What are 2 important aspects of pricing?
1) Only marketing mix variable that generates revenue (while others incur costs)
2) Price is the easiest variable to change
What are some general recommendations for pricing?
1) should be consistent with other marketing mixes
2) updated prices based on market changes
3) Gopher custom-value oriented rather than cost-oriented
4) consider internal and factors
what are the three major pricing strategies?
1) Cost-based pricing: cost-plus pricing & break-even analysis
2) Customer value-based pricing = good-value pricing (lowest price) & value-added pricing (highest price)
3) Competition-based pricing
Your _____ represents the lowest price that you can set
And your ________ represents the highest price that you can set
unit cost, customer’s value
what is cost-plus pricing
when you add a standard markup to the cost of the product.
1) Markup on Cost
- find UC
- markup price = UC + UC * %
2) Markup on Sale
- find UC
- p = UC/(1-%)
what are some advantages/disadvantage of cost-plus pricing?
Advantages:
- Certainty about costs (hard to determine)
- Pricing is simplified
- Minimize price competition (When all the companies use this pricing)
- Fairer to buyers and sellers
Disadvantages
- Ignores current demand and competition
how do you determine what your markup % (alpha) is ?
There’s no clear answer. For each industry, there should be an acceptable margin. Varies by industry
What is the break even analysis?
How do you determing break even volume? aka Quantity you need to break even?
Table showing the prices you can set, their break even volume, the actual demand (demand forecasting), actual revenue (price * actual demand), costs, profit.
The ideal is to find the price that will generate the most profit
the break even formula is
Q = FC / (p-VC)
What is customer-value based pricing, how does it work?
You ask your focus group, “ if you wanted this product, how much do you think it’s valued?”
This allows you to…
Determine your customer value, determine price, then design the product.
what is the purpose of value based pricing
to price more profitably by capturing more value, not by making more sales (it’s the highest possible price you can charge).
More difficult to apply than cost-based pricing
should value based prices be lowered, if so when?
Prices should be lowered only when there are no longer justified by the value offered in comparison to the value offered by the competition.
what are the two types of value based pricing?
Explain them
1) Good-Value Pricing: offering just the right combination of quality and good service at a fair price (e.g. IKEA - product quality is reasonable and the company tries to lower unit costs and charge lower prices. PRICE low, UC low)
MINIMUM PRICE
2) the Value-added Pricing: Attaching value added features and services to differentiate a company’s offers and charging higher prices (ex: Cineplex’s VIP cinemas with a premium theatre experience)
–> more and more approach, maximum price you can set
what is Competition-based Pricing?
set your prices to match or be lower than your competitors
- Your competitors product will be different from yours, so you can’t solely base off competition.
Name the four internal factors affecting Pricing Decisions
Marketing Objectives
Marketing-Mix Strategy
Product considerations
Organizational Considerations
Pricing based off Internal factors - Marketing objectives
1) Target segment and positioning –> depends
2) Survival, intense competition, consumer wants are changing –> charge lower price
3) Market Leadership
- sell more, penetration pricing strategy
- high sales volume, lower unit costs, higher long run profits (scale of production benefit)
4) Product quality leadership –> you have a strong brand and think ur better than competition = skipping pricing strategy
5) Entry barrier –> charge lower price when you see new competitors showing up and you’re the leader
6) help other product lines –> when you have one product line, the pricing of other product lines will depend on that product line
7) partial cost recovery for a non profit organisations
Pricing based off Internal factors - Marketing Mix Strategy
Marketers typically have two approaches when it comes to pricing decisions:
Marketers typically have two approaches when it comes to pricing decisions:
1) Positioning based off price –> pricing decision will affect other marketing mix elements
2) Positioning based non-pricing factor –> other marketing mix elements will affect the price
Pricing based off Internal factors - Organisational considerations
Who should decide price levels?
** usually it’s the brand manager product line and manager
- top management, when it’s a strategic important product
- product line managers
- Salespeople (negotiation)
- pricing department (experts that provide recommendations but the final decision is still made by top management)
Pricing based off Internal factors - Product Considerations
New product pricing : Skimming or Penetration
Product Mix Pricing
1) Product line pricing: selling price steps b/w product lines e.g $299, $399
2) Captive-product pricing: pricing Products that must be used with the main product
- Main Product and Captive Product
- for example printers (main) + cartridges (captive)
- without cartridges you can’t use printers. You’re stuck buying cartridges for life.
3) optional product pricing –> can use the main product without optional product –> can’t charge higher price
4) by-product pricing: Use waste product to make Another product
5) Product-bundle pricing: pricing Bundles of products sold together. This allows customers to have more opportunities to try various products when given in a bundle.
what are some external factors affecting pricing decisions?
- Market Structure & demand
- Competitors’ costs, prices, and offers
- Economic Conditions
- Reseller needs
- Gov action
- Social Concerns
what is a monopoly, pure competition, monopolistic competition, and oligopoly
Monopoly: 1 seller, 1 buyer
pure competition: many sellers, many buyers (sellers cannot differentiate their products = customers more price sensitive)
Monopolistics competition: many sellers come on many buyers, and they can differentiate quality making customers less price sensitive
Oligopoly = a few sellers, many buyers
