BSB126 Chapter Notes - Chapter 11: Grey Market, Price Skimming, Price Floor
Chapter 11: Pricing Concepts for Establishing Value
- Changing nature of consumers, economic conditions, markets, competitors, government
regulations, and firm’s products means constant changes in pricing strategy
- Price – overall sacrifice a consumer is willing to make to acquire a specific product (money,
time, travel costs, taxes, delivery costs etc.)
- Price must be matched with the consumer’s value perceptions
- Consumers use to price of a product to judge its quality
- 5 C’s of Pricing
oCompany objectives
Pricing should allow company to meet its objectives
Profit orientation
Focus on target profit pricing, maximise profits pricing, or target
return pricing
Target profit pricing – a particular profit goal is the overriding
concern
Maximise profit pricing – model that captures all factors required to
explain/predict sales/profits
Target return pricing – produce a specific return on investment (ROI)
Sales orientation
Increasing sales will help more than increasing profit
Some firms may focus more on market share
Premium pricing – firm deliberately prices a product above prices
set for competing products – creates value
Competitor orientation
Measure themselves primarily against competitors
Competitive parity – set prices similar to major competitors
Status quo pricing – change prices to meet competition
Customer orientation
Based on how a firm can add value to its goods/services
Designed to enhance company reputation and image – increase
value
oCustomers
Understand customer reactions to prices
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Customers want value
Demand curves and pricing
Shows how many units of a product customers will demand during a
specific period of time at different prices
Assumes all other factors remain unchanged
Knowing demand curve means a firm can examine price in terms of
the resulting demand and relative to its overall objective
Most goods/services follow traditional downward-sloping curve (as
price increases, demand decreases)
Prestige goods/services
oPurchased for status rather than functionality
oHigher price = greater status and exclusivity
oDon’t follow traditional curve
Price elasticity of demand
Consumers are generally less sensitive to price increases for
necessary items (e.g. milk)
Measures how changes in a price affect quantity of the product
demanded
Ratio of percentage change in quantity demanded to percentage
change in price
Elastic – price sensitive
oElasticity is less than -1
oSmall changes in price = large changes in quantity
demanded
Inelastic – price insensitive
oElasticity is greater than -1
oSmall changes in price = small changes in quantity
demanded
Factors influencing price elasticity
Income effect
oChange in quantity of a product demand due to change in
income
oIncrease means consumers buy higher prices alternatives
and price elasticity may drop
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Document Summary
Changing nature of consumers, economic conditions, markets, competitors, government regulations, and firm"s products means constant changes in pricing strategy. Price overall sacrifice a consumer is willing to make to acquire a specific product (money, time, travel costs, taxes, delivery costs etc. ) Price must be matched with the consumer"s value perceptions. Consumers use to price of a product to judge its quality. Pricing should allow company to meet its objectives. Focus on target profit pricing, maximise profits pricing, or target return pricing. Target profit pricing a particular profit goal is the overriding concern. Maximise profit pricing model that captures all factors required to explain/predict sales/profits. Target return pricing produce a specific return on investment (roi) Increasing sales will help more than increasing profit. Some firms may focus more on market share. Premium pricing firm deliberately prices a product above prices set for competing products creates value. Competitive parity set prices similar to major competitors.
