Pricing

Question 1

Nagel (2011) - What is value based pricing

“Nearly all successful pricing strategies embody the following principles: Better be profit-driven relative to alternative investments rather than to competitors / Better be proactive rather than reactive”

Answer 1

• Differences in pricing across customers and changes over time reflect differences or changes in the value to the customer.

Ex. lower prices for lower demand in recession? if customer recieves less value price should reflect. Price reflect value of product

Question 2

Nagel (2011) - Proactive pricing

“Nearly all successful pricing strategies embody the following principles: Better be profit-driven relative to alternative investments rather than to competitors / Better be proactive rather than reactive”

Answer 2

• That companies anticipate disruptive events, e.g. negotiations with the customers, a competitive threat or technological changes.
• The best is when a company develops a pricing strategy before they are forced to react to terms and trade-offs

Question 3

Why is it in some industries impossible to determine a products unit cost before determining its price? Cost-based pricing

Answer 3

• Unit cost change with volume. Allocate fixed costs.
• Cost-based pricers must make absurd assumptions to set price without volume and undermine profit.
• Another method is customer-driven pricing.
  Price makers are marketers. . Pricing the willingness to pay of customers instead of what the procut is worth
• Share-driven pricing strategy: price be dictated by competitive conditions in order to get more market share from the competition. reduce profitability of each sale to achieve market-share goals

Question 4

Price penetration strategy

Answer 4

• Price sensitive customers who are willing to easily swish to another brand if they find lower prices.
• Customer would test a product at a low starting price and could advertise product quality by word of mouth

Question 5

Price skimming strategy

Answer 5

• Differentiated product with high barriers to imitate. When substitution are not available customer are willing to pay more
• Price is an indicator for quality. Lower price give image of low quality
• Fast changing technological areas the company must amortize their investment quickly for the need to invest in development of a new technology. Start high to receive higher profit
• Product fields with bug experience curve effect the cost per unit will drop after time. The company can start at high price and lower it without decreasing the margin