chapter 12 Flashcards
(28 cards)
Pricing
is a unique element of the marketing mix
Price can be changed quickly
Affects profit, perception of product, who buys it
Generates competitive reactions
May be constrained by governments
in order to develop an effective pricing strategy. We should take into consideration:
- perceived value
-cost of the product
-company and the marketing strategy
-competition
-product mix
-resellers
-legislation and ethics
Price discrimination
charging different buyers (for example, customers in different regions or purchasing at different points in time) different prices for the same quantity and quality of products or services
Variable costs
such as the costs of the raw materials
is a cost that varies directly with the number of units produced and marketed
Fixed costs
tend to remain stable at any production level- rent, lease payments and insurance premiums
Competition
when launching a new product- a high introductory price may encourage other companies, attratced by the high returns, to introduce similar product
In contrast a low price- with a modest profit margin- will make competitors less inclined to enter the market
Most companies follow a price reduction by the price leader, but not necessarilit a price increase
If competitors do not follow suit, the company initiating the price hike may see its customers switch to other suppliers
Product mix
A company keeps the price of its main product low to attract the customer
Revenue
is the per nuit price multiplied by the number of units sold
The marketer must set a price for his product that generates enough revenue to cover the costs of producing and marketing it, and to allow for a satisfactory profit
If the price is high there is littler demand but plenty of supply (this increases competition) it also creates a downward pressure on prices, as a result of which more consumers will buy the product - the demand will go up
Price mechanism- the price decrease due to the more intense competition will lead to lower margins (difference between the selling price of a product and the cost of producing or purchasing it) and to a reduction in market supply
The demand curve shows the maximum number of products that customers will buy in the market during a period of time at various prices if all other factors remain the same
Price skimming strategy
is a strategy of introducing a new product at an artificially high price. This is a price level that the market will not be able to sustain in the long run
Price skimming (or market-skimming pricing) gets its name from the expression “skimming the cream off the top”
“works best for new types of durable consumer goods, such as high-tech cellular phones, from which prestige buyers derive a status”
Is often used with product differentiation stategy
+
-It makes possible for the company to segment the market according to price sensitivity or acceptable cost to consumers
The initial cash flow allows the firm to recover development costs quickly
PENETRATION PRICE STRATEGY
This strategy is the opposite of price skimming
This is when a company introduces a new product at a very low price to speed us its market acceptance and drive sales upward
SKIM vs PEN
Initial price- high, low
Consumers are not price senstitive (inelastic demand) Consumers are sensitive (elastic demand)
Product is uniqe without many substitutes, strong competition is expected soon after the product launch
Elite market allows high introductory prices and segmentation based on price sensitivity, Large sales volume will lead to lower costs per unit (economies of scale)
Objective is to maximise sales revenues and profits across segments/ Objective is to maximise market share, while expanding demand
Price Skimming
Price skimming is a strategy where a company sets a high initial price for a new product to maximize profits from early adopters who are willing to pay more, and then gradually lowers the price over time.
Example:
Smartphones: When a new iPhone model is released, Apple often sets a high price for the latest version to target early adopters who want the newest technology. As time passes and newer models are introduced, the price of the older model is reduced to attract more price-sensitive customers.
A new car model might choose a price skimming strategy for several reasons:
Recouping R&D Costs: Launching a new car model involves high research and development (R&D) expenses, especially for innovative features or technologies. By setting an initially high price, the company can recover some of these costs more quickly.
Positioning as a Premium or Innovative Model: A high initial price helps position the car as exclusive or cutting-edge, appealing to early adopters or status-driven consumers who are willing to pay more for the latest technology or design.
Targeting Less Price-Sensitive Buyers First: Early adopters are often less sensitive to price, especially in markets where consumers are willing to pay more to be among the first to own a new model. This allows the company to maximize profits from this segment before lowering the price to attract more price-sensitive buyers.
Creating an Aura of Exclusivity: Price skimming can create a perception of luxury or exclusivity, which can enhance the brand’s image and appeal, especially for premium or luxury models.
Capitalizing on Limited Supply: If the initial supply of the car model is limited, a high price can help manage demand until production ramps up, preventing potential shortages or long wait times for customers.
Flexibility for Future Price Reductions: Starting with a higher price provides room to lower it gradually over time, allowing the company to reach new customer segments without devaluing the product in the eyes of early buyers.
In summary, price skimming allows the company to maximize initial profits, position the car as a premium product, and strategically manage demand, all while capturing different market segments over time as the price decreases.A new car model might choose a price skimming strategy for several reasons:
Penetration Pricing
Penetration pricing is a strategy where a company sets a low initial price for a product to quickly attract customers and gain market share, with the intention of raising prices later once a solid customer base is established.
Example:
Streaming Services: When a new streaming service like Disney+ launched, it offered a low subscription rate compared to established competitors like Netflix. This low initial price aimed to attract a large number of subscribers quickly, making it more appealing for users to switch to or try the new service. Once a significant number of subscribers were acquired, the company could gradually increase the price.
A new car model might choose a price penetration strategy for several key reasons:
Gaining Market Share Quickly: By offering the car at a lower price, the company can attract a large number of customers right from the start. This is especially useful in a competitive market where established brands dominate.
Building Brand Awareness: A lower price makes the model more accessible, helping the new model (or brand) gain visibility and consumer interest. This can be particularly beneficial if the brand or model is less known or is entering a new market segment.
Discouraging Competition: Competitors may be less likely to release competing models or lower their prices if the new model has already captured a significant share at an attractive price point. Price penetration can act as a barrier to entry.
Economies of Scale: Selling at a lower price and higher volume can allow the company to increase production, which may lead to reduced manufacturing costs per unit over time. This increase in volume can eventually help make the car more profitable.
Customer Loyalty and Future Profitability: Attracting new buyers early on can help create a loyal customer base. Once these customers have had a positive experience with the brand, they may be more likely to buy additional products or higher-end models in the future, allowing the company to gradually increase prices.
Maximizing Adoption in Price-Sensitive Segments: If the target market includes price-sensitive consumers, a penetration strategy allows the model to reach these buyers who might not otherwise consider a new or less well-known car brand.
In summary, a price penetration strategy helps the new car model establish itself in the market, quickly build customer loyalty, and leverage economies of scale while creating a competitive edge.
Summary
Price Skimming targets early adopters with high prices, like new smartphones.
Penetration Pricing attracts a large customer base quickly with low prices, like new streaming services.
PRICING METHODS- Cost-oriented pricing
Most companies establish. the price of their products based on costs
Two types of cost-based pricing:
- Cost-plus pricing (total fixed costs+total variable costs+projected profit/ unit produced)
-Mark-up pricing (product costs/ 100- mark-up percentage) : 100) (used mainly by trading companies, bars and restaurants)
This type includes both fixed and variable costs in the price and adds a bit extra for profit. There are two ways to do it:
Cost-Plus Pricing
How it works: Add a percentage or fixed amount to the cost of the product to ensure a profit.
Example: If it costs $100 to make a product, and the company wants a 20% profit, they set the price at $120.
Mark-Up Pricing
How it works: The seller sets a percentage increase over their cost. This is common in retail.
Example: A store buys a shirt for $20. They add a 50% markup, so the selling price is $30 ($20 + 50% of $20).
Cost-oriented pricing second type: variable-cost pricing
What it is: The price is based only on costs that change depending on how much is produced, like materials or labor costs.
When it’s used: Usually when a company needs to make a quick sale or when competition is intense, and they want to keep prices low. They only cover these changing costs, not things like rent or salaries.
Example: Let’s say a product costs $5 in materials and labor each time it’s made. The company might set the price at $5 or a little more, just to make sure they cover those immediate costs.
Cost oriented: targer-return pricing
Target Return Pricing is a cost-oriented pricing method where a company sets prices to achieve a specific profit goal or return on investment (ROI).
How It Works: Start with the total cost of production, then add a markup designed to meet the target profit.
Example: If a company wants a 20% return on a $500,000 investment, it sets prices to generate an additional $100,000 in profit.
Key Points:
Focuses on covering costs and meeting profit targets.
Useful for companies aiming for specific financial goals.
Still needs to consider customer demand to ensure prices remain competitive.
This approach aligns costs with a desired return, balancing financial objectives and market demand.
Summary:
Variable Cost Pricing: Covers only the direct, changeable costs.
Cost-Based Pricing: Covers all costs and adds a profit with cost-plus (adding a percentage to total cost) or markup (adding a percentage to purchase cost).
DEMAND ORIENTED PRICING
Price based on the price level that intended buyers are willing to pay, rather than on the basis of their own costs
To better understand the nature of demand, we look at customers’ price sensitivity or the price elasticity of the demand
Price elasticity of demand
measures the degree to which customers are sensitive to changes in price. Price elasticity is when a percentile price reduction results in a percentile increase in sales that is higher than the price reduction
If the demand curve in the graph is horizontal the product is said to have perfectly or totally elastic demand
Understanding price elasticity is crucial. This concept tells you how sensitive customers are to price changes:
Elastic Demand: If a small price change leads to a big change in demand (like for non-essential goods).
Inelastic Demand: If demand barely changes with a price shift (common for necessities or unique products).
Price lining
Price Lining is a pricing strategy where a business sets multiple price points for a product line, offering different options at distinct prices. This method helps segment products to appeal to various customer budgets and preferences.
Key Features of Price Lining:
Multiple Price Tiers: The business offers a “good-better-best” range, with each tier increasing in features or quality, which justifies the higher prices.
Customer Choice: It simplifies the buying decision by presenting clear price options, making it easier for customers to pick the product that best fits their needs and budget.
Perceived Value: By clearly defining quality and pricing differences, it enhances perceived value, often leading customers to opt for the mid-range or premium options.
Example:
In a shoe store, there might be three price levels:
$50: Basic model with essential features.
$100: Mid-tier model with added comfort and design.
$200: Premium model with advanced materials and exclusive designs.
Benefits of Price Lining:
Increases accessibility to different customer segments.
Encourages upselling by showing higher-value options.
Creates a structured pricing system that’s easy for customers to understand.
Price lining helps businesses appeal to a broader audience and maximize sales across various customer segments.
Price differentiation
Price Differentiation is a pricing strategy where a business sells the same product at different prices to different customer segments, based on factors like location, purchase time, or buyer characteristics. This approach is used to maximize revenue by aligning prices with what each segment is willing to pay.
Key Features of Price Differentiation:
Different Prices for the Same Product: Unlike a fixed price, the same product or service is offered at different price points to various customer groups.
Tailored to Segments: Prices vary based on factors like geography, customer type, purchase time, or purchase volume.
Maximizes Revenue: By adjusting prices, companies can capture a larger share of the market, including budget-sensitive customers and those willing to pay more.
Example:
An airline might charge:
$100 for early bookings.
$150 for last-minute bookings.
$80 for group bookings, offering a discount to larger groups.
Benefits of Price Differentiation:
Increases sales by attracting diverse customer segments.
Optimizes profits by capturing higher prices from less price-sensitive customers.
Enhances flexibility, allowing companies to respond to market demand or seasonal changes.
Price Differentiation helps businesses tailor prices to different customer needs, improving accessibility and boosting overall profitability by aligning prices with customers’ willingness to pay.
is vadovelio: customer-type pricing, product form pricing, location based pricing, time pricing
- Customer-Type Pricing
This pricing strategy offers different prices based on customer characteristics or segments.
Example: Student Discounts: Many retailers, software companies, and services (like movie theaters or museums) offer reduced prices for students to encourage attendance and make their products more accessible.
Example: Senior Discounts: Restaurants often provide discounted meals for senior citizens, making dining more affordable for that demographic.
2. Product Form Pricing
This involves charging different prices for different versions or forms of a product, even if they serve a similar purpose.
Example: Beverages: A company might sell the same drink in various sizes:
Small: $2.00
Medium: $3.00
Large: $4.00
Example: Cosmetics: A skincare brand may offer different formulations of the same product (e.g., cream, gel, or lotion) at different price points based on the form and packaging.
3. Location-Based Pricing
Pricing varies based on the geographical location of the customer or the market.
Example: Gas Prices: Fuel prices can differ significantly by location. Gas stations in urban areas may charge more than those in rural areas due to higher demand and operating costs.
Example: Real Estate: Similar properties can have vastly different prices based on their location, with homes in desirable neighborhoods costing significantly more than those in less sought-after areas.
4. Time Pricing
This strategy involves changing prices based on the time of purchase or usage.
Example: Happy Hour Specials: Restaurants and bars often offer lower prices on drinks or appetizers during specific hours (like 4 PM to 6 PM) to attract customers during slower times.
Example: Peak vs. Off-Peak Pricing: Utility companies may charge higher rates during peak usage times (like evenings) compared to off-peak times (like overnight) to encourage consumers to use less energy during high-demand periods.
What is price discrimination
Price Discrimination is a strategy where businesses charge different prices for the same product or service based on customer characteristics or buying behaviors, aiming to maximize revenue.
Types & Examples:
First-Degree (Personalized Pricing):
Each customer is charged based on their willingness to pay.
Example: Car sales negotiations where each buyer may pay a different price.
Second-Degree (Quantity-Based Pricing):
Prices vary based on the amount purchased.
Example: Bulk discounts, like a lower per-unit cost when buying a family pack of snacks.
Third-Degree (Segmented Pricing):
Prices differ by customer segment.
Example: Movie theaters charging $10 for adults, $7 for students, and $5 for seniors.
Key Benefit: Captures more revenue by aligning prices with what each group or individual is willing to pay.
