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CHAPTER 10 midterm notes

6 Pages

Administrative Studies
Course Code
ADMS 2200
Louise Ripley

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CHAPTER 10 PRICING: UNDERSTANDING AND CAPTURING CUSTOMER VALUE WHAT IS A PRICE? Price: the amount of money charged for a product or service, or the sum of the values that customers exchange for the benefits of having/using the product or service.  Price is the only element in the marketing mix that produces revenue; all other elements represent costs.  Price is one of the most flexible marketing mix elements; prices can be changed quickly MAJOR PRICING STRATEGIES CUSTOMER VALUE-BASED PRICING Customer value-based pricing: Setting price based on buyers’ perceptions of value rather than on the seller’s cost.  Price is considered along with the other marketing mix variables before the marketing program is set. Considerations in setting price Customer-value based Competition-based Cost-based Customer Product perceptions Other internal and external costs of value considerations -Marketing strategy, objectives, and mix -Nature of the market and demand Price Floor Price -Competitor’s strategies and prices No profits Ceiling below this price No demand above this price There are two types of value-based pricing: good-value pricing and value-added pricing: Good-value pricing: Offering just the right combination of quality and good service at a fair price.  State of economy have caused a shift in consumer attitudes towards price and quality  Many companies have responded to this by introducing less-expensive versions of brand-name products.  Everyday low pricing (EDLP) is an important type of good-value pricing. Value-added pricing: Attaching value-added features and services to differentiate a company’s offers and charging higher prices. COST-BASED PRICING Cost-based pricing: Setting prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for effort and risk. Value-based pricing Vs. Cost-based pricing Cost-based pricing Design a good Determine Set price based on Convince buyers of product product costs cost product’s value Value-based pricing Assess customer Set target price to Determine costs Design product to needs and value match customer that can be deliver desired perceptions perceived value incurred value at target price TYPES OF COSTS Fixed costs (aka Overhead): Costs that do not vary with production or sales level. (Ex. Rent, salaries, heat etc.) Variable costs: Costs that vary directly with the level of production. Total costs: The sum of the fixed and variable costs for any given level of production. Cost-plus pricing (Markup pricing): Adding a standard markup to the cost of the product. Break-even pricing (Target return pricing): Setting price to break even the costs of making and marketing a product, or setting price to make a target return. COMPETITION-BASED PRICING Competition-based pricing: Setting prices based on competitors’ marketing strategies, prices, costs, and market offerings. OTHER INTERNAL AND EXTERNAL CONSIDERATIONS AFFECTING PRICING DECISIONS OVERALL MARKETING STRATEGY, OBJECTIVES, AND MIX Target costing: Pricing that starts with an ideal selling price, and then targets costs that will ensure that the price is met. ORGANIZATIONAL CONSIDERATIONS  Management must decide who within the organization should set prices.  In small companies, prices are often set by top management  In large companies, pricing is typically handled by divisional or product line managers. THE MARKET AND DEMAND Demand curve: A curve that shows the number of units the market will buy in a given time period, at different prices that might be charged.  In a normal case, demand and price are inversely related; the higher the price, the lower the demand. Price elasticity: A measure of the sensitivity of demand to changes in price.  If demand hardly changes with a small change in price, demand is inelastic  If demand changes greatly, demand is elastic  If demand is elastic, sellers will consider lowering their prices, which will produce more total revenue. THE ECONOMY Economic conditions can have a strong impact on the firm’s pricing strategies. Economic factors such as a boom or a recession affect pricing decisions because they affect consumer spending, consumer perceptions of the product’s price and value, and the company’s costs of producing and selling a product. Companies can deal with these conditions by lowering prices, or shifting their marketing focus to more affordable items in their product mixes. OTHER EXTERNAL FORCES  Resellers  Government  Social Concerns NEW PRODUCT PRICING Market-skimming pricing (Price skimming): Setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price; the company makes fewer but more profitable sales.  Product’s quality and image must support its higher price, and enough buyers must want the product at that price  Costs of producing a small volume can’t be so high that they cancel the advantage of charging more  Competitors should not be able to enter the market easily and undercut the high price Market-penetration pricing: Setting a low initial price for a new product in order to attract a large number of buyers and a large market share.  Market must be highly price sensitive so that a low price produces more market growth  Production and distribution costs must fall as sales volume increases  Low price must help keep out the competition, and the penetration pricer must maintain its low-price position—otherwise the price advantage may be only temporary PRODUCT MIX PRICING The strategy for setting a
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