Pricing Flashcards
(37 cards)
What Is a Price?
the amount of money charged for a product or service, or the sum of all the values that customers exchange for the benefits of having or using the product or service.
What is price? Historically
Historically, price has been the major factor affecting buyer choice. In recent decades, however, nonprice factors have gained increasing importance. Even so, price remains one of the most important elements that determines a firm’s market share and profitability.
Price in the marketing mix
Price is the only element in the marketing mix that produces revenue; all other elements represent costs.
Price is also one of the most flexible marketing mix elements; prices can be changed quickly. Smart managers treat pricing as a key strategic tool for creating customer value and building customer relationships. Prices have a direct impact on a firm’s bottom line.
Major Pricing Strategies
Price floor= no profits below this price
price ceiling= no demand above this price
In setting its price between these two extremes, the company must consider several external and internal factors, including competitors’ strategies and prices, the overall marketing strategy and mix, and the nature of the market and demand.
Value-based pricing
uses the buyers’ perceptions of value rather than the seller’s cost.
- Value-based pricing is customer driven.
- Price is set to match perceived value.
Value-based pricing vs. cost-based pricing
cost-based
(Value-Based Pricing)
Good-value pricing
offering just the right combination of quality and good service at a fair price.
In other cases, good-value pricing has involved redesigning existing brands to offer more quality for a given price or the same quality for less. Some companies even succeed by offering less value but at very low prices.
(Value-Based Pricing)
Everyday low pricing (EDLP)
involves charging a constant everyday low price with few or no temporary price discounts.
(Value-Based Pricing)
High-low pricing
involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items.
(Value-Based Pricing)
Value-added pricing
attaches value-added features and services to differentiate the companies offers and thus their higher prices.
For example, even as careful consumer spending habits remain, some movie theater chains are adding amenities and charging more rather than cutting services to maintain lower admission prices.
Cost-Based Pricing
sets prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for effort and risk.
•Cost-based pricing is product driven.
(Cost-Based Pricing)
Fixed costs
are the costs that do not vary with production or sales level.
- Rent
- Heat
- Interest
- Executive salaries
(Cost-Based Pricing)
Variable costs
vary directly with the level of production.
- Raw materials
- Packaging
Although these costs tend to be the same for each unit produced, they are called variable costs because the total varies directly with the number of units produced.
(Cost-Based Pricing)
Total costs
are the sum of the fixed and variable costs for any given level of production.
(Cost-Based Pricing)
Cost-plus pricing
The simplest pricing method is cost-plus pricing (or markup pricing). Price is calculated by adding a standard markup to the manufacturer’s costs.
Cost-plus pricing adds a standard markup to the cost of the product.
Benefits=
•Sellers are certain about costs.
•Price competition is minimized.
•Buyers feel it is fair
Disadvantages=
•Ignores demand and competitor prices
(Cost-Based Pricing)
Break-even pricing (target return pricing)
setting price to break even on costs or to make a target return.
Competition-based pricing
is setting prices based on competitors’ strategies, costs, prices, and market offerings.
(Other Internal and External Considerations Affecting Price Decisions)
Target costing
starts with an ideal selling price based on consumer value considerations and then targets costs that will ensure that the price is met.
(Organizational Considerations)
•Who should set prices?
•Who can influence prices?
Top management sets the pricing objectives and policies, and it often approves the prices proposed by lower-level management or salespeople.
In industries in which pricing is a key factor (airlines, aerospace, steel, railroads, oil companies), companies often have pricing departments to set the best prices or help others set them.
The Market and Demand
Before setting prices, the marketer must understand the relationship between price and demand for its products.
Both consumer and industrial buyers balance the price of a product or service against the benefits of owning it.
(The Market and Demand)
Analyzing the Price–Demand Relationship
The demand curve shows the number of units the market will buy in a given period at different prices
- Demand and price are inversely related
- Higher price = lower demand
(The Market and Demand)
Price Elasticity of Demand
Price elasticity is a measure of the sensitivity of demand to changes in price.
Inelastic demand is when demand hardly changes with a small change in price.
Elastic demand is when demand changes greatly with a small change in price.
The Economy and Other External Factors
Economic conditions
Reseller’s response to price
Government
Social concerns
(New product Pricing Strategies)
Market-skimming pricing strategy
Market-skimming pricing strategy sets high initial prices to “skim” revenue layers from the market.
- Product quality and image must support the price.
- Buyers must want the product at the price.
