marketing management chap 11

strategy decisions provides guidelines for whether…

a price should be high or low

price discrimination

charging different prices to segments according to their price elasticity ot sensitivity

price bands/tiers

price variation within a product category

customer loyal to certain brands or products tend to…

rate price lower in importance than other factors, thus they are less price sensitive

low price visibility in some industries may create…

greater variability in transaction pricing

the greater the number of competitors…

the greater the converegence on a standard price

customer/perceived value

a measure of how much a customer is willing to pay for a product or service

reservation price

the most someone is willing to pay for a product

people compare the derived value or benefits from purchasing a product with what ?

the price being charged

three possible relationship among perceived value, price, and cost

1. perceieved value >price>cost

2. price>perceived value>cost

3. price>cost>perceived value

perceived value > price > cost

marketing manager sets price below what customers are willing to pay for the product or service; customers see value in the low price

sometimes pricing a product below customer value willl…

result in shortages and present production/distribution issues

value pricing

strategeically pricing below customer value

pricing to value

setting a products price at a level that is representative of the customers perceived value

in most cases, managers set prices below customer value due to ?

lack of information

price>perceived value> cost

marketing manager has set a price that is higher than the target market is willing to pay

unless the company has—— on the product, customers wont buy, because the product represents bad value

a monopoly

how do you correct bad value ?

lower price or an increase in customer value is required

price > cost> perceived value

represents a failed scenario; products are either eliminated in NPD process or withdrawn from the market

the strategic pricing gap shows

why it is important to understand customer perceived value or willingness to pay

floor price

cost incurred by the marketer for a product/service; you would not price below this cost

ceiling

the targets segment willingness to pay; you cannot price above this level

formula for price elasticity of demand

E= % change in demand/ % change in price

If E < 1.0

the product categoy is called price inelastic, because the change of demand is less than the change of price

if E> 1.0

the product category is called price elastic

as price moves closer to customer value…

price elasticity (sensitivity) rises closer to a point at which the consumer may not buy the product at all

value in use approach

benefits of product are placed in monetary terms (time savings, reduced usage of materials, less downtime). first select a reference product, then calculate the incremental monetary benefit to the customer using the product

survey based methods

used to obtain customers willingness to pay information. examples include open-ended questions, dollar metric method, and conjoint analysis

field experimental methods

attempt to gather actual market data after manipulating price in different markets

concept of perceived value is viewed as

a functional relationship among market share, perceived value, and price

market share equals

f (perceived value/price)

in marketing decline , cutting price will

bring balance to the relationship between perceived value and price

the cost of cutting price is substantial particularly when

the competition also cuts price

a lower price does not necessarily increase perceived value because…

it may signal lower quality

cost estimates provides firms with information on how…

low the competitor can price and industry/category margins

ways to estimate costss

• reverse engineering

• use publicly avaliable information

• experience curve

reverse engineering

buy competitors product, dissemble it, and study the costs of componenets and packaging

the role of costs

costs should have little to do with pricing decision other than act as a floor or lower price limit

in a non-market-driven firm, full cost plus target margin are used to…

set price

four different types of costs to consider

1. development costs

2. overhead costs

3. fixed costs

4. variable costs

development costs

bringing new products to market

overhead costs

costs covered by revenues from individual products, but not associated with any one product

fixed costs

associated with individual products, but do not vary with sales volume

variable costs

per unit costs of making the product

factors in the pricing decision

• decision maker

• stages of PLC

• psychological aspects

• industry conditions

• pricing objectives

penetration pricing

provides most of the value to customer while retaining small margin; goal is to gain as much market share as possible

skimming/prestige pricing

gives more of the cost-value gap to you than to the customer; makes sense early in PLC because early adopters of new tech are normall price insensitive

return on sales/investment pricing

implies that you can set price that delivers the rate of return demanded by senior management

pricing for stability

difficult to develop profit forecasts and long-range plans when for price fluctuate dramatically

competitive pricing

describes a situation in which you attempt to price at the market average

reference price

any standard of comparison against which a potential transaction or purchase price is compared

when observed price is higher than reference price…

sales can decrease because customer has unpleasant perception of the difference

relationship between price and perceived quality

sometimes a higher price can lead to higher demand, because higher price can signal higher quality; low price can signal low quality, marketers can use high price to signal prestige

threats of new entrants

if likelihood is high, lower prices can help protect market position from potential erosion and make profit potnetial for new entrants look unappealing; if likelihood is low, then higher price levels can be sustained

power of buyers/suppliers

high buyer power have a lowering effect on prices, whereas high supplier power can lead to higher prices

rivalry

strong levels can lead to price wars

pressure from subsittutes

more product substitues usually leads to greater price competition

pricing bundling/unbundling

offer a set of products as a package at prices lower than the sum of the individual parts ( computer, prints, and scanner for one price)

product-line pricing

offer both a high priced and low priced brand

complementary pricing

applies to products that are used together with one of the products being consumable (example printer and printer cartidge)

value pricing

related to customer expectations as it gives customers more value than they expect for the price paid; does not neccessarily imply low price

pricing tactics

• differential pricing

• direct price discrimination

• second market discounting

• periodic discounting

• flat rate vs variable rate pricing