Pricing Strategy: Chapter 1

question

pricing errors include:

answer

too high
too low

question

theory of new innovation

answer

Rogers theory on the diffusion of innovations

question

Rogers' Theory of Diffusion of Innovations

answer

1. Adoption: Awareness--> Interest--> Evaluation--> Trial --> Adoption

2. Adoption stages:

-- Innovators: Venturesome ( 2.5%)

-- early adopters: Repseced ( Doctors, educated people) In the money if they like it. (13.5%)

--Early Majority: deliberate (34%)

-- late Majority: Skeptical (34%)

-- Laggards: Traditional (16%)

3. Characteristics of successful innovations

-- has to have relative advantage

--- value = benefits/cost

--- does your solution provide more value?

-- communicable: Can it easily spread

--Complexity:

--Compatibility: has lagistmancy

--- the greater the lafistmancy the greater success it can have

-- divisibility: the more it can be seen the more it will be successful

question

High Pricing error

answer

-Lost profits from lack of volume
-The price is eventually decreased and the company must fight for market interest and perception repositioning
-Potential allegations of price gouging and unfairness, leading to public relations and regulatory ramifications

question

Too low pricing error

answer

-Forgone profit in an attempt to gain volume which may not come
-Incorrectly set expectations for the product category, making future price increases being driven against a headwind of customer expectations

question

Pricing Decisions CFO

answer

-Responsible for measuring and reporting performance
-Almost always involved in pricing decisions from a quantitative analysis / forecasting perspective
General bia

question

Pricing Decisions Sales and Marketing

answer

-Responsible for promotion, product strategy, and placement, along with pricing
-Almost always involved in pricing decisions from a value positioning perspective
-General bias towards discounting and market share

question

Pricing Decisions Research & Development

answer

-Responsible for developing new products that customers value
-Technical individuals often are challenged to understand commercial aspects

question

Pricing Decisions Production

answer

-Responsible for quality, throughput, and capacity utilization
-General bias towards volume to reduce overhead allocation

question

Pricing Decisions •CEO

answer

-Arbitrator between competing stakeholders

question

Value Exchange

answer

•Price is the value that the firm captures in a mutually beneficial exchange with its customers
-Firm's reason for existence is to produce value for customers, value which they exchange for cash
-Customers purchase because they gain value from the product in excess of the price they pay

question

Boundaries

answer

1.Wide:

2.Narrow:

Price floor: Marginal cost = variable cost (V)

-- you never want to price below Marginal Cost except if you know you can make it up

-- if you built something valuable you do not want to price it at marginal cost

alternative solutions: reference point

-- we teach the reference point

-- strategic group = competitors that solve problems in roughly the same way

-- nearest comparable solution

Price ceiling/ consumer utility / total economic value: the max a rational person would pay

--- value = benefit/ cost

-- go high with pricing but never at the price ceiling

question

differential value

answer

benefits that increase value

and disadvantages that decrease value

if the Differential value is positive then you can place it above the alternative solution or at exchange value

exchange value= reference price + differential value= exchange value

If Differential value is negative then you can price it below exchange value ( exchange value)

question

utility

answer

= value
1. form: intrinsic benefit of something
2. place
3. time: the product is available
4. ownership: you have something to do as you pls

question

Contribution margin

answer

Price - Variable Cost

question

Gross margin

answer

price-cost

question

Profit =

answer

=Quantity X (Price - Variable Costs) - Fixed Costs

p = Q (P - V) - F
•
Variable Costs (V)
Fixed Costs (F)
Volume or Quantity Sold (hence the Q)
Price (P)
Profit (p)

question

•Quantitative Modeling and Price Optimization

answer

-Careful selection of model
-Careful treatment of data (cleansing)
-Careful market segmentation

question

•Qualitative Modeling

answer

-Potential methods of influencing willingness to pay
-Relationship to corporate strategy and industry dynamics
-Customer acceptance to approach of price discrimination

question

Boundaries of Price

answer

•There is a range of appropriate prices
-Range implies boundaries, upper and lower
•
•Extremes from standard economics
-Marginal cost is the extreme lower boundary
-Consumer utility is the extreme upper boundary

question

Marginal Cost

answer

= Extreme Lower Bound

•Marginal costs are the seller's bottom line
-Any price below marginal cost leaves the seller worse off than they would be without the transaction
-Any price above it leaves the seller better off
-Thus, marginal cost is the extreme lower boundary of the "right" price

question

Consumer Utility

answer

= Extreme Upper Bound

•Consumer utility is the buyer's bottom line.
-The customer would be worse off if they paid more for a product than they gained in utility.
Any price below -consumer utility would be leave the customer better off than going without the product.

question

•Marketing Strategy

answer

-Products are valued because they enable a customer to do something (accomplish a goal)
-Utility is derived from goal accomplishment
-Prior to the existence of the product, most consumers found an alternative means of accomplishing the same goal
•What are those alternatives?
•How much better can they achieve that goal, and perhaps others simultaneously, with the product?

question

Narrower band is defined by

answer

•the competing alternatives and differential value

question

Competing Alternatives / Substitutes

answer

•Competing offers are often readily identifiable and form a reference price
Substitutes are sometimes more challenging to identify, but they always exist

question

Reference price =

answer

-price of nearest comparable offer

question

Differential Value

answer

•is the change in consumer utility that a product delivers in comparison to its comparable alternative

question

Exchange value

answer

•is the price of the competing alternative adjusted for the differential value

question

Summary

answer

•Model your value add with exchange value models to determine the boundaries of a reasonable price
-Consumer utility
-Marginal cost
-Price of nearest alternative
-Differential value
-Exchange value
•
•Use exchange value models to identify a rational range for your price
•
•Use exchange value models to communicate pricing decisions with CFO / sales team
•
•Use customer utility models to communicate value with customers
•Accept that different customers have different perspectives on value. Use differences in valuation to drive price segmentation

question

Three main types of pricing strategy

answer

1. Customer driven pricing
2. Competitor based pricing
- you are assuming your competitors know how to price
3.Cost plus
- many companies use cost plus

question

cost-plus pricing

answer

adding a standard markup to the cost of the product

question

competitor based pricing

answer

involves setting prices based on competitors' strategies, prices, costs, and market offerings

question

reference price= 14,000
Marginal Cost = 8,500
Differential value= 2,500

what is exchange value
What price

answer

what is exchange value= 14,000+ 2,500= 16,500

What price? 16,500

question

Example 2
price = 50
V= 12
a) Annual cost= 12 x $1= 12
b) r = .06 , t= 10

what is PV
what is the nearest comparable alternative?
Differential value
Exchange value

answer

pv= 12/(1.06)^10= 93,62

Pv = CF/(1+r)^t
NPV= PV-cost

comparable alternative?=Does Not exist

DV= 0=50

Exchange value= referencial price + differential value
93.63-50= 43.62

question

price elasticity

answer

mature products

= change in volume

1 of 35

question

pricing errors include:

answer

too high
too low

question

theory of new innovation

answer

Rogers theory on the diffusion of innovations

question

Rogers' Theory of Diffusion of Innovations

answer

1. Adoption: Awareness--> Interest--> Evaluation--> Trial --> Adoption

2. Adoption stages:

-- Innovators: Venturesome ( 2.5%)

-- early adopters: Repseced ( Doctors, educated people) In the money if they like it. (13.5%)

--Early Majority: deliberate (34%)

-- late Majority: Skeptical (34%)

-- Laggards: Traditional (16%)

3. Characteristics of successful innovations

-- has to have relative advantage

--- value = benefits/cost

--- does your solution provide more value?

-- communicable: Can it easily spread

--Complexity:

--Compatibility: has lagistmancy

--- the greater the lafistmancy the greater success it can have

-- divisibility: the more it can be seen the more it will be successful

question

High Pricing error

answer

question

Too low pricing error

answer

question

Pricing Decisions CFO

answer

-Responsible for measuring and reporting performance
-Almost always involved in pricing decisions from a quantitative analysis / forecasting perspective
General bia

question

Pricing Decisions Sales and Marketing

answer

question

Pricing Decisions Research & Development

answer

-Responsible for developing new products that customers value
-Technical individuals often are challenged to understand commercial aspects

question

Pricing Decisions Production

answer

-Responsible for quality, throughput, and capacity utilization
-General bias towards volume to reduce overhead allocation

question

Pricing Decisions •CEO

answer

-Arbitrator between competing stakeholders

question

Value Exchange

answer

question

Boundaries

answer

1.Wide:

2.Narrow:

Price floor: Marginal cost = variable cost (V)

-- you never want to price below Marginal Cost except if you know you can make it up

-- if you built something valuable you do not want to price it at marginal cost

alternative solutions: reference point

-- we teach the reference point

-- strategic group = competitors that solve problems in roughly the same way

-- nearest comparable solution

Price ceiling/ consumer utility / total economic value: the max a rational person would pay

--- value = benefit/ cost

-- go high with pricing but never at the price ceiling

question

differential value

answer

benefits that increase value

and disadvantages that decrease value

if the Differential value is positive then you can place it above the alternative solution or at exchange value

exchange value= reference price + differential value= exchange value

If Differential value is negative then you can price it below exchange value ( exchange value)

question

utility

answer

= value
1. form: intrinsic benefit of something
2. place
3. time: the product is available
4. ownership: you have something to do as you pls

question

Contribution margin

answer

Price - Variable Cost

question

Gross margin

answer

price-cost

question

Profit =

answer

=Quantity X (Price - Variable Costs) - Fixed Costs

p = Q (P - V) - F
•
Variable Costs (V)
Fixed Costs (F)
Volume or Quantity Sold (hence the Q)
Price (P)
Profit (p)

question

•Quantitative Modeling and Price Optimization

answer

-Careful selection of model
-Careful treatment of data (cleansing)
-Careful market segmentation

question

•Qualitative Modeling

answer

-Potential methods of influencing willingness to pay
-Relationship to corporate strategy and industry dynamics
-Customer acceptance to approach of price discrimination

question

Boundaries of Price

answer

question

Marginal Cost

answer

question

Consumer Utility

answer

question

•Marketing Strategy

answer

question

Narrower band is defined by

answer

•the competing alternatives and differential value

question

Competing Alternatives / Substitutes

answer

•Competing offers are often readily identifiable and form a reference price
Substitutes are sometimes more challenging to identify, but they always exist

question

Reference price =

answer

-price of nearest comparable offer

question

Differential Value

answer

•is the change in consumer utility that a product delivers in comparison to its comparable alternative

question

Exchange value

answer

•is the price of the competing alternative adjusted for the differential value

question

Summary

answer

question

Three main types of pricing strategy

answer

1. Customer driven pricing
2. Competitor based pricing
- you are assuming your competitors know how to price
3.Cost plus
- many companies use cost plus

question

cost-plus pricing

answer

adding a standard markup to the cost of the product

question

competitor based pricing

answer

involves setting prices based on competitors' strategies, prices, costs, and market offerings

question

reference price= 14,000
Marginal Cost = 8,500
Differential value= 2,500

what is exchange value
What price

answer

what is exchange value= 14,000+ 2,500= 16,500

What price? 16,500

question

Example 2
price = 50
V= 12
a) Annual cost= 12 x $1= 12
b) r = .06 , t= 10

what is PV
what is the nearest comparable alternative?
Differential value
Exchange value

answer

pv= 12/(1.06)^10= 93,62

Pv = CF/(1+r)^t
NPV= PV-cost

comparable alternative?=Does Not exist

DV= 0=50

Exchange value= referencial price + differential value
93.63-50= 43.62

question

price elasticity

answer

mature products

= change in volume

Continue to order Get a quote

Pricing Strategy: Chapter 1

Recent Posts

Recent Comments

Calculate the price of your order

Our guarantees

Money-back guarantee

Zero-plagiarism guarantee

Free-revision policy

Privacy policy

Fair-cooperation guarantee