Pricing: Understanding and Capturing Customer Value

Flashcards covering pricing strategies, cost types, market competition, and price adjustment strategies based on Chapter 08 lecture notes.

Price

The amount of money charged for a product or service, which produces revenue and determines a firm's market share and profitability.

Price floor

The limit set by product costs; no profits are possible below this price level.

Price ceiling

The limit set by consumer perceptions of value; no demand exists above this price level.

Customer Value-Based Pricing

Setting prices based on buyers' perceptions of value rather than on the seller’s cost.

Good-value pricing

Offering just the right combination of quality and good service at a fair price, such as Perodua cars.

Value-added pricing

Attaching value-added features and services to differentiate a company’s offer and support charging a higher price, such as Tesla's advanced technology.

Cost-Based Pricing

Setting prices based on the costs of producing, distributing, and selling the product plus a fair rate of return for effort and risk.

Fixed costs (overhead)

Costs that do not vary with production or sales level, such as rent, salaries, and insurance.

Variable costs

Costs that vary directly with the level of production, such as raw materials, packaging, and commissions.

Total costs

The sum of the fixed and variable costs for any given level of production, expressed as $\text{Fixed Costs} + \text{Variable Costs}$.

Cost-plus pricing (markup pricing)

The method of adding a standard markup to the cost of the product.

Break-even pricing (target return pricing)

Setting price to break even on the costs of making and marketing a product, or setting price to make a target return.

Competition-Based Pricing

Setting prices based on competitors’ strategies, costs, prices, and market offerings.

Pure competition

A market type where many sellers offer identical products and have very low pricing power, such as farmers selling vegetables.

Monopolistic competition

A market type where many sellers offer similar but differentiated products, resulting in moderate pricing power.

Oligopolistic competition

A market dominated by a few large sellers offering similar products with high pricing power depending on competitors, such as Maxis or U Mobile.

Pure monopoly

A market where only one seller controls the entire market with no substitutes, having very high pricing power.

Law of Demand (Alfred Marshall, 1890)

The principle stating that as price increases, the quantity demanded decreases, assuming other factors remain constant.

Price Elasticity of Demand

A measure of the sensitivity of demand to changes in price.

Inelastic demand

A situation where demand hardly changes with a small change in price, typically seen with necessities like petrol.

Elastic demand

A situation where demand changes greatly with a small change in price, such as with movie tickets.

Frugality

The practice of being economical, thrifty, and resourceful with resources like money, food, and time.

Market-skimming pricing (price skimming)

Setting a high initial price to skim maximum revenues from segments willing to pay the high price, as seen with the PlayStation 5 launch at $RM2,299$.

Market-penetration pricing

Setting a low initial price to attract a large number of buyers and gain a large market share quickly.

Product line pricing

Setting prices across an entire product line.

Optional-product pricing

Pricing optional or accessory products sold with the main product.

Captive-product pricing

Pricing products that must be used with the main product.

By-product pricing

Pricing low-value by-products to get rid of them or make money on them.

Product bundle pricing

Pricing bundles of products sold together.

Discount and allowance pricing

Reducing prices to reward customer responses such as volume purchases or paying early.

Segmented pricing

Adjusting prices to allow for differences in customers, products, or locations.

Psychological pricing

Adjusting prices for psychological effect.

Promotional pricing

Temporarily reducing prices to spur short-run sales.

Geographical pricing

Adjusting prices to account for the geographic location of customers.

Dynamic pricing

Adjusting prices continually to meet the characteristics and needs of individual customers and situations.

International pricing

Adjusting prices for international markets.