Pricing Strategies In The Marketing Mix Flashcards
What is meant by Price, Value and Consumer?
• Price is the amount of money paid to acquire a product and/or service that gives certain utility
• Demand exists when consumers are willing & able to buy a product.
• Value is the benefits perceived by the consumer and is reflected in consumer’s willingness to pay.
Value stems from offering lower prices than competitors for equivalent benefits or providing unique benefits (differentiation) that offset a higher price.
• Price serves as a visible expression of value.
• The price consumer is willing to pay for a product is determined by the value obtained from its consumption
•Firms aim to provide good value for money i.e. the “Value Proposition”
What is Price from a Firms Perspective?
Price for individual firm: A product’s price is a major determinant of the market demand for it.
• Price has a considerable bearing on a company’s revenues
and profits and is important most of the time — but not always. Products’ differentiated features, brand, high quality, convenience or a combination of these may be more important to consumer than price.
• The firm needs to skilfully use price as one of the four marketing mix elements.
•Only marketing mix element that generates revenue not costs.
•Most flexible market mix element e.g. internet price change to see response
What is Agriproduct Pricing?
• Pricing principles for commodities (undifferentiated agricultural products e.g. rice, wheat) & differentiated agriproduct (e.g. Kellogg’s’ rice bubbles, Sanitarium Weetbix) are the same; but their application is not.
What is a Price Taker?
• Undifferentiated commodity
producers are ‘price takers’ as
they generally have little or no
power over what price they
receive (price may be market determined or buyer determined).
• There are a range of price- discovery mechanisms that differ by commodity and within a
commodity by country
What is a Price Maker?
• Differentiated product manufacturer or retailer
(in contrast) establishes a selling price as part of the marketing mix.
• A supplier of a specialized food product will price it in terms of the value of benefits it offers the customer / consumer relative to competitive products
What is the Basic Company Objective and Product Price?
• The basic objectives of most firms is profitability, simply expressed as:
Profit = Sales (units sold × price per unit) – Marketing Expenditure
(product development, promotion, distribution)
– Manufacturing Costs – Overhead Costs
What are the Internal Factors to be considered while Pricing?
- Price & quantity sold are not independent of each other i.e. if price the quantity sold .This relationship is determined by the price elasticity of demand i.e. more elastic the demand the greater the impact of price change.
- Marketing activity influences the position and slope of the demand curve
- Price has to be aligned with the profit time horizon over which the
profit has to be maximized. High price may be attractive for a new and innovative product, but it may also be appropriate to forego short terms profits (by having a lower price) to
discourage new entrants and build volumes, leading to economies of scale and efficiency enhancement.
4.Pricing Objective may be:
1) Profit Maximisation short or long term
2) Market penetration to maximise market share – min price 3) Product quality leadership – high price
4) Cost minimisation & Hedge future prices for price taker
What are the External Factors : market demand and Customer and Consumer Expectations?
1.Customer/Consumer Expectations can affect Perceived “Value Proposition”
• Customer wont always want lowest price
• Understand value placed on benefits
• Match price to perceived value
• Make different offers to different market segments because customers
vary
• Consumers evaluate product price and value against comparable
products
• Pricing strategy must reflect nature of the competition
What is a monopoly?
• Monopoly: Single supplier. Considerable discretion in
price setting
What is an Oligopoly ?
• Oligopoly: Few suppliers. Each firm knows that any price change is likely to provoke a response from its competitors
• Oligopoly i.e. Few suppliers are very conscious of each other’s price
and will always match a price drop (e.g. Coles & Woolworths).
• On the other hand if one supplier raises its price, the others will not follow, and the lone supplier who increased the price suffers a sharp reduction in sales.
• This situation gives rise to a
‘kinked demand curve’ that tends to
result in stable prices (e.g. 1$/litre milk)
What is Monopolistic Competition?
• Monopolistic Competition: Many suppliers with differentiated products that are imperfect substitutes. Suppliers are aware of the prices of competing products & have some ability to set their own price.
What is Perfect Competition?
• Perfect Competition: Numerous suppliers that cannot
influence the market price and are price takers
What is meant by Price setting?
Cost oriented approaches – cover production costs and
earn a fair profit.
1. Mark-up or cost-plus pricing - per unit profit, as a % of cost of production per unit
Price = ATC + (ATC x %Profit)
i.e. target retail margin (profit) as a % of wholesale price per unit
What is meant by a Target Return?
Target return - cover the total cost of production (break even point) and then a targeted return on investment. (variation of mark-up pricing) Profit (ii)PxQ-TC where P = price Q = quantity TC = Total Cost Solving for Price P= P+TC/ Q
What is a Break Even Point?
Break-even point - quantity of output where total costs equal total revenue. Takes into account, both fixed and variable cost components.
