Pricing Strategies Quiz

Chapter 10: Pricing

• Pricing is the amount of money charged for a product or service
• It's the sum of all values that consumers give up
• The only element in the marketing mix that produces revenue
• All other elements represent costs

Chapter Learning Outcomes

• What is a price?
• Customer perceptions of value
• Company and product costs
• Other internal and external considerations affecting price decisions
• New product pricing strategies
• Product mix pricing strategies
• Price-adjustment strategies
• Price changes

What Is a Price?

• Price is the amount of money charged for a product or service
• It represents the sum of all values that consumers give up
• to gain the benefits of having or using the product or service
• The only element in the marketing mix that produces revenue
• Unlike other marketing mix elements, price is not just a cost; it is also a driver of revenue

Factors to Consider When Setting Prices

• Customer perceptions of value (price ceiling, no demand above this price)
• Internal and external considerations (marketing strategy, objectives, nature of the market, competitors strategies and prices)
• Product costs (price floor, no profits below this price)

Customer Perceptions of Value

• Customer-oriented pricing: understanding how much value consumers place on product benefits, setting a price capturing that value
• Value-based pricing: uses buyers' perceptions of value, not seller's cost, as the key
• Types: Good-Value Pricing, Value-Added Pricing
• Cost-based pricing: product driven

Value-Based Pricing

• Value-based pricing uses the buyers' perceptions of value, not the sellers' cost, as the key
• Price is considered before the marketing program is set
• Value-based pricing is customer driven
• Types of value-based pricing: Good-Value Pricing, Value-Added Pricing
• Cost-based pricing is product driven

Customer Perceptions of Value

• Good-value pricing: offering right combination of quality and good service to a fair price
• Value-added pricing: attaching value-added features/services to differentiate offers, support higher prices, and build pricing power

Customer Perceptions of Value

• Everyday low pricing (EDLP): charging a constant every-day low price with few or no temporary discounts.
• High-low pricing: charging higher prices on an everyday basis, with frequent promotions to lower prices temporarily on selected items

Value-Added Pricing

• Unique restaurants
• Brand-name drugs
• Trendy fashions
• Sports equipment
• High-quality food
• Pricing power: ability to escape price competition and justify higher prices/margins without losing market share

Company and Product Costs

• Cost-based pricing: involves setting prices based on the costs of producing, distributing, and selling a product, plus a fair rate of return for effort and risk
• Adds a standard markup to the cost of the product

Types of Costs

• Fixed costs: do not vary with production or sales levels (Rent, Heat, Interest, Executive salaries)
• Variable costs: vary with the level of production (Packaging, Raw materials)
• Total costs: sum of fixed and variable costs
• Average cost: cost associated with a given level of output

Other Internal and External Considerations Affecting Price Decisions

• Customer perceptions of value: set the upper limit for prices
• Costs: set the lower limit
• Companies must consider internal and external factors when setting prices
• Overall Marketing Strategy, Objectives, and Mix
• 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 the price? Who can influence prices?
• The Market and Demand

Other Internal and External Considerations Affecting Price Decisions

• Before setting prices, marketers must understand the relationship between price and demand for their products.
• Pricing in Different Types of Markets
• Analyzing the Price-Demand Relationship
• Price Elasticity of Demand
• Competitors' Strategies and Prices: Comparison of offering in terms of customer value; Strength of competitors; Competition pricing strategies; Customer price sensitivity
• Other External Factors: Economic conditions; Reseller's response to price; Government; Social concerns

New-Product Pricing Strategies

• Market Skimming Pricing: high initial prices to skim revenue from the market.
• Product quality and image must support the price.
• Buyers must want the product at the price.
• Costs of producing the product in small volume should not cancel the advantage of higher prices.
• Competitors should not enter the market easily.

New-Product Pricing Strategies

• Market Penetration Pricing: low initial price to penetrate the market quickly and attract a large number of buyers quickly to gain market share.
• Price sensitive market.
• Inverse relationship of production and distribution cost to sales growth.
• Low prices must keep competition out of the market

Product Mix Pricing Strategies

• Product line pricing
• Optional-product pricing
• Captive-product pricing
• Product bundle pricing
• By-product pricing

Price-Adjustment Strategies

• Discount and allowance pricing
• Segmented pricing
• Psychological pricing
• Promotional pricing
• Geographic pricing
• Dynamic pricing
• International pricing

Price Changes

• Initiating Pricing Changes: Price cuts (excess capacity, increasing market share); Price Increases (cost inflation, increased demand, lack of supply)
• Buyer Reactions to Pricing Changes: price increases (product is "hot," company greed); price cuts (new models available, models not selling well, quality issues)
• Competitor Reactions to Pricing Changes
• Responding to Price Changes: Reduce price to match competition; Maintain price but raise the perceived value; Improve quality and increase price; Launch a lower-price "fighting" brand