Flashcards in Chapter 10: Pricing Strategy Deck (35):
How is PRICE important to a company?
Price influences demand, perceptions of quality, and profitability for the firm. The higher we push the price, the better job we have done in uncovering consumer needs and designing the right marketing mix.
What is PRICE?
It is the money exchanged for a product or service.
It is the most abstract of the marketing mix. It signals product quality and status. It is inherently subjective and tied to consumers' perceptions rather than objective reality.
What are BARTERING SITUATIONS?
Products and services are exchanged for other products and services.
What is the sweet spot or possible price range for a product/service?
Above the seller's cost of goods sold and below the buyer's perceived value. In the end, customers prefer the product with the greatest differential of perceived value to price.
How to consumers determine value?
Benefits - costs of acquiring
What are the 4 marketing efforts that affect perceived value?
1. Reference Prices (Internal and external)
3. Substitutes (similar benefits)
4. Marketing Efforts (quality, channels of distribution, service levels)
What are FIXED COSTS?
Do not vary with different quantities produced/sold.
What are VARIABLE COSTS?
Vary with output level quantity.
How do you compute for UNIT CONTRIBUTION?
Unit price - Unit variable cost = Unit contribution
How do you compute for TOTAL CONTRIBUTION?
Unit contribution X # of units sold = Total contribution (net income)
How do you compute for TOTAL COST?
(Fixed cost + Variable Cost) X quantity = Total Cost
How do you compute for PROFIT?
Profit = Total Revenue - Total Cost
What are the 3 profit drivers?
What is the break-even analysis?
When total costs = total revenue. No profits, no losses.
What two pricing strategies are at the ends of the pricing-strategy scale?
Price Skimming (high) & Price Penetration (low)
What is PRICE SKIMMING?
Marketers set a relative high price to obtain high margins (consumer surplus) at the expense of sales quantity (demand).
As demand for high-paying customers is satisfied, price is lowered to capture consumer surplus from the next group of customers (Blu-Ray players first came out vs today's prices)
What is PRICE PENETRATION?
Marketers set a relatively low entry price to capture market share quickly. Lower prices discourage entry of competitors and reduce costs per unit.
Explain Coca-Cola vs Toilet Paper.
Coca-Cola is a product that is consumed more, the more of it is available in a house-hold.
Toilet paper use, regardless of availability, is generally unchanging.
When is PROMOTIONAL PRICING a good idea?
When the more a product a customer has, the faster they consume it (Coca-Cola). The goal is to give away a little profit now to earn greater and greater returns in the future.
What are the 4 approaches to pricing?
2. Golden Goose
What 3 things must we understand to arrive at an appropriate pricing policy?
1. Our costs
2. Our competitors
3. Our customers
What is COST-PLUS pricing?
Knowing your own costs but not much else. The trouble with this method is that product costs are irrelevant to customers.
What is COMPETITIVE pricing?
Know own costs and a lot about competitors (but not about customers). Using a price from other companies with similarly valued products. The key in applying a competitive pricing approach is tackling the question of reference prices. (Resort vs gas station, buying situations)
Companies then set prices depending on extra risk/extra value they believe they offer.
What are the 3 types of buying RISKS people consider?
1. Financial - Will this purchase end up in a financial loss?
2. Physical - Will this end up physically harming me/family?
3. Psychological - Will this purchase make me look bad to community/peers?
High Risk sets a low threshold on acceptable price.
What are the 3 types of VALUE people consider?
1. Functional - Purchase will provide more features/functionality.
2. Economic - Purchase will save me money.
3. Emotional - Product will make me feel more accepted, admired, assured, etc.
High value sets a high threshold on acceptable price.
What is GOLDEN GOOSE pricing?
Know own costs, and a lot about customer value. (But not competitors) Charging a higher price for a "golden-goose" product/service that eventually attracts competitors willing to deliver something similar for less.
Experienced marketers know what about a golden goose?
You should slowly harvest the golden eggs. This can be done by running value well ahead of price.
What is VALUE pricing?
Know own costs and a lot about customer value, and competitors. Charging a price that is high enough to capture a lot of customer value, but not so high as to encourage business-crushing competition.
What must accompany raising and lowering prices?
A good set of reasons.
Which of the marketing mix has the most profound influence on price?
PLACE. Learn to deliver the right product when and where people want it the most and be rewarded by earning a premium.
What are the 5 basic steps in setting price?
1. Select the pricing objective
2. Determine demand
3. Estimate company costs
4. Know competitors' prices
5. Select pricing method
What is PRICE ELASTICITY OF DEMAND?
Measures how sensitive consumer demand is to change in price. The more elastic something is, the more volatile demand can change if price changes.
What is PRICE LINING?
Different prices for different products in a product line.
What is YIELD MANAGEMENT pricing?
Match demand and supply for set capacity