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Chapter 11

Chapter 11 Notes


Department
Management (MGM)
Course Code
MGMA01H3
Professor
Alison Jing Xu
Chapter
11

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Chapter 11 Pricing Notes
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 or using the product or service; historically, it has been the major factors affecting buyer choice
price is the only element in the marketing mix that produces revenue; all other elements represent costs
one frequent problem is that many companies are too quick to reduce prices to get a sale rather than convincing buyers that their
product’s greater value is worth a higher price; and other common mistakes include pricing that is too cost oriented rather than
customer-value oriented, and pricing that does not take the rest of the marketing mix into account
Factors to Consider When Setting Prices
customer perceptions of the product’s value set the ceiling for prices and product costs set the floor for prices
in setting its prices between these two extremes, the company must consider a number of other internal and external factors,
including its overall marketing strategy and mix, the nature of the market and demand, and competitors’ strategies and prices
Customer Perceptions of Value
when customers buy a product, they exchange something of value to get something of value in return
effective, customer-oriented pricing involves understanding how much value consumers place on the benefits they receive from
the product and setting a price that captures this value
Value-Based Pricing
value-based pricing setting price based on buyers’ perceptions of value rather than on the seller’s cost
value-based pricing means that the marketer cannot design a product and marketing program and then set the price
price is considered along with the other marketing mix variables before the marketing program is set
a company using value-based pricing must find out what value buyers assign to different competitive offers; however, companies
often find it hard to measure the value customers will attach to a product
good-value pricing offering just the right combination of quality and good service at a fair price
value-added pricing attaching value-added features and services to differentiate a company’s offers and charging higher
prices
Company and Product Costs
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; a company’s cost may be an important element in its pricing strategy
Costs as a Function of Production Experience
experience curve (learning curve) drop in average per-unit production cost that comes with accrued production experience
if a downward-sloping experience curve exists, this is highly significant for the company
not only will company’s unit production cost fall, but it will fall faster if firm makes and sells more during a given time period
Cost-Plus Pricing
cost-plus pricing adding a standard mark-up to the cost of the product
any pricing method that ignores demand and competitor prices is not likely to lead to the best price
mark-up pricing remains popular for many reasons—(1) sellers are more certain about costs than about demand; (2) when all
firms in the industry use this pricing method, prices tend to be similar and price competition is thus minimized; and (3) many
people feel that cost-plus pricing is fairer to both buyers and sellers
Break-Even Analysis and Target Profit Pricing
break-even pricing (target profit pricing) setting price to break even on the costs of making and marketing a product, or
setting price to make a target profit; uses the concept of a break-even chart
the break-even chart shows the total cost and total revenue expected at different sales volume levels
the manufacturer should consider different prices and estimate break-even volumes, probable demand, and profits for each
Other Internal and External Considerations Affecting Price Decisions
internal factors affecting pricing include the company’s overall marketing strategy, objectives, and marketing mix, as well as
other organizational considerations; while external factors include the nature of the market and demand, competitors’ strategies
and prices, and other environmental factors
Overall Marketing Strategy, Objectives, and Mix
target costing pricing that starts with an ideal selling price, then targets costs that will ensure that the price is met
other companies deemphasize price and use other marketing mix tools to create non-price positions
often, best strategy is not to charge the lowest price but rather to differentiate the marketing offer to make it worth a higher price
some marketers even position their products on high prices, featuring high prices as part of their product’s allure
Organizational Considerations
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management must decide who within the organization should set prices
top management usually sets the pricing objectives and policies, and it often approves the prices proposed by lower-level
management or salespeople, whether in small companies or in large companies
others who have an influence include sales managers, production managers, finance managers, and accountants
The Market and Demand
demand curve shows the number of units the market will buy in a given time period, at different prices that might be charged
price elasticity a measure of the sensitivity of demand to changes in price
if demand hardly changes with a small change in price, the demand is inelastic; else it is elastic
if demand is elastic, sellers will consider lowering their prices as it produces more total revenue
at the same time, most firms want to avoid pricing that turns their products into commodities
Competitors’ Strategies and Prices
consumers will base their judgments of a product’s value on the prices that competitors charge for similar products
in addition, the company’s pricing strategy may affect the nature of the competition it faces
Other External Factors
economic conditions can have a strong impact on the firm’s pricing strategies
economic factors such as boom or recession, inflation, and interest rates affect pricing decisions because they affect both
consumer perceptions of the product’s price and value and the costs of producing a product
the company should set prices that give resellers a fair profit, encourage their support, and help them sell the product effectively
the government is another important external influence on pricing decisions
finally, social concerns may need to be taken into account as a company’s short-term sales, market share, and profit goals may
need to be tempered by broader societal considerations
New-Product Pricing Strategies
Market-Skimming Pricing
market-skimming pricing 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
it makes sense only under certain conditions—(1) the product’s quality and image must support its higher price and enough
buyers must want the product at that price; (2) the costs of producing a smaller volume cannot be so high that they cancel the
advantage of charging more; and (3) competitors should not be able to enter the market easily and undercut the high price
Market-Penetration Pricing
market-penetration pricing setting a low price for a new product to attract a large number of buyers and a large market share
several conditions must be met—(1) the market must be highly price sensitive so that a low price produces more market growth;
(2) production and distribution costs must fall as sales volume rises; and (3) the low price must help keep out the competition,
and the penetration pricer must maintain its low-price position, otherwise, the price advantage may only be temporary
Product Mix Pricing Strategies
Product Line Pricing
product line pricing setting the price steps between various products in a product line based on cost differences between the
products, customer evaluations of different features, and competitors’ prices
the price steps should take into account cost differences between the products in the line
more importantly, they should account for differences in customer perceptions of the value of different features
Optional-Product Pricing
optional-product pricing the pricing of optional or accessory products along with a main product
Captive-Product Pricing
captive-product pricing setting a price for products that must be used along with a main product
in case of services, this captive-product pricing is called two-part pricing and is broken into a fixed fee plus a variable usage rate
the service firm must decide how much to charge for the basic service and how much for the variable usage
the fixed amount should be low enough to induce usage of the service; profit can be made on the variable fees
By-Product Pricing
by-product pricing setting a price for by-products to make the main product’s price more competitive
the by-products themselves can even turn out to be profitable
Product Bundle Pricing
product bundle pricing combining several products and offering the bundle at a reduced price
price bundling can promote the sales of products consumers might not otherwise buy, but the combined price must be low
enough to get them to buy the bundle
Price Adjustment Strategies
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