ACCTG 1 Lecture Notes - Lecture 9: Debit Card, Pricing Strategies, Cost Accounting
Benita Weber Maastricht University ESBM S9
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S9 – ESBM: Ch 11 – Pricing and Credit
Strategies
• One of most important determinants of profit: prices of products
• Setting prices requires entrepreneurs to balance multitude of complex forces
• Pricing decisions have huge impact across the firm (marketing, operations &
strategy)
• Price must be compatible with consumer’s perception of value
1. Three Potent Forces: Image, Competition, and Value
• Recommended to take a strategic approach to pricing
• Pricing strategy is: 1. Major determinant of its image in the marketplace; 2.
Influenced by the pricing strategies of its competitors; 3. Important element in the
perceived value for customers
1.1 Price Conveys Image
• Communicate information about overall image to customers, signal about brand,
position, quality etc.
• Must establish prices that reinforce desired image and are compatible with what
customers expect and are willing to pay
• Prices send powerful message to customers
• Don’t make mistake to try to compete solely on price with larger competitors
• Can raise prices to improve financial results as long as they convince customers of
their superior value
→ value customers gain from company’s products must exceed the price they pay
and the expectations they have about the company and its products
• Key ingredient to understand company’s target market (their willingness to pay) →
target market, business image, and pricing strategy are closely related
1.2 Competition and Price
• Price transparency & customer’s price sensitivity impose constraints on ability to
raise prices
• Must take competitor’s prices into account → match or beat is not automatic
decision
• Pricing also about position and extra value offered to customers
• Consider rival’s motives and strategy
• Monitor competitor’s prices on close substitutes
• Avoid head-to-head price competition → nonprice competition as effective strategy
• To offer lower prices than competitors, must first create low-cost advantage by:
o Choosing low-cost location
Benita Weber Maastricht University ESBM S9
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o Minimizing operating costs by maximizing efficiency
o Exercising tight control over inventory and restricting product lines to those
items that turn over quickly
o Providing customers with no or limited service (e.g., self-service)
o Using low-cost, bootstrap marketing techniques
o Selling basic products but offering customers the option of purchasing
additional product or service features that generate higher profit margins
o Achieving high sales volume that allows the business to spread its fixed costs
across a large number of units (“economies of scale”)
• Dangerous strategy that may lead to price war → decimate profits → instead
differentiate
• Power of price cuts is often overestimated → sales volume rarely increases enough
to offset lower profit margin
• Customers that are lured by lowest prices are usually not loyal
1.3 Focus on Value
• Right price depends on: value it provides for a customer
o Objective value: willingness to pay if customers perfectly understood the
product’s true objective value
o Perceived value: actual price they are willing to pay
• Enhance perceived value by emphasizing unique and desirable attributes
• Setting prices too low is more dangerous than setting prices too high
• Fighter brand: a less expensive, no-frills version of a company’s flagship product that
is designed to confront lower-priced competitors head-on, satisfy the appetites of
value-conscious customers, and preserve the image of the company’s premium
product
• Three reference points define a fair price: price paid for the product in the past,
competitors’ prices for similar products & costs company incurs to provide product
• Small price increases (to account for inflation or rising costs) better than big periodic
increases
• Biggest mistake entrepreneurs can make is underestimate the firm’s actual total cost
of a product
• Businesses facing rapidly racing costs should consider following strategies:
o Communicate with customers
o Rather than raise the price of the good or service, include a surcharge
o Eliminate customer discounts, coupons, and promotions
o Offer products in smaller sizes or quantities
o Focus on improving efficiency everywhere in the company
o Emphasize the value your company provides to customers
o Raise prices incrementally and consistently rather than rely on large
periodic increases
o Shift to less expensive raw materials, if possible
o Anticipate rising materials costs and try to lock in prices early
o Consider absorbing cost increases
o Modify the product or service to lower its cost
o Differentiate your company and its products and services from the
competition
Benita Weber Maastricht University ESBM S9
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• For most products there is an acceptable price range, not just a single ideal price →
chosen price depends on desired image (discount, middle of the road, prestige) and
perceived value
2. Pricing Strategies and Tactics
• Wide variety of pricing strategies and tactics
• Pricing policies must be compatible with total marketing plan and image firm intends
to create
2.1 Introducing a new Product
• Have no precedent on which to base decision
• Most pricing problems result from firms setting prices too low
• Try to satisfy three objectives:
1. Get the product accepted: price must be acceptable to potential customers;
depends on products position:
a. Revolutionary products: products that are so new and unique that they
transform existing markets → wide price range
b. Evolutionary products: products that offer upgrades and enhancements
to existing products → not as wide as revolutionary
c. Me-too products: products that offer the same basic features as existing
products on the market → narrow price range
2. Maintaining market share as competition grows
3. Earn a profit
• Three basic strategies: Penetration, skimming and life cycle pricing
• Penetration: if product introduced into highly competitive market with large number
of similar products (with little room for differentiation), must penetrate market to be
successful
o Introduce product at low price (just above unit cost) to develop a wedge and
quickly achieve a high volume of sales
o Introduction accompanied with heavy advertising and promotional
techniques, special sales and discounts
o Works best with high switching costs
o Long-range strategy (small profits until customer acceptance)
o Danger: attract unloyal customers; risk of losing customers when increasing
prices
o Objective: break into market quickly, generate high sales volume, and build
market share
• Skimming: when introducing into market with little to no competition, or market
with elite group
o Emphasizing intangible benefits of higher-priced goods/selling the experience
o Higher-than-normal price to quickly recover initial developmental and
promotional costs & promote heavily → appeal to market that is not price
sensitive
o Reinforces prestigious image and allows for quick corrections of pricing
mistakes
o Requires differentiation from competitors’ offers
Document Summary
S9 esbm: ch 11 pricing and credit. Major determinant of its image in the marketplace; 2. Influenced by the pricing strategies of its competitors; 3. Important element in the perceived value for customers. Introduce product at low price (just above unit cost) to develop a wedge and quickly achieve a high volume of sales. 3. 1 markup: markup (markon): the difference between the cost of a product or service and its selling price. If not all jobs require same amount of materials, calculate hourly price without cost of materials and then add them later. Intangible, offer more flexibility in pricing than tangible products: risk of pricing service to low and harming perceived value, the impact of credit and debit cards and mobile wallets on. Pricing: consumers crave convenience such as paying by debit/credit card or mobile wallet, accepting credit/debit card and mobile payments increases expenses, but otherwise miss out on customers (usually benefits>costs)
