Introduction & Factors to consider when setting prices
What does 'price' refer to?
1) Amount of money charged for a product or service; or
2) Sum of the values that consumers exchanged in return for having or using the product or service.
Where is value-based pricing often used in?
Highly competitive marketplace
Give an example of a fixed cost
Rent, Salaries of FT, utilities, insurance
Break-Even Pricing Scenario:
Your event planning company is preparing a proposal for BYZ Corporation's annual conference. The estimated cost for organizing the event is $15,000. To achieve a 20% profit margin on the project, what should be the final total quoted amount in your proposal for BYZ Corporation?
a) $19,000
b) $17,500
c) $18,000
d) $20,000
To calculate the correct answer:
$15,000 × 20% = $3,000
$15,000 + $3,000 = $18,000
Correct Answer: c) $18,000
What pricing strategy sets a high initial price to maximize revenue from customers willing to pay more before gradually lowering it?
Market skimming pricing
What are the 2 major considerations in setting price?
1) Product costs sets the FLOOR for prices
2) Customer perception of a product's value sets the CEILING for prices
Arrange the steps of the value-based pricing process in the correct order:
1. Set target price to match customer perceived value
2. Design product to deliver desired value at target price
3. Assess customer needs and value perceptions
4. Determine costs that can be incurred
3. Assess customer needs and value perceptions
1. Set target price to match customer perceived value
4. Determine costs that can be incurred
2. Design product to deliver desired value at target price
Define variable cost
Cost that vary directly with the level of production
The fixed costs for organizing a community sports tournament are:
Venue Rental: $1,500, Advertising: $300, Equipment: $200, Medals : $100
Total Fixed Costs: $2,100
The variable costs are:
T-shirt for each participant: $8, Refreshments: $4
Variable Costs per participant: $12
Ticket price : $17
Break Even Volume = ?
Break Even Volume = Fixed Cost / Price – Variable Cost
= $2,100 / $17 - $12
= 420
What is Market Penetration Pricing?
Refers to companies setting a low initial price in order to penetrate the market quickly and deeply so as to attract a large number of buyers quickly and win a large market share.
What other factors should be considered when setting a price?
1) Competitors’ prices
2) Overall marketing mix
3) Nature of the market and demand
What are the 3 important concepts behind value-based pricing?
1) Customers are value conscious rather than price conscious
2) Customers assign a personal value to a product or service
3) The selling price is based on customers’ perceived value rather than on the vendor’s costs
What is the process for cost-based pricing?
1) Design a good product
2) Determine product costs
3) Set price based on cost
4) Convince buyers of product’s value
Why is cost-plus pricing a popular pricing method?
Any of these or similar phrasing
1) Certainty of costs
2) Stable pricing
3) Minimized competition
4) Fair pricing
In Market Skimming Pricing, why do companies benefit from high short-term profits?
As profitability increases, competitors are likely to be attracted to the market and the price will fall as competition increases.