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Chapter 11

MGMA01H3 Chapter Notes - Chapter 11: Predatory Pricing

Management (MGM)
Course Code
Tarun Dewan

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Chapter 11:
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
Price = major factor affecting buyer choice
Price = only element in the marketing mix that produce revenue; other = cost
Price = most flexible = change quickly
Small percentage improvement in price generate large percentage of profit
Price plays a key role in creating customer value and building customer
Factors To Consider When Setting Prices
Price charge = between too high to product any demand and too low to produce profit
Customer perceptions of the product value = price ceiling
Product cost = price floor
When setting prices, the company must consider internal and external factors,
including overall marketing strategy and mix, the nature of the market and demand,
and competitors’ strategies and prices
Customer Perception of Value
Customer oriented pricing = understanding how much value consumers place on the
benefits they receive from the product and setting a price that captures this value
1.Value-Based Pricing setting price based on buyers’ perceptions of value
rather than on the sellers cost
a.First assesses customer needs and value perceptions
b.Sets its target price based on customer perceptions of value
c.The target value and price then drive decisions about what costs can
be incurred and the resulting product design

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d.Must find out what value buyers assign to different competitive offers
2.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
a.design a product, adds up the costs of making, sets a price that covers
costs plus target profit
3.Good-Value Pricing offering just the right combination of quality and good
service at a fair price
a. Involved redesigning existing brands to offer more quality for a given
price or the same quality for less, or even less value but rock-bottom
b.Everyday low pricing (EDLP) involves charging a constant, everyday
low price with few or no temporary price discounts
c.High-low pricing involves charging higher prices on an everyday
basis but running frequent promotions to lower prices temporarily on
selected items
4.Value-Added Pricing attaching value-added features and services to
differentiate a company’s offers and charging higher prices
a.Pricing power its power to escape price competition, and justify
higher prices and profit margin
Company and Product Cost
Cost-based pricing lower prices -> smaller margins -> greater sales and profits
1.Types of Costs
a.Fixed costs cost that do not vary with production or sales level
b.Variable costs cost that vary directly with the level of production
c.Total costs sum of the fixed and variable costs for any given level of
d. If cost a company more than competitors to produce and sell its
product, the company needs to charge a higher price or make less
profit, putting it at a competitive disadvantages

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2.Costs at Different Levels of Production
a.Management needs to know how its costs vary with different levels of
3.Costs as a Function of Production Experience
a.Experience curve (learning curve) the drop in the average per-unit
production cost that comes with accumulated production experience
b.Risk: aggressive pricing might give the product a cheap image
c.Risk: the strategy also assumes that competitors are weak and not
willing to fight it out by meeting the company’s price cuts
d.Risk: competitors may find a lower-cost technology
4.Cost-Plus Pricing adding a standard markup to the cost of the product
a.Not make sense any pricing method ignores demand and competitor
prices is not likely to lead to the best price
b.Still popular:
i.Sellers are more certain about costs than about demand.
Simplify price, they do not need to make frequent adjustments
as demand changes
ii.When all firms in the industry use this price method, prices
tend to be similar and price competition is thus minimized
iii.Fairer to both buyers and sellers
5.Break-Even Analysis and Target Profit Pricing
a.Break-even pricing setting price to break even on the costs of making
and marketing a product, or setting price to make a target profit
b.Constrain to make fair return on investment
c.Manufacture should consider different prices and estimate break-even
volumes, probably demand, and profits for each
Other Internal and External Consideration Affecting Price Decisions
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