M/A - Pricing Overview & In-depth Flashcards
Provide the 3 major influences of pricing (3 C’s)
- Cost - Can be fixed or variable cost, short & long term can sell a product that is price less than cost max benefit
- Customer - Assist in setting the market price
How much value is the good/services, Demographics can also set pricing - Competitor - Have a significant influence on Price, influencing the industry, dynamic can take competitors pricing into account
Ex. gain market share, differentiation strategy
What are the two categories of pricing consideration
- Demand-based pricing
- Cost-based pricing
What are relevant cost pricing decisions that are to be considered
Short-term - including whether to accept a one-time special order or what product mix to the manufacturer with limited resources
Long-term - Fixed costs become relevant because it is possible to adjust and solve the problem
Ex. Selling machinery to free up cash flow
What are the four characteristics of the market
- Competitors in the market
- Relationship between seller
- How much product differ from those of the competitors
- Number of customers and their ability to influence the price
What are the 4 most common market structure
- Monopoly - When one organization controls a particular market and can charge what it wants without regard for customer
- Perfect Competition - Exist when there are many competitors in the market, customers have a wide range of options available
- Sellers are independent of each other - Oligopoly - When a small cartel organization, participants can earn profits using implicit collusion to set prices
- Monopolistic Competition - Many industries are somewhere between the two extremes of monopoly and perfect competition
Ex. Fast food industries, many independent market participants are differentiated
What are the 5 stages of the product life cycle
- Development stage
- Product is being developed and can’t earn revenue until released - Introduction stage
- Sales begin slowly - Growth stage
- Sales increase, sometimes very quickly - Maturity stage
- Sales level off and become more consistent - Decline stage
- Sales start to fall off; this may happen very sharply or much more gradually
Product life cycle management - consists of managing a product or service through its introduction, growth, maturity, decline
What is the difference between a price setter and a price taker
Price setter - organization can set the price for their market, either because their price differentiates or by monopoly
Price taker - Organizations are not able to set prices in their market and must follow the pricing that exists when prices are undifferentiated
What are two external factors to shape the nature of the sales curve
- Rate at which the consumer adopts it,
- degree to which existing and future products can better meet consumer needs
What are the 6 types of cost-based pricing
- Cost-based pricing sets the price at the function of cost, factors can be fixed or variable
- Predatory pricing
- Products are deliberately priced below cost to drive out competitors.
- It is illegal in Canada, but difficult to prove
Ex. Product selling for lower than cost - Price skimming
-Goods are sold at higher prices initially so fewer sells needed to break even
- “Early-adaptor” lower price sensitivity
-Customers don’t mind paying more to have a new product - Price bundling
- Several products or services are offered for sale as are combined products
- Less expensive buying the bundled
Ex. Burger $7, Fries $3, Drink $2 or all three for $10 - Penetration pricing
- Involves setting the price low to attract customers and gain market share
- Penetration pricing differs from predatory pricing in that penetration is only short term to gain market share
Ex. Netflix - Peak-loading pricing
- Seller charges a higher price for some product or service when demand is at capacity limit
- Demand is low, price decrease to attempt to increase price - Loss-leader pricing
-Strategy where a product is sold at a price below its cost to stimulate the sales of other
Ex. Grocery store that sells milk and bananas
What are the 5 types of demand-based pricing
- Life-cycle cost
- Prices are set so the cost can be recuperated over the life cycle
- To maximize profit over the product life cycle then max revenue and minimize cost at each stage - Target based pricing
- Is set and then suitable profit is deducted
- Target price - estimated price for a product or service that customers are potentially willing to pay
- Understand customer perceived value - Variable product cost
- Selling price is created by adding a markup (% or dollar amount to the variable cost
- Organizations need to be aware of their fixed cost to ensure the markup % is high enough to cover these cost - Full absorption cost
- Prices are set by marking up the full cost of the product to set the selling price
- Ensures the price is set at a level that recovers all the cost - Cost-based contract
- Price determine by reimbursing cost + suitable margin,
- Customer must be willing to pay the price that the organization has set, otherwise it will not be able to find enough customer to stay in business
- Fixed price contract - Contract in which the supplier is paid at a fixed price, Tendering or contracting
What are some issues with cost based pricing
- Poor quality cost informaiton can lead to poor pricing and product decision
- Death spiral, sales volume for the organization is falling, result would be to set prices higher which relates to competitors with lower cost
- Lead to suboptimal decision
What are 2 other types of pricing method
- Value-based pricing
Ex. Starbucks, based on setting a price on the trade-off between the perceived value to the consumer and producer incentive to product
- Organization should simultaneously consider the marketplace and its cost when making pricing decision - Reverse engineering pricing
- Dissambling the competitors product, to determine how the product is made and duplicate it to make it more efficient and obtain market share.
