Week 9: Price Setting Flashcards

1
Q

Outline the FIVE key components of the price-setting decision process

A
  1. Set pricing objectives
    - Pricing decision must be based on the marketing and overall corporate objectives
    - Start with principal objectives and add collateral pricing goals:
    - > Achieving target return on investment
    - > Achieving market-share goal
    - > Meeting competition
  2. Demand determinants and assessing value
    - Issues when considering demand:
    - >Usage and importance of product/service by various segments
    -> Price sensitivity (elasticity of demand)
    -> Assessing value
    -> Possible buyer preference for a supplier because a total offering provides more value
    - Differentiating through value-creation
    ->Value? - relationships, emphasise unique add-on benefits:
    …Benefits = core and add-on
    …Sacrifices = acquisition, processing and usage costs
  3. Determine costs and relationship to volume
    - Target pricing and costing
    - > Many companies calculate price using ‘cost’ and ‘mark up approach’ - adding an amount to the cost of a product to determine its sale price (internally not market driven)
    - Target pricing
    - >First examine and segment the market
    - > Determine what type, quality and attributes each segment wants at a pre-determined target price
    - > Understand the perception of value to the target selling price
    - > Calculate costs considering margins
    - Cost classification system goals
    - >Target pricing forces marketers to understand what buyers want are are willing to pay
    - >Target costing forces companies to understand their cost structure in terms of direct and indirect costs, fixed and vairable costs and their contribution margins
    - >Combining target pricing and target costing means that instead of using cost-control techniques, a better approach is to compute the total costs that must not be exceeded, allowing for acceptable margins
  4. Competition
    - Competition establishes an upper limit on price
    - Price is only one component of the cost-benefit equation
    - There are many ways to have a differential advantage other than price: advanced features, technical expertise, timely delivery and product reliability (zero defects)
    - Service and support also have a differentiating effect
  5. Set price level
    - Pricing and profit objectives
    - Demand determinants
    - Cost determinants
    - Competition
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2
Q

Explain the first stage of the value-based approach to pricing

A
  1. Defining key market segments

- Segment markets into customers on the basis of what the customers value

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3
Q

Explain the second stage of the value-based approach to pricing

A
  1. Isolating drivers of value
    - Cost drivers - create value by economic savings
    - Revenue drivers - add incremental value by facilitating revenue or imprving sales revenue, increase profit, increase margins
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4
Q

Explain the third stage of the value-based approach to pricing

A
  1. Quantifying the impact of the suppliers product on the driver
    - Quantify the impact of a firms product or service offering on customer’s business - how much money is made/saved?
    - Compare the firms product/service offering compares to next best alternative (eg. competitors offering)
    - Isolate unique features that differ from competitor - do those provide value the customer cannot get elsewhere? How much value is created?
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5
Q

Explain the fourth stage of the value-based approach to pricing

A
  1. Estimating the value created by the product and service offering
    - Understand how customer uses the product and how much value customer will realise
    - Search and switching costs
    - Extent of a customers search and ability to switch products and or suppliers influence price sensitivity
    - Other factors
    - >End use: how important is the product as an input into total cost of the end product, if cost is insignificant, demand is inelastic
    - > End market focus: since demand for many industrial products is derived from the demand for the product of which they are a part, strong end user focus needed
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6
Q

Explain the fifth stage of the value-based approach to pricing

A
  1. Developing the pricing strategy and marketing plan
    - Set the price and develop responsive marketing strategy
    - >Elasticity varies by segment
    - >Price elasticity measures how sensitive customers are to price changes
    - >Price Elasticity of demand refers to rate of percentage change in quantity demanded to percentage change in price
    - > Overall demand in the market will not change (is derived) but demand at a target (customer) level may vary between targets
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