Marketing Exam 3 Pricing Wolter

Why is pricing so important?
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Why is pricing so important?
Lecture
What is value-based and cost-based pricing?
Value-based: setting the price based on what customers are willing to pay

Cost-based: setting prices based on costs (especially variable costs)
What are fixed and variables costs?
o Variable costs: change with quantity sold and are generally tied to the product sold. Ex: production cost of TV is directly related to how many are produced and sold

o Fixed costs: don't change based on sales. Ex: rent, utilities, insurance, salaries
Which method is harder, Value-based or Cost-based?
Value based because how do you determine the value of every single item in publix
Why do large retailers not engage in value-based pricing?
Takes way too much work to individually figure out the "ideal value price." It is easier to look towards the market for examples
What type of strategy is EDLP?
"Everyday low prices." This is an example of static prices, which do not fluctuate and they are relatively stable over time
For new products, what is skimming pricing?
Skimming strategy: setting an initially high price and using gradual, timed price drops to make as much profit as possible over time by maximizing how much you make from each sale.

§ Key is to sell to as many customers as you can at a specific price, then lower the price slightly and sell to as many customers as you can at the next lower price
For new products, what is penetration pricing?
Penetration pricing: introducing a new product at a relatively low price with the intention of establishing a large market share before competitors can establish themselves.

Good example is Netflix (started as mailing DVD service for $5.99/ month)
What are the likely outcomes of a price war?
o Unlikely to gain a real advantage for any of the competitors involved because most customers who switch only for the price do not become loyal customers. They will continue to switch back and forth following the cheapest price

o In the end, you all lost money you could have made if you hadn't dropped prices in the first place. Long run, price spiral will happen and in the extreme case it will go low enough to drive some competitors out of business
What is a reference price?
Expectation about the price of a given product
What is processing fluency?The ease in which consumers process informationWhen are reference prices less accurate?Reference prices are less accurate when the customer expects (for example) to pay $1.25 for a bottle of water, but the actual price is $3.25... customer is less likely to purchase o Based on experienceWhat are five things that affect consumers' reaction to prices?Odd-even pricing Price sizes (processing fluency) Price placement (processing fluency) Priming/Decoys (reference price) Pain of paymentHow does Odd-even pricing affect consumers' reaction to prices?People are more likely to buy something priced at $3.99 vs $4.00. perhaps because $3.99 seems to be a discounted value from $4How does Price sizes pricing affect consumers' reaction to prices?Price sizes (processing fluency): odd prices ending in .99 are seen as cheaper than the price that is one penny higher. But round pricing is processed fluently which works better for emotional purchases. Non-round prices take more resources to process and change the "measuring stick" by which product is judgedHow does Price placement pricing affect consumers' reaction to prices?Price placement (processing fluency): directional cues carry connotations (up= prestige/ down = non-prestige / left = small / right= big such that prices in the lower left corner will seem smaller in magnitudeHow does Priming/Decoys pricing affect consumers' reaction to prices?Priming / Decoys (reference price): priming large number will make a reference price higher and people more willing to pay a higher price. Decoys set the reference price which can make a superior option look betterHow does Pain of payment pricing affect consumers' reaction to prices?paying is painful so having payment before consumption, using funny money, and removing dollar signs increases purchase and satisfactionWhat is price elasticity?o simply the percentage change in quantity sold that occurs with a percentage change in price. Price elasticity measures how responsive people are to changes in price.How is price elasticity calculated?Calculated by (percent change in quantity/ percent change in price) § Percent change in price= (P2-P1) / (P1) § Percent change in quantity= (Q2-Q1) / (Q1)What determines price elasticity?o Many factors determine the demand elasticity for a product, including price levels, the type of product or service, income levels, and the availability of any potential substitutes. High-priced products often are highly elastic because, if prices fall, consumers are likely to buy at a lower price. o Substitutes: more subs= more elastic o Necessities: more necessary= less elastic o % of disposable income: higher $% = more elasticWhat is a demand curve?A graph showing how the demand for a commodity or service varies with changes in its priceIs there a correct price?that there isn't a "correct" price per se, but there are definitely "wrong" prices in that you do not want to set a price that does not make money or that is unlikely to be viewed as acceptable to customers. Therefore, before you set an actual price, it helps to understand the financial aspects of pricing that you should consider when setting a priceWhat is price discrimination?o charging different customers different prices for buying the same thing (at roughly the same time)What is the purpose of price discrimination?Price discriminations are lawful if they reflect the costs of dealing with different buyers or are the result of seller's attempts to meet a competitor's offeringWho are superconsumers? Are they price sensitive or insensitive?o Superconsumers are defined both by economics and attitude o Subset of heavy users who are highly engaged with a category and a brand. They are especially interested in innovative uses for the product and in new variations on it. THEY ARE NOT PARTICULARLY PRICE SENSITIVEAre there superconsumers for any product?here can be, it is hard to tell according to prof.What is dynamic pricing?Changing the price constantly to match competitors or customer demandWhere is dynamic pricing especially prevalentAirfare, Hotel, Rental CarsWhen is dynamic pricing illegal?Bait and switch: occurs when a company offers customers an attractive low price on an item, but then doesn't have the item available when the customer tries to buy it, instead pushing a higher-priced item that typically has a higher margin. This practice is illegal when the advertised price was never a real offer.Even when dynamic pricing is legal, why must firms be careful when price discriminating (especially regarding dynamic pricing)?Changing the prices too much makes the company look bad because of the large amount of price variationWhat are the four determinants of unfairness perceptions?o Perceptions of excessive profit o Perceived immorality o Inability to understand pricing strategy o reputationWhat is Pay What You Want pricing?Customer gets to choose the price they think is fair for the good/ service they are consumingWhich industries has it been found to work?o Works for coffee shops and restaurants o Does not work for movie theatresHow does a reference price work with PWYW?o Gives people a standard for what they should be paying o Example: Side Track Coffee in Opelika o Smithsonian reference price is $20What happens when you pair CSR with PWYW?o People are willing to pay more for a good/ service if the product is related to a good cause o Profits increase