Unit 9: Developing and Managing Pricing Decisions Flashcards
Pricing creates _________ whereas most marketing activities create _________.
revenue, costs
Pricing is perhaps the most important signal that the enterprise sends to the market about its _____________, so it must be _________ with the other marketing mix variables.
positioning, congruent
________ is the biggest indicator of quality.
Price
pricing is where the marketer shifts from __________ value for the customer to __________ value for the firm.
creating, capturing
Three different perspectives on price:
To the seller, price is revenue
To the consumer, price is the cost of something
Price allocates resources in a free-market economy
Therefore, a company’s ability to find ____________ in competing products is always more successful than merely _________ and hoping to make up the difference on sales volume.
meaningful differentiation. cutting price
Companies like Dell offered ______________, while Apple has added more ____________ for customers with every product and service introduction.
low cost, undifferentiated products
meaningful value
Your company makes high-end watches and is the most recognized brand in the market with a long history of perceived quality and status. Setting a __________ reinforces consumer notions of prestige and quality while maintaining ___________ for the company.
high price, high profitability
(PROFIT MAXIMIZATION)
Multiple product lines offering a variety of features at prices lower than the competition maximizes ________ which may lead to greater economies of scale, brand power and better return on investment.
market share
Your company is known for producing a large variety of good value cell phones at lower prices than the competition.
maximizing market share
introducing a car at a price significantly outside the established range may cause consumers to either question quality (at the ________) or value (at the ________).
low end, high end
Your company competes in a mature market for economy sedans. The market has well established price points ranging from $15,000 to $22,000.
maximizing competitive parity (status quo)
Most organizations typically price their offerings by applying a predetermined markup to its cost to make or obtain the product - an approach that is called __________ and fits within a category known as ___________
cost-plus pricing, cost-oriented pricing
That approach to pricing, though, does not take into account the most crucial aspect of how pricing actually works in the marketplace - the value of the offering as perceived by the customer, based on what they think it can do for them and how it compares with other offerings available to them.
cost-oriented pricing
____________ is harder and “requires a commitment to systematic, rigorous work,” but “the returns on that effort can be substantial,”
value-based pricing
_________ is that which is given up in an exchange to acquire a good or service
Price
Revenue
price charged to customers multiplied by the number of units sold
Price x Sales Unit = Revenue
Profit
Revenue minus expenses
Revenue - Costs = Profit
Profit drives….
growth, salary increases, and corporate investment
While not optimal, cost-oriented pricing is more prevalent because:
1.
2.
3.
- costs are relatively easy to estimate or measure
- easy to justify to stakeholders
- simplifies the pricing process
Basing the price of a product on its value to its chosen customers
Value-Oriented Pricing
2 key elements of value-oriented pricing:
- a value orientation: a focus on the economic value created by an organization’s product for a given customer
- set of processes to capture a portion of that value for the firm
at a given customer perceived value of our offering and a given cost of goods sold, we have to find some balance between the _____________ our offering (versus other competing offerings) and ___________________________ to this customer segment.
customer’s incentive to purchase, our firm’s incentive to sell the offering
In general, the more that the _______________ exceeds the _________, the greater the incentive is for the customer to make the purchase
customer’s perceived value, price
the more that the price exceeds our firms ______________ (which is the same thing as profit or margin), the more incentive our firm has to sell this product to this customer segment.
costs of goods sold
Using the value-pricing thermometer concept, pricing “too high” means pricing at a point that exceeds the ______________ when there is a negative incentive (or disincentive) for the customer to purchase our offering.
customer’s perceived value
A customer’s incentive to purchase is equal to:
perceived value (PV) minus price
A schematic often used to capture the key elements of value-based pricing is the __________________
value-pricing thermometer
Three critical inputs to any value-pricing decision:
- true economic value
- perceived value
- cost of goods sold
True Economic Value:
value a fully informed buyer would or should ascribe to the product (different by customer segments)
* cost of next best alternative + value of performance differential
Perceived Value:
value of the product as perceived by the customer and influenced by marketing efforts
Cost of Goods Sold:
typically represents the lower bound on the price an organization would be willing to set
However, an emerging trend in pricing across many industries is the use of ___________ implemented through ________________.
dynamic pricing, yield (or revenue) management systems
_____________ is an approach to pricing in which the posted price for an offering varies according to the current level of market demand.
Dynamic pricing
Of course, there are a number of reasons for why we would offer different prices to different customers at different times, a concept that is sometimes thought of as _______________.
price customization
The first good reason for adjusting pricing for different customer segments is that the ______________ and _______________ of any given offering can vary greatly across customers due to factors such as:
true economic value (TEV) and perceived value (PV)
tastes related to the offering
the nature of use of the offering
the intensity of use of the offering
competitive offerings of which the customer segment is aware
four tools that help organizations align prices with the value that specific customers or customer segments place on a product:
control the availability of prices by selectively presenting an offer to a particular group of customers but not to others.
set the price based on buyer characteristics, such as age, gender, location, or affiliation, when those characteristics correlate with the TEV and/or PV for an individual.
set the price based on transaction characteristics, such as quantity purchased, time of purchase, or method of payment, when those characteristics correlate with the TEV and/or PV for an individual.
manage the product-line offering such that the offered assortment provides increasing functionality at an increasing price, sometimes called a good/better/best strategy.
New Balance offers a variety of types of shoes to its customers at various price points, typically in 3 basic tiers, based on the quality of the material and components of the shoe. This is an example of managing the product line offering and is known as:
good/better/best strategy
price elasticity of demand =
Note that this formula usually results in a __________, but that is traditionally ignored because it is the __________ of the number that is of interest.
% change in quantity demanded/ % change in price
negative number, magnitude
___________ means any very small change in price results in a very large change in quantity demanded
Perfectly elastic
E = infinity sign
__________ means small changes in price cause large changes in quantity demanded
Relatively elastic
1 < E < infinity sign
___________ means any change in price is matched by an equal change in quantity demanded
Unit elastic
E = 1
___________ means any large changes in price cause small changes in quantity demanded
Relatively inelastic
0 < E < 1
____________ means quantity demanded does not change when price is changed
Perfectly inelastic
E = 0
Under relatively elastic demand conditions, price sensitivity is _______ and quantity demanded should be _____________ to small changes in price
high, very responsive
Relatively elastic demand is good for overall revenue for when we want to ______ prices, but not good when we want to _______ them
lower, raise
under relatively inelastic demand, the opposite is true - price sensitivity is ______ and the quantity demanded does ________ great with price
low, not vary
Relatively inelastic demand is good for overall revenue when we want to _________ prices, but not good when we want to _______ them
raise, lower
When calculating elasticity of demand (E), a relatively inelastic demand (0 < E < 1) indicates that:
large changes in price cause small changes in quantity demanded
elastic has a ________ line on graph
flatter
inelastic has a _________ line on graph
steeper
Product indicators of sensitivity to price include all of the following EXCEPT:
easy comparability
the ability to switch easily
performance as expected
low differentiation of alternatives
the ability to switch easily
All of the following are price indicators of customer price sensitivity EXCEPT:
the existence of reference prices
performance as expected
easy comparability
high in a relative sense
performance as expected
_____________ helps understand how much sales volume is required to cover fixed and variable costs fully (the point at which we breakeven) and, therefore, the sales volume at which we can start to realize profitability.
Breakeven analysis
____________ vary with unit production or unit sales, such as materials included in product or sales commissions.
Variable costs
__________, like a manufacturing plant, do not vary with unit production or unit sales
Fixed costs
Break-Even Quantity =
total fixed costs/fixed cost contribution
fixed cost contribution =
price - avg. variable cost
The point at which total revenue equals total costs is the __________________.
break-even point
Factory labor:
Variable Cost
Accountant salaries:
Fixed Cost
Manufacturing equipment:
Fixed Cost
Sales commissions:
Variable Cost
Utilities:
Fixed Cost
Office computers:
Fixed Cost
Materials:
Variable Cost
IKEA has a breakeven volume of 100,000 units for their new AGUNNARYD lamp. The variable cost per unit is $75 and the revenue per unit is $99.99. The fixed costs are:
$2,499,000
Marketers often use which of the following techniques to determine the impact of a price on volume required to reach profitability?
Breakeven Analysis
The demand curve suggests that an auto manufacturer will sell 20,000 Mercedes-Benz M-Class vehicles when they are priced at $50,800, but when the price is reduced to $45,000, that quantity will increase to 27,000 units. What is the resulting elasticity?
-3.07
the degree to which an individual’s willingness to purchase changes with a change in price.
price sensitivity
a conceptual tool used to assess the change in unit sales required to maintain profitability in light of a change in product price
marginal math
a product or service with features and characteristics easily evaluated before purchase
search goods
_________ goods are more subject to substitution and price competition than ___________ goods
search, experience
customers incentive to purchase =
perceived value (PV) - price
firm’s incentive to sell =
price - cost of goods sold
unit margin =
price we sell at - cost to make/purchase
percentage margin =
unit margin / price we sell at
pricing approach where posted price is based on
expected demand and typically useful for “perishable”
products/services (e.g., airline seats)
yield management system
The price at which demand and supply are equal.
price equilibrium
Consumers’ responsiveness or sensitivity to changes in price.
elasticity of demand
Price sensitivity is high if…
Product:
- Low differentiation of alternatives
- Easy comparability
- Will perform as expected
- Not mission-critical
Price sensitivity is high if…
Buyer
- Sophisticated, deliberative
- Bearing costs
- Able to switch easily
- Not motivated by prestige
