company must manage its costs carefully. If it costs the company more than it does its competitors to produce and sell a similar product, the company will need to charge a higher price or make less profit, putting it at a competitive disadvantage.

Question 11

In assessing competitors’ pricing strategies, the company

Answer 11

should ask several questions.
First, how does the company’s market offering compare with competitors’ offerings in terms of customer value?

Next, how strong are current competitors, and what are their current pricing strategies?

Importantly, the goal is not to match or beat competitors’ prices. Rather, the goal is to set prices according to the relative value created versus competitors.

Question 12

Pricing strategies in The introductory stage. They can choose between two broad strategies:

Answer 12

1) market-skimming pricing and
(2) market-penetration pricing

Question 13

Market-skimming pricing

Answer 13

Many companies that invent new products set high initial prices to ‘skim’ revenues layer by layer from the market

Question 14

Market-penetration pricing

Answer 14

They set a low initial price in order to penetrate the market quickly and deeply – to attract a large number of buyers quickly and win a large market share. The high sales volume results in falling costs, allowing the companies to cut their prices even further

Question 15

Price changes

Answer 15

After developing their pricing structures and strategies, companies often face situations in which they must initiate price changes or respond to price changes by competitors.

Question 16

Initiating price changes

Answer 16

Initiating price cuts - One such circumstance is excess capacity. Another is falling demand in the face of strong price competition or a weakened economy. In such cases, the firm may aggressively cut prices to boost sales and share. But as the airline, fast-food, automobile and other industries have learned in recent years, cutting prices in an industry loaded with excess capacity may lead to price wars as competitors try to hold on to market share.

Initiating price increases - A successful price increase can greatly improve profits. Rising costs squeeze profit margins and lead companies to pass cost increases along to customers. Another factor leading to price increases is over-demand

Question 17

Buyer reactions to price changes

Answer 17

Customers do not always interpret price changes in a straightforward way. A price increase, which would normally lower sales, may have some positive meanings for buyers.
Similarly, consumers may view a price cut in several ways. For example, what would you think if Rolex were to suddenly cut its prices? You might think you are getting a better deal on an exclusive product. More likely, however, you would think that quality had been reduced, and the brand’s luxury image might be tarnished. A brand’s price and image are often closely linked. A price change, especially a drop in price, can adversely affect how consumers view the brand.

Question 18

Competitor reactions to price changes

Answer 18

Competitors are most likely to react when the number of firms involved is small, when the product is uniform and when the buyers are well informed about products and prices.

Question 19

Responding to price changes

Answer 19

If the company decides that effective action can and should be taken, it might make any of four responses.

First, it could reduce its price to match the competitor’s price.

Alternatively, the company might maintain its price but raise the perceived value of its offer.

Or, the company might improve quality and increase price, moving its brand into a higher price–value position.

Finally, the company might launch a low-price ‘fighter brand’ – adding a lower-price item to the line or creating a separate lower-price brand.

Question 20

Public policy and pricing

Answer 20

In setting prices, companies usually are not free to charge whatever prices they wish. Many federal and state laws govern the rules of fair play in pricing.

Question 21

Federal legislation on price fixing

Answer 21

states that sellers must set prices without talking to competitors

Question 22

Sellers are also prohibited from using predatory pricing

Answer 22

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

Question 23

The Competition and Consumer Act 2010 seeks to prevent unfair price discrimination by

Answer 23

ensuring that sellers offer the same price terms to customers at a given level of trade

Question 24

Laws also prohibit retail (or resale) price maintenance

Answer 24

manufacturer cannot require dealers to charge a specified retail price for its product

Question 25

Deceptive pricing

Answer 25

occurs when a seller states prices or price savings that mislead consumers or are not actually available to consumers.