Unit 9 Flashcards
TEV
- true economic value
- what a fully informed buyer would pay for the product
PV
- perceived value
- What a consumer who might not be aware of all the benefits that the product claims to offer
- less than TEV
cost oriented pricing
pricing strategy in which the price of a product or service is set primarily based on its production and operational costs, with a markup added to ensure profitability. ( ignores, demand and competition)
cost plus pricing
Price=Cost+(Cost×Markup)
customer’s incentive to purchase=
perceived value - price
firm’s incentive to sell=
price - COGS
dynamic pricing methods
- control availability of the number of items can be sold at that price
- Set price based on buyer characteristics (senior discounts)
- transaction characteristics ( buying way ahead of time or buying in bulk)
- differ product line offerings (good, better, best)
What makes PV and TEV different to customers
- Tastes
- Nature of offering
- Intensity of use
- Competitive offerings
E > 1
elastic demand (more sensitive to changes in price)
- flatter
E < 1
Inelastic demand (less sensitive to changes in price)
- steeper
Importance of price
- price creates revenue
- price drives profitability
revenue=
price x sales units
Value oriented price thermometer
TEV: max price
PV: what a customer will pay
Product price: Firms incentive to sell= price-COGS
COGS: floor of price
dynamic pricing
Price is based on expected demand
Ex: flights
3 dimensions affecting price sensitivity
- product
- price
- buyer
Sensitive to price changes related to product
- alternatives are super comparable
- alternatives are super similar
- the product is not mission critical
- if these are true, you will care a lot about finding the cheapest option
Sensitive to price changes related to price
- easily comparable
- high relative to prices of other things (large investment of capital)
- reference prices exist in the market (anchors/ expectations of what a normal price would and should be)
- the price does not indicate the quality in this case
- if these are true, you will care a lot about finding the cheapest option
Sensitive to price changes related to buyer
- the buyer is sophisticated and knows a lot
- the buyers bears all the costs of the purchase
- ability to switch
- does not care about prestige
- if these are true, you will care a lot about finding the cheapest option
Elastic demand
a change is price causes a dramatic change in demand
- flatter demand curve
inelastic demand
a change in price does not cause a significant change in demand
- steeper demand curve
Unitary demand
change in price causes an equivalent change in demand ( 1 for 1 )
profitability overview
Profit= revenue- cost
revenue= price x units sold
cost= variable cost + fixed costs
variable costs= units x variable price per unit
fixed cost contribution=
price- average variable cost
2 pricing strategies
- cost oriented (less indicative of market trends)
- value oriented
2 key elements of value-oriented pricing
- value orientation= focus on what value a firm can create for a customer
- processes to capture value for the firm
Unit margin=
price we sell at – cost to make/purchase
or
revenue per unit – variable cost per unit
% margin=
unit margin / price we sell at
or
unit margin / revenue per unit
Price goes up, want
Inelastic demand
Price does down, want
elastic demand
price equilibrium
- demand curve and supply curve cross
- demand and supply are equal
- natural place markets are trying to get to
