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RSM250H1 (18)
Min Zhao (3)
Chapter 12

RSM250 chapter 12 pricing notes.docx

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Department
Rotman Commerce
Course
RSM250H1
Professor
Min Zhao
Semester
Fall

Description
Chapter 11 P.248-259 Pricing -set value not price. What is a 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. -Price has been the major factor affecting buying choice, but recently, non-price factors have gained importance. -Price is the only element in the marketing mix that produces revenue; all other elements represent costs. -more flexible compared to product features and channel commitments. -plays key role in creating customer value and building customer relationships. Factors to consider when setting prices -price charged is between one that is too high to produce any demand and one that is too low to produce a profit. -customer perceptions set price ceiling -product costs set price floor -internet and external factors is considered in setting a price between the two extremes such as: overall marketing strategy and mix, nature of the market and demand and competitors strategies and price.  Customer Perceptions of a Value -Price decisions start with customer value. -effective customer oriented pricing involves understanding how much value consumers place on the benefits of the product. 1) Value based pricing – uses buyers’ perceptions of value, not the seller’s cost as the key to pricing. -Price is considered along with the other marketing mix variables before the marketing program is set. -Cost-Based Pricing is product driven: Design a good productdetermine product costsset price based on costconvince buyers of product’s value -Value based pricing: Assess customer needs and value perceptionsset target price to match customer perceived valuedetermine costs that can be incurreddesign product to deliver desired value at target price. -hard to measure customer value o Good value pricing – offering just the right combination of quality and good service at a fair price. -in many cases this has involved introducing less espensive versions of established brand name products. Ex. Value meals -redesigning existing brands to offer more quality for a given price or the same quality for less. -one type: retail level is everyday low pricing (EDLP): constant everyday low price with no/few discounts. o Value added pricing – attaching value added feature and services to differentiate a company’s offers and charging higher prices. -a way to increase pricing power -attaching value added features to differentiate from competitors instead of cutting price.  Company and Product Costs – setting prices based on the costs for producing, distributing and selling the product plus a fair rate of return for effort and risk. -companies with lower costs can set lower price that result in smaller margins but greater sales and profits. Other companies intentionally pay higher costs so that they can claim higher prices and margins. -essential to manage the spread between costs and prices, how much the company makes for the customer value. o Types of costs Fixed costs – costs that do not vary with production or sales level Variable costs – costs that vary directly with the level of production, tends to be the same for each unit produced. Total costs – the sum of the fixed and variable costs for any given level of production -if the cost is more than the competitors to produce and sell its product, the company will need to charge a higher price, or make less profit, putting it at a competitive disadvantage. o Costs at different levels of production -Average cost falls as fixed costs are spread over more units, each one bearing a smaller share of the fixed cost. -increasing diseconomies of scale when they over produce past the optimum. o Costs as a function of production experience -as a company gains experience in producing calculators, it learns how to do it better. “learning” causes it to become more efficient and gains economies of scale. This causes AC to fall with accumulated production experience. -accumulated production experience is called the experience curve/learning curve. -downward sloping experience curve=unit production cost fall faster if the company makes and sells more during a given time period. -to take advantage, company must obtain large market share early on in the PLC. -strategy: price calculators low, sales will increase, costs will decrease, =lower future prices. -cannot focus on EC single mindedly, major risks: aggressive pricing = cheap image, assumes competitors are weak and not willing to have price war, competitor may find a lower cost tech. o Cost plus pricing – adding a standard markup to the cost of the product. i ed osts -Any pricing method that ignores demand and competitor prices is not likely to lead to the best price. -Sellers are more certain about costs than about demand(tying cost and demand simplifies pricing) -when all firms in the industry use this pricing method, prices tend to be similar and price competition is thus minimized. -people feel cost plus pricing is fairer to both buyers and sellers. o Breakeven 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. -used by GM, public utilities which are constrained to make a fair return on their investment
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