Chapter 11 Textbook Summary Notes.docx

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Management and Organizational Studies
Management and Organizational Studies 2320A/B
Kevin Thompson

Chapter 11 Textbook Summary Notes Pricing  Price: the amount of money charged for a product or service o The sum of all values that customers give up to gain the benefits of having or using a product or service o Determining a firms market share and profitability o Only element in the marketing mix that produces revenue o Most flexible marketing mix elements o Prices can be changed quickly o Pricing is the number-one problem facing many marketing executives, and many companies do not handle pricing well o One frequent problem is that 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 o Smart managers treat pricing as a key strategic tool for creating and capturing customer value o Key role in creating customer value and building customer relationships  Factors to Consider when Setting Prices o Should fall somewhere between one that is too high to produce any demand and one that is too low to produce a profit o Customer perceptions of the product’s value set the ceiling for prices o Product costs set the floor for prices o Customer Perception of Value  Must start with customer value  Exchange something of value (the price) to get something of value in return (the benefits of having or using the product)  Value-based pricing: uses buyers’ perceptions of value, not the seller’s cost, as the key to pricing  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  Company first assesses the customer needs and value perceptions  Price is set to match consumers’ perceived value  “Good value” is not the same as “low price”  Companies often find it hard to measure the value customers will attach to a product  Cost Based Pricing  Product driven  If the price turns out to be too high, the company must settle for lower markups or lower sales, both resulting in disappointing profits  Good Value Pricing  Offering just the right combination of quality and good service at a fair price  Has involved redesigning existing brands to offer more quality for a given price or the same quality for less  Some companies even succeed by offering less value but at rock-bottom price  Important type – EDLP (everyday low pricing) o Charging a constant, everyday, low price with few or no temporary price discounts  High low pricing – charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items  Value Added Pricing  Doesn’t mean simply charging what customers want to pay or setting low prices to meet the competition  Build the company’s pricing power – its power to escape price competition and justify higher prices and profit margins  To increase pricing power, a firm must retain or build the value of its market offering  To increase their power, many companies adopt value- added pricing strategies  They attach value added features and services to differentiate their offers and thus support higher prices o Company and Product Costs  Cost based pricing: involves setting prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for its effort and risk  Fixed Costs: costs that do not vary with production or sales level  Variable costs: vary directly with the level of production  Total costs: the sum of the fixed and variable costs for any given level of production  Experience curve: the drop in the average per-unit production cost that comes with accumulated production experience  Cost-plus pricing: adding a standard markup to the cost of the product  Any pricing method that ignores demand and competitor prices is not likely to lead to the best price  First, sellers are more certain about costs than about demand  Second, when all firms in the industry use this pricing method, prices tend to be similar and price competition is thus minimized  Third, many people feel that cost-plus pricing is fairer to both buyers and sellers  Break-even pricing: the firm tries to determine the price at which it will break even or make the target profit it is seeking o 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  External factors include the nature of the market and demand, competitors’ strategies and prices, and other environmental factors  Overall Marketing strategy  Before setting the price, the company must decide on its overall marketing strategy for the product or service  A firm can set prices to attract new customers or to profitably retain existing ones  It can set prices low to prevent competition from entering the market or set prices at competitors levels to stabilize the market  It can price to keep the loyalty and support of resellers or to avoid government intervention  Prices can be reduced temporarily to create excitement for a brand or one product may be priced to help the sales of other products in the company’s line  Price decisions must be coordinated with product design, distribution, and promotion decisions to form a consistent and effective integrated marketing program  Companies often position their products on price and then tailor other marketing decisions to the prices they want to charge  Target costing: pricing that starts with an ideal selling price, then targets costs that will ensure that the price is met  Non-price positions – the 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 products allure  Other Organizational Considerations  In small companies, prices are often set by top management  In large companies, pricing Is typically handled by divisional or product line managers  In industrial markets, salespeople may be allowed to negotiate with customers within certain price ranges  Others who have an influence on pricing include sales managers, production managers, finance managers, and accountants  The Market and Demand  Good pricing starts with an understanding of how customers perceptions of value affect the prices they are willing to pay  The marketer must understand the relationship between price and demand for the company’s product  Pricing in different types of markets o Four types of markets o Pure competition – the market consists of many buyers and sellers trading in a uniform commodity such as wheat copper, of financial securities. No single buyer or seller has much effect on the going market price – sellers in these markets do not spend much time on marketing strategy o Monopolistic competition – the market consists of many buyers and sellers who trade over a range of prices rather than a single market price and differentiate their offers to buyers o Oligopolistic competition – the market consists of a few sellers who are highly sensitive to each other’s pricing and marketing strategies (difficult for new sellers to enter the market) o Pure monopoly – the market consists of one seller who may be a government monopoly, a private regulated monopoly, or a private non- regulated monopoly. Pricing is handled differently in each case. In a regulated monopoly, the government permits the company to set rates that will yield a “fair return”. Non-regulated monopolies are free to price what the market will bear.  Analyzing the Price-Demand Relationship o The relationship between the price charged and the resulting demand level is shown on the demand curve o In the case of prestige goods, the demand curve sometimes slopes upward  Consumers think that higher prices mean more quality o Price elasticity: how responsive demand will be to a change in price o If demand hardly changes with a small change in price, we say the demand is inelastic (vertical demand curve) o If demand changes greatly with a small change in price, we say that demand is elastic (horizontal demand curve) o If demand is elastic, sellers will consider lowering their prices  A lower price will produce more revenue  Competitors Strategies and Prices  Consumers will base their judgments of a products value on the prices that competitors charge for similar products  The company’s pricing strategy may affect the nature of the competition it faces  If the company faces a host of smaller competitors charging high prices relative to the
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