Chapter 10: Pricing and value proposition

Question 1

Major pricing strategies;

Answer 1

1. Customer value-based pricing
2. Cost-based pricing
3. Competition-based pricing

Question 2

Short-run average cost curve (SRAC) and long-run average cost curve (LRAC):

Answer 2

The SRAC (Short-Run Average Cost) curve shows how average cost per unit changes with output when at least one input is fixed. The LRAC (Long-Run Average Cost) curve shows the lowest possible average cost when all inputs are variable, representing the most efficient production scale over time.

Question 3

External factors – the market and demand. Four types of markets, each with different pricing challenges:

Answer 3

1. Pure competition: Many buyers and sellers trade a uniform product.
2. Monopolistic competition: many buyers and sellers trade differentiated products at varied prices.
3. Oligopolistic competition: A few large sellers dominate the market. Each is highly sensitive to competitors’ pricing and marketing strategies.
4. Pure monopoly: a single seller controls the market.

Question 4

Discounting, 5 types:

Answer 4

• Trade discounts: a trade or a functional discount is a reduction of the list price given by a producer to an intermediary for performing certain functions.
• Quantity discounts.
• Cash discounts.
• Seasonal discounts.
• Allowances: a concession in price to achieve a desired goal.

Question 5

Geographical pricing (pricing involves reductions for transport of other costs associated with the physical distance between the buyer and the seller). 3 types:

Answer 5

• Zone pricing
• Incoterms: define cost responsibility in international shipping.
• Regional variation.

Question 6

Other pricing strategies:

Answer 6

• Transfer pricing: type of pricing used when one business unit of a company sells a product to another unit within the same company.
• Full cost/standard cost pricing: based on actual or forecasted cost plus margin.
• Price discrimination.

Question 7

Pricing stages:

Answer 7

1. Pricing objectives (such as: covering basic costs, etc)
2. Assessing the target market’s evaluation of price and its ability to buy.
3. Determining demand
4. Analysis of demand, cost, profit, and relationships
5. Competitor pricing
6. Selecting a basis for pricing
7. Selecting a pricing strategy

Question 8

Psychological pricing

Answer 8

• Reference pricing (anchoring): displaying a higher “original” price next to a lower sales price.
• Bundle pricing: selling multiple combined with discount.
• Multiple-unit pricing: encouraging bulk purchases.
• Everyday low pricing (EDLP)
• Odd/even pricing: 9.99
• Customary pricing: setting prices at levels traditionally accepted by consumers.
• Prestige pricing: setting high prices to signal quality or luxury.