W12 Price Flashcards
What is price?
assignment of value to an offering, ‘offering’ includes: goods, services, favours, votes, or anything with value to the consumer
Digital currency, definition, benefits, drawbacks
Digital currency is not controlled by an entity, it has no intermediaries
Transactions occur person-to-person off record
✅ Eliminates card fraud, lower transfer fees
❌ Facilitates illegal transactions
What are the price competitions
- Price-based competition — cost leadership position
- Non-price competition — focused on differentiation
Steps to price planning
- Setting pricing objectives
- Estimate demand
- Estimate costs
- Examine environment
- Price strategy
- Price tactics
- Setting pricing objectives
PROFIT - set prices to allow for a certain profit margin on all goods sold; profit is what motivates investors
- Firms with a variety of product mix maximise profits of the entire portfolio instead of individual products - Account for elasticity, supply and demand, and margins vs. turnover (often for B2B goods)
SALES — gain market shares by overtaking competitors, shifting old stock, driving new products
- Often uses sales promotions, bundling, discounts, undercutting competitors - Products with competitive advantage can still satisfy objectives without promotions, price cuts etc.
IMAGE — price is often the first thing consumers notice about a brand, it determines how the brand is perceived
- Consumers who lack knowledge within the market category rely on price as a cue to quality - Prestige products/brands marketing status charge higher prices to reinforce their image - Low prices may boost short-term sales but may damage brand and reduce sales in the long-term
COMPETITIVE EFFECT — try to dilute competitors’ marketing efforts by undercutting market prices
CUSTOMER SATISFACTION — pricing according to WTP to ensure customer loyalty, used by quality-focused firms hoping to retain customers for the long-term
- Estimate demand
Demand curves illustrate the effect of price on the demand if all other factors remain the same
- Normal products follow the law of the demand (as price goes up, quantity demanded goes down)
- Prestige products see an increase in demand as price increases because the product is perceived to be more valuable, if the price decreased, it is perceived to be less desirable → decrease demand
- This relationship has its limits, too high of price = unaffordable, low demand
Shifts in demand can occur naturally (e.g. celebrity seen with product, change in weather) or marketers can stimulate shifts (through effective marketing)
Estimate demand
- Total demand = numbers of buyers x average amount each member is likely to purchase
- Predict what the company’s market is likely to be
- Determine costs
Price must cover costs for objectives concerned with profit and sales, this includes:
- Variable costs: costs that fluctuate depending on how many units are produced (wage, raw materials)
- Fixed costs: costs that do not vary with number of units produced (rent, maintenance, utilities, salaries)
- Average fixed cost is the fixed cost per unit, the total fixed cost ÷ number of units produced
- The average fixed cost decreases the more units are produced
- Combining variable cost with fixed cost = total costs for a given level of production
- All of these costs fluctuate with differing levels of production, the price producers charge, e.g. variable cost may decrease due to economies of scale, but it could also increased because more overtime labour is needed, fixed cost change in the long-term
Break-even point
Markup and margins
Break-even point
Break-even point is the amount of units that must be sold to cover all costs and make a profit, calculated by the break-even analysis
Helps marketers understand relationship between costs and price, at what point the firm makes a profit
- Break-even point = total fixed cost ÷ contribution per unit to fixed costs
- Contribution per unit (how much profit a single sale makes) = difference between price and variable costs
- Profit = quantity above break-even point x contribution per unit
- Profit goal = profit figure a firm wants to earn
Markup and margins
Prices increase as the product passes through the channel
- Markup — amount added to cost to create price at which the channel member will sell product at to the next channel member or to the customer
- Each member (manufacturer, wholesaler, retailer) must price the goods to make a profit while also considering the next member’s markup
- Should never exceed the list price or the manufacturer’s suggested retail price (MSRP), I.e. the estimated WTP
- Margins — the difference between the cost and the added amounts
- Gross margin covers the profit expected by all channel members as well as fixed cost, encompasses retailer margins and wholesaler margins
- Examine pricing environment
ECONOMY
- Economic trends influence pricing strategies, e.g. business cycle, inflation, economic growth, consumer confidence in economy
- During recessions, consumers grow more price sensitive so firms cut prices to cover costs but don’t make profit
- During inflation, customers get accustomed to price increases, even when the inflation goes away → allows real price increase
- But during inflation, customers cut back on purchases so marketers need to lower prices and temporarily sacrifice profits
COMPETITION
- Competitive pricing can cause pricing wars, which can lower customer perception of fair pricing, eroding the profitability of the whole market
- Oligopoly industry - few sellers, many buyers (e.g. airlines)
- Adopt status quo pricing (pricing similarly to competitors) to ensure profitability in the long-term
- Monopolistic industry - many sellers offering slightly different product (e.g. restaurants)
- Firms focus on non-price competition to differentiate from domineering brands
- Pure competition industry (e.g. farmers)
- Little opportunity to raise or lower prices
- Supply and demand directly affect price
- Oligopoly industry - few sellers, many buyers (e.g. airlines)
GOVERNMENT REGULATIONS
- Regulations for employee health care, environmental protection, safety causes costs to increase
- Regulations on specific industries, e.g. food and medicine
- Regulations to maintain affordability of staple goods to prevent price gouging during shortages and slow inflation
- Makes profitability impossible
CONSUMER TRENDS
- Culture, demographics, trends, e.g. time poverty, environmental concerns, shopping for control (consumers value products that provide control amidst terrorism, unrest, disasters etc.)
INTERNATIONAL TRADE
- Marketers must adapt to unique conditions in countries, e.g. lower prices for staple goods in developing countries
- Size and type of distribution channels = higher gross margins and markups = higher prices
What is price elasticity (part of step 2. estimating demand)
Price elasticity is how consumers react to price, I.e. the percentage change in unit sales that results from a percentage change in price
- Elastic demand = changes in price have large effect on demand
- Inelastic demand = changes in price have little effect on demand
Price elasticity = percentage change in demand ÷ percentage change in price
If price elasticity > 1 = demand is elastic
Cross elasticity of demand is when change in price of one product affect the demand of other products
- Substitutes: consumers will purchase alternatives if the price increases
- Complements (one product is essential to the second): increase in price of one decreases demand for it and the second product
- Choose pricing strategy
Cost-based pricing Demand-based pricing Competition-based pricing Customer needs-based pricing Price segmentation Bottom of the pyramid pricing
Cost-based pricing
Cost based pricing is very common for marketers
Cost-plus pricing totals all costs per unit and add markup
Price = fixed cost (+ production volume) + variable cost + markup
Keystoning: doubles cost of item (100% markup)
Markup on cost: markup determined by percentage of cost
Markup on selling price: markup determined by percentage of price
Simple to calculate, risk free, covers cost
Doesn’t consider changing input prices, target market nature, demand, competition, product life cycle, product’s image etc.,
Sometimes difficult to estimate costs
Demand-based pricing
Demand-based pricing bases price on estimated demand in different markets at different prices w/ research
- Target costing — match price with demand by identifying the WTP before designing the product, then working backwards to ensure the product stays within a cost that makes it profitable while satisfying customer needs
- Yield management (dynamic pricing) — charging different prices to different customers to manage capacity
Competition based pricing
Price leadership strategy where a dominant firm introduces a new price and competitors match or drop out to minimise competition, e.g. in oligopolistic industries, this is an acceptable and legal way to agree on prices
