question
Price-Benefit Map
answer
Graph components:
-Price/ Cost on y axis
-Benefits on x axis
-Value-equivalence line/ fair value line
Depending on where you are on the line, you can offer an inferior value good, or a good price.
Price is subject to change
-Price/ Cost on y axis
-Benefits on x axis
-Value-equivalence line/ fair value line
Depending on where you are on the line, you can offer an inferior value good, or a good price.
Price is subject to change
question
What are the four factors in developing a price strategy?
answer
-Understanding Customer Price Sensitivity/ Price Elasticity
-Setting Price to create company value
- importance of cost structure
-setting price in a competitive context
-Setting Price to create company value
- importance of cost structure
-setting price in a competitive context
question
Why does the economics way of pricing not always work?
answer
-Most firms do not have all the data they need
-Stockpiling can distort data
-Stockpiling can distort data
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Price Elasticity/ Price sensitivity
answer
-To set optimal price, firms must understand the relationship between the offering's price and the customer demand for that offering
-the percentage change in quantity sold relative to percentage change in price
-greater price sensitivity (Beta)= more elasticity
|e| < 1 = inelastic
|e| > 1 = elastic
|e| = 1 = unitary elastic
-the percentage change in quantity sold relative to percentage change in price
-greater price sensitivity (Beta)= more elasticity
|e| < 1 = inelastic
|e| > 1 = elastic
|e| = 1 = unitary elastic
question
Elastic Demand
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price changes cause great change in demand (flat demand curve)
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Inelastic Demand
answer
Price changes cause little change in demand (steep demand curve)
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What makes estimating beta (price sensitivity) so hard?
answer
-Beta is a function of factors other than price (awareness, choice set, etc.)
-We don't always observe the beta is <0
-Marketers intervene
stockpiling can distort the relationship between price and demand
-We don't always observe the beta is <0
-Marketers intervene
stockpiling can distort the relationship between price and demand
question
What can firms do to influence Beta?
answer
-reduce awareness/ availability of substitutes (lower beta)
-Raise (perceived) switching costs (lower Beta)
-Decrease ease of direct comparison (lower Beta)
-Bundle with more expensive goods (relative value in bundle: lower % leads to lower Beta)
-Use price/ quality inferences (lower Beta)
-Raise (perceived) switching costs (lower Beta)
-Decrease ease of direct comparison (lower Beta)
-Bundle with more expensive goods (relative value in bundle: lower % leads to lower Beta)
-Use price/ quality inferences (lower Beta)
question
What is the Economic Value to the Customer (EVC) and what are the limitations?
answer
-EVC is the monetary value placed on the benefits and cost savings provided by a product
Limitations:
-buyers may not "buy" the EVC calculations
-competitors may sell bellow EVC
-EVC can be too subjective and difficult to quantify
Limitations:
-buyers may not "buy" the EVC calculations
-competitors may sell bellow EVC
-EVC can be too subjective and difficult to quantify
question
What are the four factors is setting a price?
answer
-Price Ceiling (Demand factors, EVC, WTP)
-competitive factors
-final pricing decision
-company factors
-Price Floor (cost factors, direct variable cost)
this makes up the price range
-competitive factors
-final pricing decision
-company factors
-Price Floor (cost factors, direct variable cost)
this makes up the price range
question
How can we set a price to create company value?
answer
-price discrimination strategies
-considering financial factors: costs
-considering other factors: positioning
-considering financial factors: costs
-considering other factors: positioning
question
What are price discrimination strategies?
answer
-firms want to price discriminate
-price discrimination is a selling strategy that charges customers different prices for the same product or service based on what the seller thinks they can get the customer to agree to
-in pure price discrimination, the seller charges each customer the maximum price they will pay
price discrimination is illegal if it's done on the basis of race, religion, nationality, or gender, or if it is in violation of antitrust or price-fixing laws
-price discrimination is a selling strategy that charges customers different prices for the same product or service based on what the seller thinks they can get the customer to agree to
-in pure price discrimination, the seller charges each customer the maximum price they will pay
price discrimination is illegal if it's done on the basis of race, religion, nationality, or gender, or if it is in violation of antitrust or price-fixing laws
question
What is first degree price discrimination?
answer
Price set uniquely for each customer (negotiated prices)
-example: used car sales
-example: used car sales
question
What is second-degree price discrimination?
answer
Incentives set for consumers to reveal their WTP, e.g. price set depending on the quantity sold
-the seller knows there are different types of buyers, but cannot determine, therefore leads to self-selection
-quantity discounts (non-linear pricing)
-block pricing
-the seller knows there are different types of buyers, but cannot determine, therefore leads to self-selection
-quantity discounts (non-linear pricing)
-block pricing
question
What are the challenges with non-linear pricing?
answer
-uncertain usage
question
What is third-degree price discrimination?
answer
-Price set depending on customer segment (segment is a proxy for WTP)
-get people who are price sensitive to pay lower price, and get people who are not price sensitive to pay higher price
-skimming (high price) vs penetration
-promotion pricing vs EDLP; convenience stores vs. supermarkets
-random discounting (coupons), periodic discounting (end of season), rebates
-CRM database marketing
-get people who are price sensitive to pay lower price, and get people who are not price sensitive to pay higher price
-skimming (high price) vs penetration
-promotion pricing vs EDLP; convenience stores vs. supermarkets
-random discounting (coupons), periodic discounting (end of season), rebates
-CRM database marketing
question
What is the difference between versioning and targeted heterogeneous prices?
answer
Versioning: create multiple types and consumer self selects
Targeting: firm targets consumer with optimal price based on knowledge of consumer's buying habits
Targeting: firm targets consumer with optimal price based on knowledge of consumer's buying habits
question
What are the company factors?
answer
Financial considerations:
- internal target margin or internal rate of return (IRR)
-cost consideration (variable costs and fixed costs)
Consistency with positioning strategy:
-within the company product line (prices should reflect the good-better-vest positioning)
-image consistency
- internal target margin or internal rate of return (IRR)
-cost consideration (variable costs and fixed costs)
Consistency with positioning strategy:
-within the company product line (prices should reflect the good-better-vest positioning)
-image consistency
question
What is cost-driven pricing?
answer
-price every product to yield a fair return over "full cost"
question
What are the costs change with changes in sales?
answer
Variable costs: cost recovery
Fixed costs: costs sharing
Opportunity costs: capacity optimization
Fixed costs: costs sharing
Opportunity costs: capacity optimization
question
What question should you ask about strategic costs
answer
NOT: What prices do we need to cover costs and achieve our profit objectives
BUT: Given our cost structure, what combinations of costs and volume would yield the most profitable outcomes?
-How much much sales gain would be required to profit from a price cut?
-How much sales loss would be tolerable to profit from a price increase?
-What costs can we afford to incur and still earn a profit?
BUT: Given our cost structure, what combinations of costs and volume would yield the most profitable outcomes?
-How much much sales gain would be required to profit from a price cut?
-How much sales loss would be tolerable to profit from a price increase?
-What costs can we afford to incur and still earn a profit?
question
What is the difference between cost-based/cost-plus pricing (product orientation) and value-based pricing (customer-centric orientation)
answer
Cost-based/cost-plus pricing (product orientation)
-design a good product,
-determine product costs,
-set price based on costs+profit,
-convince buyers of product's value
Value-based pricing (customer-centric orientation)
-assess customer needs and value perceptions,
-set target price to match customer value perceptions,
-determine costs that can be incurred,
-design actual product to deliver desired value at target price
-design a good product,
-determine product costs,
-set price based on costs+profit,
-convince buyers of product's value
Value-based pricing (customer-centric orientation)
-assess customer needs and value perceptions,
-set target price to match customer value perceptions,
-determine costs that can be incurred,
-design actual product to deliver desired value at target price
question
What are the competitive factors ?
answer
Ability to respond on price (price wars)
-resources
-cost structure
Willingness to respond on price
-competitive position
-direct financial cost
What is the correlation between ability and willingness to respond in price?
-cannot lower price right away when competition comes in
-resources
-cost structure
Willingness to respond on price
-competitive position
-direct financial cost
What is the correlation between ability and willingness to respond in price?
-cannot lower price right away when competition comes in
question
What are competitive reactions?
answer
-Plan for competitor's response
-monitor competitor's pricing
-manage customer and competitor's expectations regarding your pricing
Compete on price only when:
-you have a cost advantage
-it is part of an overall strategic reaction
-monitor competitor's pricing
-manage customer and competitor's expectations regarding your pricing
Compete on price only when:
-you have a cost advantage
-it is part of an overall strategic reaction
question
What are customer factors?
answer
Price Psychology
-reference price/choice set
-prospect theory
-price signaling
Price Sensitivity
-influenced by many factors other than economic value
-varies across customers and usage situations
-How can we measure it?
-reference price/choice set
-prospect theory
-price signaling
Price Sensitivity
-influenced by many factors other than economic value
-varies across customers and usage situations
-How can we measure it?
question
What are the three presumptions about consumers?
answer
-some are poorly informed in this product category
-some are very price elastic in this product category
-some have high transaction costs (other than search costs)
-some are very price elastic in this product category
-some have high transaction costs (other than search costs)
question
What are the three typical principal concerns a firm has?
answer
-wants to take advantage of consumer heterogeneity
-wants to price competitively
-wants to price a product line so as to develop interrelationships among items
-wants to price competitively
-wants to price a product line so as to develop interrelationships among items
question
What is random discounting?
answer
undiscernible or "random" to the uniformed consumer and infrequent, so that these customers will not be able to second guess the price
question
What is periodic discounting (price skimming strategies)?
answer
the manner of discounting is predictable over time and not necessarily unknown to consumers and the discount can be used by all consumers
question
What is second market discounting (generics, secondary demographic segments, and some foreign markets)?
answer
firm has unused capacity and consumers have transaction costs so there is no perfect arbitrage between the two markets (price in secondary market should exceed all increases in variable and fixed costs and loss of profits from the first market)
question
What is price signaling?
answer
price a lower-quality product as though it were higher quality
question
What is penetration pricing?
answer
low pricing to catch price-sensitive segment
question
What is geographic pricing?
answer
charge the same to different areas (ignoring differing costs, e.g., phone calls, airline travel)
question
What is image pricing?
answer
identical products with different names/prices
question
What is premium pricing?
answer
two product versions, high and low: "overprice" the better one and take a loss on the poorer one
question
What is price bundling?
answer
discount for buying a "package" without selecting only the items you want
question
What is leader pricing?
answer
low price on a good to lure customer in, then higher prices on other goods
question
What is two-part pricing?
answer
ex: cover charge then per charge
question
What is complementary pricing?
answer
introduce basic unit at low price; follow-ons are priced expensively
question
What is dynamic pricing?
answer
setting prices for good or service based on the demand for that good or service at the moment, based on the availability of supply
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