Exam Notes: Pricing Strategies

The Price

• Price from a Traditional Perspective: Value in monetary units.
• Seller's Perspective: Value assigned to goods for exchange.
• Buyer's Perspective: Effort, time, and utility.
• Definition: The amount a customer pays for a product.
• Pricing Factors:
  • Production costs (materials, labor, etc.).
  • Target audience and their purchasing power.
  • Brand's price range.
  • Prices of similar products.
  • External factors (economic situation, government policies).

The Price as Instrument of Marketing

• Competitive tool for consumer comparison.
• Short-term instrument.
• Source of revenue.
• Psychological impact on consumers (price associated with quality).
• Sometimes the only information available to consumers.

Objectives of Price Policy

• Survival: Covering costs with substantial inventory.
• Minimize costs: Increase profit margin.
• Maximize sales: Increase units sold.
• Quality leadership: Set higher prices, offer high-quality products.

Factors Influencing Price

• Internal: Objectives, costs, product life cycle, marketing mix.
• External: Legal norms, market and competition, suppliers, demand sensitivity.

Supply and Demand Curve

• Equilibrium Price: The price at which supply equals demand.
• Consumer Surplus: Difference between willingness to pay and actual price.
• Producer Surplus: Difference between selling price and willingness to sell.

Sensitivity and Elasticity of Demand

• Elasticity: Measures the change in demand relative to a change in price.
  • Elastic Demand: A change in price significantly affects demand (result is equal or greater to 1).
  • Inelastic Demand: Price changes have little impact on demand (result is less than 1).
• Examples of Inelastic Goods: Necessities, goods with few substitutes.

Elasticity of Demand

• Edp > 1: Elastic demands with many substitutes.
• $Edp = 1$: Unitary demand.
• Edp < 1: Inelastic demands with few substitutes.
• $Edp = \infty$: Perfectly elastic demand; quantity drops to zero with any price increase.
• $Edp = 0$: Perfectly inelastic demand; quantity does not change with price.

Components of Price: Costs

• Fixed Costs: Do not change with production quantity.
• Variable Costs: Change proportionally with production level.
• Direct Costs: Directly attributable to a unit of product.
• Indirect Costs: Cannot be directly assigned to a product.
• Costs by Function:
  • Procurement.
  • Manufacturing.
  • Marketing.
  • Distribution.
  • Post-sales services.
  • Administrative costs.

Economies of Scale and Experience Curve

• Economies of Scale: Cost advantages due to increased production levels.
• Experience Curve: Costs decrease as an organization gains experience in producing a product.

Profit Margins

• Calculated as the difference between sales revenue and costs.
• Margin Calculation Examples:
  • Net Sales = Selling Price - Discount.
  • Gross Margin = Net Sales - Cost Price.
  • Gross Profit Margin = Gross Margin - Marketing Costs.
  • Net Profit Margin = Gross Profit Margin - Remaining Costs.

Break-Even Analysis

• The point where total revenue equals total costs.
• Formula: $Q = CF / (P - CVu)$, where:
  • Q = Quantity to break even.
  • CF = Fixed Costs.
  • P = Price per unit.
  • CVu = Variable Cost per unit.

IVA (Value Added Tax)

• An indirect tax on the value added to goods and services.
• Base Imponible: Total amount of transaction subject to tax.
• Tipo Impositivo: Tax rate applied to the base.
• Cuota de IVA: The resulting tax amount (Base Imponible * Tipo Impositivo).

Types of IVA in Spain

• General IVA: 21% (e.g., electronics, clothing).
• Reduced IVA: 10% (e.g., public transport, hotels).
• Super-Reduced IVA: 4% (e.g., basic foods, books).

IVA Concepts

• IVA Soportado: VAT paid on purchases.
• IVA Repercutido: VAT charged on sales.
• IVA Liquidation: IVA Repercutido - IVA Soportado.

Currencies (Divisas)

• Foreign currency; any official money other than the local currency.

Methods of Price Fixing

• Based on costs: adding a profit margin to the cost of production.

Methods of Price Fixing

• Based on the Demand: Subjective based on the value perceived by the consumer.

Methods of Price Fixing

• Based on Competitors: Prices are determined considering the prices of competitors.

Price Strategies by Product Line

• Loss leader: Set very low prices to attract the sale of other products.
• Package price: Is a joint price, for different and complementary products at a lower price than purchase them separately.
• Captive price: Apply loss leader strategy to the main product with a very high price of the complement.
• Unique price: Fix the same price for all products in the same product line.
• Two-part: Apply a fixed price for the primary service, and other variable depending on the usage.
• Dynamic: The price changes dynamically depending on the consumer market.

Price Strategies for New Products

• Penetration: Set the lowest price as possible to get higher market.
• Skimming: Apply the highest price the market can afford, so only consumers willing to pay the high price buy the product.

Differential Pricing Strategies

• Apply different levels of price on a single product depending on characteristics of consumer or place.
• Periodic Discounts: Price discount with previous knowledge of consumers.
• Random Discounts: Discounts at certain and defined place and time.
• Variable Prices: Different price levels depending on sale characteristics of buyer.
• Second Market Discounts: Exclusively apply to individuals that have certain characteristics.
• Discount for prompt payment: Favors the nearest payment time, avoids risk of default.
• Volume discount: Stimulate buyers to buy the highest ammount possible.

Psychological prices strategies

• Bases on aspects that consumers perceive from potential consumers.
• Habitual or customary price: Associate determinate products with a specified price.
• Prestige: Relate the product price with attributes.
• Even Price: is perceived as better quality.
• Odd price: Reduce the price to think the procut has less value.