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Pricing + Pricing Methods [Part 2] (Cost-Oriented Pricing (Disadvantages,…
Pricing + Pricing Methods
[Part 2]
Cost-Oriented Pricing
Based on the idea that the most important element of pricing is the cost of the resources that make up the product
The marketer sells the product at the highest price possible, regardless of the firm's own preference/costs, or what the market price is
Break-Even point is the key starting point
This is
cost
not
price
: things that determine price include: competition, freshness, customer attitudes + product placement
Advantages
Ensures that incurred costs are covered
Simple + easy to calculate
When costs are stable for long periods, there's price stability which is cheaper + less annoying for retailers + customers
Disadvantages
Doesn't consider non-cost factors
like brand image, degree of prestige in ownership, or effort expended
Ignores demand + the price elasticity of demand
Doesn't take advantage of market potential, e.g if a product is new + innovative may be able to charge a higher price
Doesn't take into account customer willingness to pay
Often used in the retail sector - will add a constant percentage markup to each product
Economic/Demand-Oriented Approach
Suggests you should only charge what the market is prepared to pay
Price Elasticity Demand: Price Rise = Less Demand, Price Drop = More Demand
Advantages
May lead to potential high profit
Disadvantages
Marketing is becoming a lot more sophisticated: it isn't always as simple as this
PED is a good explanation of market behaviour but not really helpful as a management tool
Companies should be wary of overcharging customers, especially w/ urgent requests.
EXAMPLE:
in 2012 several petrol stations were charged with
price gouging
[setting prices perceived to be unfair] during Hurricane Katrina under NY law [Bond 2012]
Market sets the price: supplier lowers the price + consumers buy more --> market clears
EXAMPLE:
Airline companies like Emirates: operate 3 types of cabin service - First Class/Business Class/Economy. All pay different amounts
Price Elasticity of Demand:
how customers respond to price changes
Price-Testing + Dynamic Pricing
Prices can be updated in real time according to customer types + current market conditions
Advantages
The size of the market that can be opened up is much bigger than the static market potential size
Gives companies greater control over their pricing strategy: have access to real-time price trends across 1000s of products/competitors. Get a clear idea of supply + demand
Disadvantages
Online buyers can struggle w/ trust bc it isn't a very fair method
Favours the wealthy - they're less likely to be priced out of a market when there's high demand E.g for electricity during a heatwave
Price Discrimination:
Amazon got in trouble in 2000 for showing different prices at the same time for the same item to different customers
Surge Pricing:
Uber have been criticised for their increased pricing during hostage situations, hurricanes etc. In 2015 they introduced caps on how high the surge price can go during emergencies
Retailers will adjust prices on everyday items several times a day
Algorithms that take into account competitor pricing, supply + demand + other external factors
EXAMPLE:
Time-based pricing is v popular in the tourism industry. Higher prices charged during peak season - this is where profits are made - + then may only charge operating costs in off season
Ethical Dilemmas
Price Collusion
Where competitors work together to set prices/distribution targets to the detriment of consumers + excluded competitors
Unethical bc results in unfair + higher charges to consumers
Can stifle innovation bc competitors don't need to develop better offerings to compete. This means consumers don't benefit from increased quality/performance
EXAMPLE:
British Airways fined in 2007 after they fixed fuel price surcharges w/ rival Virgin Atlantic between 2004 + 2006. They eventually paid half the fine in 2012
Illegal in the UK bc they should technically compete to give customers the best value
Predatory Pricing/Price Gouging
As previously mentioned, includes
surge pricing
like the Uber example
Targets desperate people: e.g payday loan companies charging ridiculous interest + exploiting the vulnerable
Occurs when a company charges more than the government think is fair
Occurs when companies use a demand pricing method + so charge a lot more when demand is high
Deceptive Pricing
When companies trick consumers into thinking they're paying a lower price for the product than what they're actually supposed to
EXAMPLE:
In-app purchases on mobiles etc. that are needed to continue playing or to level up
Price Discrimination
Setting different prices for different groups of people
Linked to market segmentation E.g students, seniors paying less
Issue is when there is no difference in the offer but the price is different
EXAMPLE:
Tourist signs at the Taj Mahal in India show the price for foreigners vs locals - it's 25x more for foreigners
Product Dumping
Used in the context of international trade
When companies export a product at a price that's lower in the foreign importing market than the price in the exporter's domestic market
Endangers the financial viability of manufacturers/producers in the importing nation
EXAMPLE:
An excess of steel made in Asia was being bought by UK companies at a low cost
Good for customers bc they get cheaper prices, but bad for local companies bc it disrupts their market
Challenges