Week 8 - Pricing Decisions Flashcards
Week 8 Key Concepts and Objectives
- What methods companies use to price offerings
- A comprehensive approach to developing pricing strategy
- Strategies for adapting your prices for promotions and as responses to competitor price attacks
What are 2 price factors to consider for the remote environment
- Overall economic climate
- Regulatory environment
- Horizontal price fixing (Colluding with competitors)
- Vertical price fixing (resale price maintenance, dictating to channel partners a
minimum price)
– Deceptive pricing (bait and switch)
– Predatory pricing (cutting prices dramatically with the intent of destroying
competition)
What are the pricing strategies to take note for near environment?
- What are your competitors’ basic strategies?
- What are their relative price/differentiation positions?
- How successful are they with their pricing strategy?
- What pricing moves are expected?
What are the 4 types of internal costs to take note?
- Variable costs (costs that vary by volume) vs. fixed costs (costs that have to be paid no matter how much you produce)
- Volume effect on cost (economies of scale)
- Experience effect (learning curves)
- Controls over costs
What are the steps to strategically setting costs
- Goals and Objectives
- Gain market position (sales/market share)
- Achieve profitability goals
- Product positioning (increase prestige image)
- Stimulate demand tactically (in a recession a short term cut)
- Influence competition (discourage market entry)
(Or a combination of these) - Set the price point
- situational analysis to arrive at final number - Decide how much to talk about it
- Plot matrix based on Role of price and Price Level - High Active
- Low Active
- high Passive
- Low Passive
What are the 3 methods of pricing and their respective advantages and disadvantages
- Cost Based pricing (Solely based on internal costs)
Advantage: Simple
Disadvantage: Does not take into account external market forces - Value Based Pricing (Based on consumers perception of pains and gains)
Advantages: Good way to “sell” pricing and works best in growth stage of PLC to justify higher price
Disadvantages: Data on what represents “value” may not always be easily available or 100% accurate - Competition based pricing (Prices are based on external requirements)
- head on pricing (Change exactly the same price as competitor)
- Competition pricing (Lower or increase the price based on competition)
Advantages: Appeal from competitors (Contextual)
Disadvantages: May not take into account competitors internal cost structures
Name the 4 types of pricing strategies
- Differential Pricing
- Single vs multiple prices - New Product price Strategies
- Penetration vs skimming - Product line pricing
- Maximising profits for entire line - Adaptive Pricing
- Promo pricing and responding to competitive price attacks
Describe Differential pricing and it’s 2 types
Charging different prices to different buyers for the same quality and quantity of product
- Negotiated pricing: establishing a final price
through bargaining - Secondary-market pricing: setting one price for
the primary target market and a different price
for another market
– Often the price charged in the secondary
market is lower.
Describe New Product Strategies and it’s describe it’s 2 types alongside when to use and their advantages and disadvantages
- Penetration
- Setting prices below those of competing brands to penetrate a market and gain significant market share quickly
- Product priced as low as possible
- Gather market share early and increase margins later
When To Use:
- Consumers are price sensitive but theres mass appeal
- Economies of scale
- Competitive threat can be managed
Advantages:
- Increase market share which is expected to lead to long-run profitability
Disadvantages:
- Forgo short term profits
- High promo/advertising expenditures needed
Real life Example: Amazon
- Skimming
- Charging the highest possible price that buyers who most desire the product will pay
- price as high as possible to make early profits
When to use:
- Small but sufficient initial audience expected
- Unit cost of producing is not too high
- High competition expected medium term
- barriers of entry not sustainable
Advantages:
- Makes money and covers NPD cost
- Quality image
Disadvantages
- Consumer alienation after price drop
- If price drop too late, quick comp reactions will lower sales
Describe product line pricing and it’s 4 strategies
Product line pricing is set to maximise profits for an entire line. It is done by establishing and adjusting prices of multiple products within a product line.
- Captive pricing: Pricing the basic product in a product
line low while pricing related items at a higher level - Premium pricing: Pricing the highest-quality or most
versatile products higher than other models in the
product line - Bait or Entry level pricing: Pricing an item in the
product line low with the intention of selling a higher-
priced item in the line - Price lining: Setting a limited number of prices for
selected groups or lines of merchandise
Describe adaptive pricing and it’s 2 components
- Promotional Pricing
- Price leaders – Product priced below the usual markup, near cost or below cost
- Comparison pricing/discounting – Setting a price at a specific level and comparing it
with a higher price
Determination of Specific price? Price Discounts + Reductions
Examples:
* Special-event pricing – Advertised sales or price cutting linked to a holiday, season or
event
* Seasonal discounts – A seasonal discount is a price reduction to buyers buying goods or
services out of season.
* Quantity discounts – Quantity discounts are deductions from list price for purchasing in
large quantities.
- Competitive Pricing
Reasons:
- competitors launch a sudden price attack
- Price war is detrimental to the profitability of both players (the entire industry)
Responses:
Short-term -> Price Match
Long-term -> Achieve superior cost efficiencies (Price response) or Differentiate/diversify product (Non-Price response)
