Strategic Pricing

Question 1

Why is price important?

Answer 1

• In the 4P framework, Price is the only element that controls receipts by the business.
• If pricing is wrong, a company can’t survive in the long run

Question 2

What is a good price?

Answer 2

• A good price is one that will sell your product/service

- Customers observe price discrimination

Question 3

What are the pricing principles?

Answer 3

• Postage Pricing
  
  • Pre-1840, recipients paid the postman for postage, on a distance and sheets basis
  • Receivers would bribe postmen, read it, and send it back without paying
  • 1840: pre-payment
• Trains vs Planes
  
  • Planes cheaper than trains in Japan
• Option tickets
  
  • Different contract options: flexi/economy
• Pricing by commitment
  
  • Early purchase of bus sales more expensive than early purchase of planes
  • Due to licensing commitments etc, have to fly plane, can cancel bus route
• Regulated Pricing
  
  • Prior to 1978 prices were airlines were price listed
  • Even the most expensive fare in 2005 is lower than the price of 1980

Question 4

What are the types of pricing?

Answer 4

• Cost-based pricing
• Competition based pricing
• Value based pricing
• Skimming pricing
• Penetration pricing

Question 5

What is cost based pricing?

Answer 5

• Costs/Units
  
  • Incremental/Joint/Unattributable
  • Incremental: Direct Fixed(LR)/Variable(SR+LR)
• Commodities
• Not a managerial decision
• Inconsistency

Question 6

What is competition based pricing?

Answer 6

• Market tollerance

- Costco/Woolies

Question 7

What is value based pricing?

Answer 7

• Function
• Ultimate goal of business is to price on function
• Early internet banking charges lower than mail: cost based not value based

Question 8

What is value analysis?

Answer 8

• Perceive value = perceived benefits/price
• Where price = total cost to there buyer = purchase price + acquisition price + transportation + installation + order handling + risk of failure
• Perceived benefits = combination of physical attributes, service attributes, technology support, competitive ecosystem
• But value is subjective
• Profit Value Map
• Research

Question 9

What are the components of perceived value?

Answer 9

• Cost
• Exchange
• Aeshteitcs
• Relative Use

Question 10

What kind of research can be done for value analysis?

Answer 10

• Value analysis
  
  • Concentartes on increasing perceived value and performance relative to consumers news and willingness to pay
• Value engineering
  
  • Concentrates on increasing value by decreasing costs while maintaining performance

Question 11

What is discriminatory pricing?

Answer 11

• Driven by value subjectivity
• Large fixed cost industries are prone: telecom etc.
• Efficiency lost from non-marginal cost pricing can by regained by introducing lower price points: pareto efficient

Question 12

What kinds of discriminatory pricing are there?

Answer 12

• First Degree
  
  • Person to person, perfect
• Second Degree
  
  • Bulk discounts
• Third Degree
  
  • Seniors discounts

Question 13

What are price discrimination techniques?

Answer 13

• Prepayment vs postmayment
• time of purchase, day of week
• Additional features
• Refund options