Topic 7 - Price Flashcards
price
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.
three main pricing strategies
(1) customer value-based pricing,
(2) cost-based pricing and
(3) competition-based pricing.
Customer value-based pricing
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.
two types of value-based pricing:
good-value pricing and value-added pricing
good-value pricing
Offering just the right combination of quality and good service that customers want at a fair price.
Value-added pricing
companies attach value-added features and services to differentiate their offers and thus support higher prices
Cost-based pricing
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
Competition-based pricing
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.
Effective, customer-oriented pricing involves
understanding how much value consumers place on the benefits they receive from the product and setting a price that captures that value.
A company’s costs take two forms:
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.
In assessing competitors’ pricing strategies, the company
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.
Pricing strategies in The introductory stage. They can choose between two broad strategies:
1) market-skimming pricing and
(2) market-penetration pricing
Market-skimming pricing
Many companies that invent new products set high initial prices to ‘skim’ revenues layer by layer from the market
Market-penetration pricing
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
Price changes
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.
Initiating price changes
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
Buyer reactions to price changes
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.
Competitor reactions to price changes
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.
Responding to price changes
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.
Public policy and pricing
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.
Federal legislation on price fixing
states that sellers must set prices without talking to competitors
Sellers are also prohibited from using predatory pricing
selling below cost with the intention of punishing a competitor or gaining higher long-run profits by putting competitors out of business
The Competition and Consumer Act 2010 seeks to prevent unfair price discrimination by
ensuring that sellers offer the same price terms to customers at a given level of trade
Laws also prohibit retail (or resale) price maintenance
manufacturer cannot require dealers to charge a specified retail price for its product
Deceptive pricing
occurs when a seller states prices or price savings that mislead consumers or are not actually available to consumers.
