Chapter 11 Flashcards
(34 cards)
What is Price?
This course: the amount of money charged for a product.
Broad - the total value that customers give up for the benefits of owning or using a product.
Relevance & Importance of pricing
consumers – price reflects their sacrifice (willingness to give up)
company – price is the sole source of revenue and signals quality
5 Cs of Pricing (Factors affecting pricing decisions)
- Company objectives
- Customers
- Competition
- Cost
- Channel members
Company objectives
- Profit Orientation: (i) target profit; (ii) target return; (iii) maximize profit
- Sales Orientation – low price
- Competitor Orientation – lower, higher or match
- Customer Orientation – premium pricing
c
income effect
change in the quantity of a product demanded by consumers because of a change in their income.
substitution effect
consumers’ ability to substitute other products for the focal brand, thus increasing the price elasticity of demand for the focal brand.
cross-price elasticity
the percentage change in demand for Product A that occurs in response to a percentage change in price of Product B.
- substitute and complementary products
Monopoly
one firm controls the market
utilities industry
Oligopoly
a handful of firms control the market
banking industry, retail gasoline industry, commercial airline travel
Monopolistic Competition
many firms selling differentiated products at different prices
Pure competition
many firms selling commodities for the same price
Channel members
- manufacturers, wholesalers and retailers can have a significant impact on pricing
- manufactures must protect against grey market transactions (often electronics)
Major Pricing Approaches
Value-based pricing: Consumer’s perceived value
Cost-based pricing: total costs to produce and sell
Competition-based pricing: competitor’s pricing strategy
Value-Based Pricing
– Price is based on value perception of consumers
– Measure consumer willingness to pay
– Improvement value method – Estimate the value of improvement (i.e., how does additional features of your product compare with other offerings?)
– Hybrid vs. gas cars
Cost-Based Pricing
- accounting for all possible costs in marketing the product and then adding a decided margin in determining the selling price
Concerns with cost-based pricing
Need to know all costs - fixed and variable costs
Ignoring consumer’s perceived value in your products leads to underpricing (e.g., Pet Rock)
Competition-Based Pricing
– firm bases its price on how it thinks competitors will price rather than on its own costs or on demand.
– more commonly observed in the B2B context
Concerns with competition-based pricing:
It can encourage firms to ignore their unique value proposition
It can lead to price wars with a focus on increasing market share – which does not necessarily lead to profits
New Product pricing
Market-Skimming Pricing
Market-Penetration Pricing
Market-Skimming Pricing
- setting a high price for a new product to skim maximum revenues, layer by layer, from segments willing to pay the high price
E.g., most tech-based FMCD (mobile phones, TVs, gaming consoles, etc.) - inelastic market, special product
Market-Penetration Pricing
- setting a low price for a new product in order to attract a large number of buyers and a large market share.
E.g., Jio launched mobile services in India at a very low price and became market leader in less than 3 years - economy of scale
Every Day Low Pricing
– keeps price consistently low, with very few temporary price promotions.
Encourages consumers to stick to one retailer – high loyalty
High-Low pricing
– high base price with frequent price specials
Encourages consumers to switch store switching but maybe no loyalty
Buy Now Pay Later (BNPL)
A payment installment option that lets consumers spread the cost of purchases over weeks or months
Price lining
Setting a line of price, starting from the floor price up to the ceiling price with some options in between, using different versions of the base product.
