BUS 343 Chapter Notes - Chapter 10: Indictable Offence, Price Discrimination, Geographical Pricing

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Published on 14 Mar 2017
School
Simon Fraser University
Department
Business Administration
Course
BUS 343
Professor
Chapter 10 Pricing: Understanding and Capturing Customer Value
Cutting prices is often not the best answer leads to lost profits and damaging price wars
Companies should sell value, not price
By justifying higher price by the greater value that is gained
Price amount of money charged for p/s; sum of values that customer exchange for benefits of using p/s
Historically the major factor affecting buying decisions; now helps determine market share and profitability
Only element in marketing mix that produces revenue (and flexible); all others represent costs
Major Pricing strategies price usually falls between too high to produce demand or too low to make profits
Price Ceiling ustoe peeptios of podut’s alue sets this aout
Price floor product costs
3 strategies: customer value-based pricing, cost-based pricing, competition-based pricing
Cost-Based Pricing
Design a good product determine product costs set price based on cost convince buyers of product’s value
Value-based pricing
Assess customer needs/ set target P to match Determine costs that Design product to deliver desired value at target P
value perceptions perceived V can be incurred
Customer Value-based pricing: settig pie ased o uye’s peeptios of alue athe tha o the selle’s ost
Because customer makes end decision on whether price is right
Price is considered along with other marketing mix elements before marketing program is set, not at the end
Hard for companies to measure values that customers attach to products (taste, envi, relaxation, status, etc)
o Ask customers, experiments (price offers)
Good-value pricing: offering just the right combo of quality and good service at a fair price
o Less expensive versions of established brand name product lines
Value is subjective, but many assume getting brand name products at lower prices than normal
So this strategy involves redesigning existing brands
Or less value at rock-bottom prices
o Everyday Low Pricing (EDLP) one type of good-value pricing at retail level
Charging a constant, everyday low price with few or no temporary discounts (e.g. Costco)
o High-low pricing charging higher princes on an everyday basis but running frequent promotions to lower
prices temporarily on selected items
Frequent sales days, early-bird savings, bonus in-store credit
Value-added pricing: attaching value-added featues/seies to diffeetiate opay’s offes & hagig highe P
o Adding more amenities and charging more, rather than cutting services and charging less
Cost-based Pricing setting prices based on costs for producing/distributing/selling the product + fair rate of return for effort
and risk
Working with low cost producers helps set lower prices (Walmart)
Let lower prices with small margins, but greater sales and profits
Types of costs
o Fixed costs (overhead) do not vary with product/sales level
o Variable costs vary directly with level of production
o Total costs sum of fixed and variable costs for any given level of production
Cost-Plus (mark-up) Pricing adding a standard mark-up to the cost of a product
o Buy from manufacturer for $20 and add 50% markup to $30 for selling
If operating costs are $8 per unit, then $2 profit made on mark-up
o Any pricing method that ignores consumer demand is not likely to give best price
But sellers more certain about costs that demand so tie price to cost
But when all firms in industry use this pricing, they all end up with similar prices
Breakeven (target-return) pricing setting price to break even on the costs of making/marketing a product or to make
a target return
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o Breakeven total cost = total revenue higher price = lower breakeven point
o Target return = break even + more sales to make a profit
o Method fails to consider customer value and relationship between price and demand, so only goo to
determine minimum prices needed to cover costs
Competition-based pricing: settig pies ased o opetito’s stategies, pies, osts ad aket offeigs
First see how your market offering differs from theirs in terms of customer value
How strong are current competitors and what are their current pricing strategies
o Charge lower prices to drive weak competitors out of market (if smaller competitors)
o If large, low-priced competition, target unserved market niches with value-added products
Overall marketing strategy, objectives, and marketing mix must decide before setting price
If target and positioning is already decided, marketing mix strategy is straightforward
Price can be set to attract new customers or to profitably retain existing customers or to prevent competition from
entering the market
o Or to keep loyalty/support/excitement for brand
Pricing must be coordinated w/ product design, distribution, & promotion decisions to form a consistent M. program
Target costing pricing starts with an ideal selling price and then target costs that will ensure price is met
Non-price positions marketing offer to make it worth high price
Some position their products for high prices
Organizational considerations who sets price?
Companies where pricing is a key factor have pricing departments
Small companies top management; big companies product line managers; industrial markets sales person
negotiates
Pricing in different types of markets
Pure competition market consists of many buyers and sellers trading in a uniform commodity such as wheat
o No single buyer has much effect on ongoing market price so does’t oy aout piig stategy
Monopolistic competition market consists of many buyers and sellers who trade over a range of prices rather than
a single market price
o Because they can differentiate their offers to buyers
Oligopolistic competition market consists of a few sellers who are highly sensitive to eah othe’s piig ad
marketing strategies
o Eah is esposie to opetito’s piig stategies ad oes
Pure monopoly market consists of one seller
o Government monopoly (Canada Post), private regulated monopoly (power company), or private
nonregulated monopoly different pricing for each cas
Demand curve number of units the market will buy at different prices using (estimated demand)
Demand at different prices depends of the type of market competition
Price elasticity measure of the sensitivity of demand to price changes
Elastic: demand changes greatly with a small change in price lower price produces more total revenue
o But do’t want to lower it to price that turns products into commodities
Inelastic: demand changes hardly with small changes in price
The economy
Factors like boom, recession, inflation, and interest rates affect pricing decisions affect consumer spending
After 2008-2009 recession, people look at price-value relationship more
But price cuts to respond to slow economy has LT consequences
Instead of cutting prices, marketers should shift focus to more affordable items in product mixes
Other external factors how will resellers, government, society respond to various prices?
Resellers set prices that give resellers a fair profit, encourage their support and help them sell the product
Government regulatory
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Document Summary

Chapter 10 pricing: understanding and capturing customer value. Cutting prices is often not the best answer leads to lost profits and damaging price wars: companies should sell value, not price, by justifying higher price by the greater value that is gained. Design a good product determine product costs set price based on cost convince buyers of product"s value. Assess customer needs/ set target p to match determine costs that design product to deliver desired value at target p value perceptions perceived v. Frequent sales days, early-bird savings, bonus in-store credit: value-added pricing: attaching value-added featu(cid:396)es/se(cid:396)(cid:448)i(cid:272)es to diffe(cid:396)e(cid:374)tiate (cid:272)o(cid:373)pa(cid:374)y"s offe(cid:396)s & (cid:272)ha(cid:396)gi(cid:374)g highe(cid:396) p, adding more amenities and charging more, rather than cutting services and charging less. Cost-based pricing setting prices based on costs for producing/distributing/selling the product + fair rate of return for effort and risk: working with low cost producers helps set lower prices (walmart) Let lower prices with small margins, but greater sales and profits.

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