Week 6 - Price Flashcards
What is Price
Price is the measure of value to both buyers and sellers
- Buyers need prices that reflect product worth and what they can pay
- Sellers need prices to cover their costs and provide sufficient profit margin to justify the risk
Price (2)
Price is directly related to profitability
Profit= (Price x sales volume) - total costs
serves as the visible expression of value
Intricacies of Pricing
Price shoppers/ price seekers will always be a key market segment in all markets
In today’s internet-driven markets, price shopping has become a more dominant market driver
Other segments seek lower prices for greater value (Price Aversion)
Price Shopper
Someone concerned about the price when shopping (constantly looking for bargain shopping)
Price Seeker
Somone who prioritise getting fair or reasonable prices for the product
Determining Pricing objectives
More specific tend to focus on various combinations on various combinations of the following issues
- Profitability
- Long-term prosperity
- market share
- positioning
- What the customer is prepared to pay
Pricing Objectives
Pricing objectives should be Specific, Measurable, Actionable, Reasonable, Timetabled (SMART)
Not-For-Profit Pricing
Their pricing objectives may be to generate enough funds to sustain their activities
Alternatively, a not-for-profit organisation may price its product to make them appealing to their target market
In such circumstances, state and provincial government will often subsidise such loss-making services as part of their ‘service obligation’
The legal environment
A number of government regulations and laws seek to prevent activities aimed at controlling or manipulating prices
Under Australian Consumer Law, there is a clear intention and expectation that pricing to consumers should be explicit and transparent
Consumers should not be the subject of deception or discrimination, they should know clearly the total price before purchasing
Selecting the pricing method
The value of the product to the customer places a ceiling price (maximum customer is willing to pay)
The organisation must ensure it obtains value from the marketing exchange.
The organisation’s cost to make the product sets a floor on prices (minimum price)
Organisations must make pricing decisions that make their products competitive in the marketplace.
What can the price be based upon
Price can be based upon
- costs
- demand
- competition
Demand Pricing (Demand Considerations)
Demand exists when consumers are willing and able to buy a product
Demand rises when it can fulfil an unsatisfied need or want
Demand-Based Pricing
Sets prices according to the level of aggregate/individual customer demand in the market
Surge Pricing
based on the immediate/current market demand
The demand Schedule
A table that shows the actual or estimated quantity demanded for particular prices
Demand relationship with price
For the vast majority of products, there is an inverse relationship between price and quantity sold, as price rises, the quantity sold falls and vice versa
The demand curve
The demand curve has a downward or negative slope
Prestige Products and the Demand Curve
Prestige products do not follow the down curve due to perceived value/exclusivity, perceived quality, luxury, and status signalling. Lowering the price of these products can make them seem less exclusive, decrease in quality and make them lose their appeal as a status symbol
Price elasticity of demand
The sensitivity of the quantity demanded to changes in price is known as the elasticity of demand
Price elasticity of demand varies from product to product and industry to industry
Price elasticity of demand formula
Price elasticity of demand = percentage change in quantity demand / the percentage change in price
Price elasticity of demand (price sensitive)
Demand is said to be price elastic if the price elasticity is greater than 1, thus making it price-sensitive
i.e. if the percentage change in the quantity demanded
exceeds the percentage change in the price
Price elasticity of demand (price insensitive)
Demand is said to be price inelastic if the price elasticity is less than 1, thus making it price-insensitive
i.e. if the percentage change in the quantity demanded
is less than the percentage change in price
Ethical issues of demand-based pricing
Demand-based pricing can often lead to very high
profits, but can lead to other problems
Would it be ethical to increase the price of insulin by
1,000%?
Cost based Pricing
The selling organisation adds a percentage or dollar amount to the cost of the product
Cost-based pricing (Cost-plus pricing)
often used when it is difficult or impossible to
determine the costs of the product until it has been made or
completed
SellingPrice = Cost + (Cost × MarkupPercentage)
Cost-based pricing (Markup pricing)
Used by wholesalers and retailers and involves adding a percentage of their purchase cost to determine the resale price
ResalePrice=PurchaseCost×(1+MarkupPercentage)
Cost and Revenue Analysis
Costs established a price floor (minimum), below which prices are not sustainable for a for-profit organisation
Price floor is something that can introduced by the government.
Cost and Revenue Analysis (Price leader)
If priced near the cost, a product is called a price leader
Cost and Revenue Analysis (Loss leader)
If priced below the cost, a product is called a loss leader
Break-even analysis
A break-even analysis determines the volume of unit sales at which total costs equals total revenue. This is known as the break-even point. (BEP)
The Quantity at which Total Revenue = Total Cost
Firms start making profit after the BEP
Price x Quantity = Total Fixed Cost + Total Variable Cost
Break Even Point formula
BEP = Fixed Cost / (Unit Price - Unit Variable Cost)
Fixed cost = What has to be paid
Unit Price = What the product is selling at
Unit variable cost = how much of the materials was used
Break even example:
A pizza maker spends:
* $500 on rent
* $200 on insurance
* $300 on utilities.
When he makes one pizza, it costs him $5 worth of material
(flour, water, cheese, etc.).
He has priced his pizzas at $15. What is BEP
BEP = (500+200+300) / (15-5)
= 1000 / 10
BEP = 100 pizzas
What is Marginal analysis and when is it useful
Understanding the effect on costs and revenue when a company produces and sells one more unit of product
Can be useful in pricing individual units of output or to individual buyers
Marginal analysis
Profit is maximised by selling the quantity at which marginal cost equals marginal revenue
Marginal analysis requires detailed data on actual and estimated costs and revenues at all volumes and prices.
Competition Pricing Considerations
involves setting prices based on the prices charged by competitors
Competition-Based Pricing serves to ensure that an organisation maintains its sales volumes and market share, but does not guarantee profitability
In price-sensitive industries, organisations monitor their competitors’ prices on a daily or even more frequent basis.
Understanding Competitor’s Pricing
The likely response of competitors to the organisation’s pricing will in part, be determined by the competitive structure of the industry
- Oligopoly
- Monopoly
- Perfectly competitive
What are alternatives to competing on price
Organisations with a strategy of differentiation of their products, such as uniqueness, quality, brand, image or service
When it is feasible, non‐price competition is clearly
preferable to price competition as it gives the organisation
greater power to decide on the profit margin per unit sold
What is Business-to business pricing
It is marketing relationships between suppliers and organisational buyers that tend to be close, long term and formal in nature
Pricing is often more complex and open to negotiation in business markets than the consumer market
What is Pricing for intermediaries
Organisation will only choose to deal with intermediaries who can add value to the organisation’s offering
Most producers recommend a final retail price tat consumer should pay but each intermediary needs to make profit
To ensure the profitable operation of the various partners involved in getting products from the produce to the consumer or organisational buyer, various discounts apply to transactions in business markerts
What is price management
It is the consumer purchasing behaviour that is usually based on a rational evaluation of the value of a product varying between individual consumers
An essential indicator of the importance of price in consumers’ purchasing decisions is the perceived uniqueness or differentiation of the product.
Different market segments will have varying levels of sensitivity to price
What is Penetration Pricing (Pricing new products)
A method that uses a low launch price below the market price to gain:
maximum sales volume
rapid market share
turnover of a new product
What is Price skimming (Pricing new products)
Charging the highest price that the customer who most desires the product is willing to pay
Over time, the price is lowered to bring in larger
numbers of buyers, again at the highest prices that
these buyers are willing to pay.
What is differential pricing (Pricing established products)
The practice of charging different buyers different prices for the same (or equivalent) product.
e.g. student discounts, senior citizen discounts
What is special event pricing
Links discounted prices across an organisation’s entire range with some special or seasonal event.
e.g. End-of-season sales, Christmas sales, black friday
What is promotional pricing
Pricing strategy combined with promotional activities to attract customers and drive short-term sales.
e.g. Flash sales, Buy-1-get-1-free, coupon codes
How to set and manage the final price
Once implemented, the price must always be
monitored as factors can change over time
(Demand, customer perceived value, cost of production, competitors price, market conditions, regulatory and legal, product life cycle)
Pricing is perhaps the most flexible element of the
marketing mix. This flexibility ensures that pricing is
the most dynamic and volatile element of the
marketing mix.
The internet has made prices more visible, more
flexible and, consequently, more competitive than
ever before
