Chapter 9 Flashcards
What are the different pricing strategies?
Customer Value-Based Pricing
Competition-Based Pricing
Cost-Based Pricing
What is Customer Value-Based Pricing?
Customer-oriented pricing involves understanding how much value consumers place on the benefits they receive from the product and setting a price that captures that value.
Is price decided after product design?
NO. Price is considered along with all other marketing mix variables before the marketing program is set.
How can companies measure value? (customer value-based pricing)/
By asking the consumers how much they would pay for a basic product and for each benefit added to the offer
By conducting experiments to test the perceived value of different product offers
What are the 2 types of value-based pricing?
Good-value pricing
Value-added pricing
What is Good-Value Pricing?
Offering the right combination of quality and good service at a fair price
They do this by:
1. less-expensive versions of established brand name products or new lower-price lines
2. involves redesigning existing brands to offer more quality for a given price or the same quality for less
3. Everyday low pricing & high-low pricing
What is Value-Added pricing?
Rather than cutting prices to match competitors, companies add quality, services, and value-added features to differentiate their offers and thus support their higher prices.
What is cost-based pricing?
It is about setting prices based on the costs of producing, distributing, and selling the product plus a fair rate of return for the company’s effort and risk.
For instance, companies with lower costs can set lower prices that result in smaller margins but greater sales and profits.
Other companies intentionally pay higher costs to be able to add value and claim higher prices and margins.
What is a fixed cost?
Costs that do not vary with production or sales level
ex: bills for rent, heat, and executive salaries
What is a variable cost?
Costs that vary directly with the level of production
These costs tend to be the same for each unit produced, but total varies with number of units produced
What is a total cost?
sum of fixed and variable costs for any given level of production.
what is cost-plus pricing?
IT is establishing a product’s price by adding a standard markup to its cost.
This ignores customer demand and competitive price, but it is easy.
What is Break-even pricing?
Company will try to determine the price at which they’ll break even or make the target return they are seeking
What is target return pricing?
A variation of break-even pricing, uses the concept of a break-even chart, which shows total cost and revenue at different sales volume levels.
What are some of the issues with break-even and target return?
This fails to consider customer value and the relationship between price and demand
(as price increases, demand decreases and the market may not buy even the lower volume needed to break even at higher prices)
When that happens, company must trim its costs to lower the break-even point so that it can charge the lower price consumers expect
What is competition-based pricing?
It is setting prices based on competitors’ strategies, costs, prices, and market offerings.
Consumers will base their judgments of a product’s value on the prices that competitors charge for similar products.
What are the questions to ask when setting competition-based pricing?
How does the company’s marketing offering compare with competitors’ offerings in terms of customer value?
How strong are current competitors, and what are their current pricing strategies?
What is the goal of competition-based pricing?
To set prices according to the relative value. If a company creates greater value for customers, higher prices are justified.
NO MATTER WHAT PRICES YOU CHARGE, YOU HAVE TO BE CERTAIN YOUR CONSUMERS UNDERSTAND WHAT YOUR VALUE IS AND YOU HAVE TO DELIVER IT
What are the internal factors affecting price decisions?
- Overall marketing strategy, objectives and mix
Pricing decisions must be coordinated with packaging, promotion, and distribution decisions.
Positioning may be based on price (target costing start with an ideal selling price, then target costs that ensure the price is met)
Nonprice positions can be created to differentiate the marketing offer. - Organizational considerations
Management must decide who within the organization should set prices - small companies –> prices set by top management
- large companies –> pricing handled by divisional or product managers
- industrial markets –> salespeople may be allowed to negotiate with customers within certain price ranges. Even so, top mgmt sets the pricing objectives and policies, and it often approves prices proposed by lower-level mgmt or salespeople
- in industries in which pricing is a key factor (ex:airline, steel, railroads, oil, etc.) companies often have pricing departments to set the best prices or help others set them.
What are the external factors affecting price decisions?
Market and demand
economy
impact on other parties in its environment
What is peculiar about price-demand relationship?
Each price the company might charge will lead to a different level of demand
What is the price elasticity of demand?
How responsive demand will be to a change in price.
If it is inelastic, the demand hardly changes with a small change in price.
If it is elastic, demand changes greatly.
What happens if the demand is elastic?
Sellers will consider lowering their prices, since a lower price will produce more total revenue as long as extra costs of producing don’t exceed extra revenue
Has customer price sensitivity increased?
Yes, forces like deregulation and instant price comparison (the world wide webbbbbbbbs) have increased it.
