...Differences Between Value-Based Pricing and Cost-Based Pricing Businesses have methods by which to price their products and services. Value-based pricing and cost-based pricing are two common strategies companies use to promote goods and services. Setting the right prices is the key to effective marketing as well as to long-term profitability. Both of these approaches have strengths and weaknesses relative to the other. When a company uses cost-based pricing, the company sets a price at a percentage above the cost it incurs to manufacture the product or to provide the service. Value-based pricing takes a different approach, considering the potential value the product or service will bring to its customers. Value-Based Pricing A value-based pricing company considers the value of its product or service, as opposed to the cost the company incurred to create and produce it. To do this, the company determines how much money or values its product or service will generate for the customer. This value could originate from factors such as increased efficiency, happiness or stability. Companies or individuals that produce medications, chemicals and computer programs and software and artwork often use this pricing strategy. Cost-Based Pricing Cost-based pricing uses manufacturing or production costs as its basis for pricing. The cost-based pricing company uses its costs to find a price floor and a price ceiling. The floor and the ceiling are the minimum and maximum prices for a specific...
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...Life cycle cost comparison: Primozone GM192 vs. Ozonia CFV15 A guide of how to create value for your customer. Course: ISM 13 Module 3 Pricing Authors: Blume, Anna 900711 Collu, Giulia 850511 Tutor & Examiner: Hand in date: 1 Caesar, Peter 15-01-15 Primozone Abstract This paper is aimed at providing a comparison of the total cost of owner ship (TCO) of two comparable products through the tool of a lifecycle cost analysis (LCCA). The compared products are ozone generators from Primozone and Ozonia. Firstly the importance of pricing is presented followed by the discussion of the four most common pricing approaches and the best pricing method according to literature to achieve high margins is introduced. The described topics will be explained in detail in the theoretical framework followed by a comprehensive description of how value based pricing can be put into practice through economic value analysis and quantification and be therefore used as sales arguments based on the LCCA presented in Appendix A. The parameters for the LCCA were chosen with the help of the head of sales of Primozone, Jürgen Bischhaus. The collected data are presented in Chapter 4 and implemented into the excel spreadsheet in Appendix A. Several changing parameter scenarios were applied with the result that Primozone outperforms Ozonia in each of them except energy consumption, which are marginally higher, but not significantly. This also results in the ability...
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...Chapter 9 Pricing: Understanding and Capturing Customer Value Previewing the Concepts: Chapter Objectives 1. Discuss the importance of understanding customer value perceptions and company costs when setting prices. 2. Identify and define the other important internal and external factors affecting a firm’s pricing decisions. 3. Describe the major strategies for pricing imitative and new products. 4. Explain how companies find a set of prices that maximize the profits from the total product mix. 5. Discuss how companies adjust their prices to take into account different types of customers and situations. 6. Discuss the key issues related to initiating and responding to price changes. Just the Basics Chapter Overview Pricing is the second element in the marketing mix. It plays a powerful role, and that role is detailed in this chapter. There are several sections to this chapter and a lot of material to address. The chapter begins with discussing what a price actually is. It makes the point that price is more than just the money the buyer hands over to the seller—the broader view is that the price is the sum of all the values that the buyer exchanges for obtaining or using the product. There is also a brief discussion of dynamic- versus fixed-price policies, and how we as a society have evolved from dynamic to fixed and back to dynamic again. The chapter then moves into the heart of pricing. Both internal and external factors that...
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...uCASE SUMMARY Atlantic Computers A Bundle of Pricing Options 4/4/2011 Atlantic Computers is a leading developer of high-tech servers. It has recently decided to expand its product line downwards in order to take advantage of an emerging market for basic servers. Before it can launch the “Atlantic Bundle”, Atlantic Computers must decide which pricing strategy to implement. Of the four options: Status Quo, Competition Based, Cost-Plus, and Value in Use pricing, I believe the best option is Value-in-Use pricing. ATLANTIC COMPUTER: A BUNDLE OF PRICING OPTIONS Summary of the Situation Analysis Atlantic Computer is a manufacturer of servers and high-tech products. Two market segments exist in the server industry: High performance and Basic Servers. Atlantic Computers has held a 20% share of the High Performance market with their Radia servers being their premier product. However, the market for Basic servers is growing and this has caused Atlantic Computers to develop and introduce a Basic Server called the Tronn and a software tool called the “Performance Enhancing Server Accelerator” (PESA). The Tronn was developed mainly for the emerging US market opportunity for basic servers. The PESA would allow the Tronn to perform up to four times faster than its standard speed and make frequently requested information more accessible. Thus, bundling the Tronn and PESA made more sense. Atlantic is not concerned that the Tronn will be considered a substitute for its High Performance...
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...Weaknesses c. Opportunities d. Threats 3. Customer Needs and Wants Write the definition of needs and wants, and then describe needs and wants the company seeks to satisfy by offering the product. 4. Customer Value Write the definition of superior customer value. What superior customer value does the product offers to satisfy the needs of target customers? 5. Target Market (s) the company decided to serve: Write the definition of the target market, and then describe the target customers in terms of their location, gender, age…etc. 6. Product Differentiation and Positioning Strategy: Write the definition of Product Differentiation and Positioning. Write how the company differentiates its product to create superior customer value, and how the product is positioned in the mind of target customers. 7. Marketing Mix (4Ps): a. Product: Write the definition of a product and write about the features of your product and the number of versions offered for that product. Does the company have one or more product lines, what are they. Are they more or less consistent? b. Pricing: Write the definition of the price, and show the product selling price, is the price determined based on perceived customer value or based on product cost. Is the product selling price below, match, or above the prices of competing products. c. Place ( distribution): Write...
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...Atlantic Computers: A bundle of pricing options In the case, it mentioned that, conservatively, one Tronn server equals to two Zink servers; Aggressively, one Tronn equals to four Zink servers. Within the premise that Matzer and his colleagues were quite conservative, he decided to compare two basic servers loaded with the PESA versus four basic servers. In this case, therefore, we calculate the price of Atlantic Bundle with the assumption that two Atlantic Bundles is the equivalent of four Ontario Zink servers. 1. * Status-Quo Pricing This pricing strategy considers only the cost of server and gives PESA software tool away for free. Therefore, the price of two Atlantic Bundles is $4,000. ------------------------------------------------- Price of 1 Tronn server $2,000 ------------------------------------------------- 2 Tronn servers + PESA software (Free) $4,000 This pricing strategy gives the lowest price. However, by giving PESA for free, there is no substantial difference between Tronn and Zink. This would be difficult for Atlantic Computer to gain market shares in the basic servers segment. * Competition Based Pricing Using price of competing products as a benchmark instead of considering own costs or the customer demand, we price the Tronn server based on the price of competitive server, Zink by Ontario, rather than considering costs and give PESA away for free. ------------------------------------------------- ...
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...Definitions Oct 29 Price: A value that will purchase a finite quantity, weight, or other measure of a good or service. Customer Value-Based Pricing: is the practice of setting the price of a product or service at its perceived value to the customer. This approach tends to result in very high prices and correspondingly high profits for those companies that can persuade their customers to agree to it. It does not take into account the cost of the product or service, nor existing market prices. Good-Value Pricing: is offering just the right combination of quality and good service at a fair price. Value-Added Pricing: is a pricing strategy that attaches value-added features and services to differentiate a market offering and support higher prices, rather than cutting prices to match competitors. Cost-Based Pricing: A pricing method in which a fixed sum or a percentage of the total cost is added (as income or profit) to the cost of the product to arrive at its selling price. Fixed Costs (Overhead): A periodic cost that remains more or less unchanged irrespective of the output level or sales revenue, such as depreciation, insurance, interest, rent, salaries, and wages. While in practice, all costs vary over time and no cost is a purely fixed cost, the concept of fixed costs is necessary in short term cost accounting. Organizations with high fixed costs are significantly different from those with high variable costs. This difference affects the financial structure of the organization...
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...Access Pricing Principles — Telecommunications July 1997 Preface Part XIC of the Trade Practices Amendment (Telecommunications) Act 1997 introduces a new regime governing access to services in the telecommunications industry. A key component of this regime is the pricing of access which, in part, is to be administered by the Australian Competition and Consumer Commission. The purpose of this document is to outline the approach the Commission will adopt, in the usual case, when considering access pricing issues under Part XIC. A draft of this document was released for public comment in February 1997 and a public forum was held in April 1997. The Commission wishes to thank all parties who made submissions or participated in the public forum. This document reflects the Commission’s views after consideration of all relevant submissions and representations. The Commission also wishes to thank AUSTEL, Treasury, the Department of Communications and the Arts and the Bureau of Transport and Communications Economics for their assistance in preparing this document. The views expressed in this document are those of the Commission. ii Contents Preface ............................................................................................................................ ii Introduction ....................................................................................................................1 Legislative criteria ..................................................
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...Distinguish between the terms "rates" and "price" as relates to transportation? ANS: A rate, appropriate to the regulation of transportation, refers to the amount that can be found in a Rate Tariff Book as payment to a carrier for performing a given transportation service, and is the lawful charge for the service. Under deregulation, price is a more appropriate term applying to what transportation carriers charge for their services; price representing the value of services performed based on prevailing market forces. 2. The theory of contestable markets is offered to identify the relevant market structure for the deregulated transportation environment. Explain the theory. ANS: Explanation is offered for the case of airline deregulation. For deregulation to work, its market structure must closely resemble pure competition. The airline industry appeared to be oligopolistic and would prevent new entrants. Some consensus did exist that the airline industry could perform competitively. This provides the rationale for the theory, which proposes that potential competition be substituted for the active participation of many sellers. For the theory to work, four conditions have to be met: no barrier to market entry, no economics of scale, consumers would be willing to switch quickly among carriers, and existing carriers had to be prevented from responding to new entrants' lower prices. 3. Define and discuss Cost of Service Pricing. ANS:...
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...Introduction Transfer pricing has long been an important cost management topic for transactions among domestic subsidiaries. The concern is to promote actions and behaviors that seek to maximize the corporate performance and profitability rather than the subsidiary performance. Unlike transfer pricing between two divisions of the same company, this transactions between subsidiaries cross international boundaries, involve tax issues concerning the determination, analysis and adjustment of prices between this related entities. I. Transfer price 1. Transfer price definition The transfer prices are the prices at which an enterprise transfers physical goods and intangible property or provides services to associate enterprises. They are the prices charged for any transaction between affiliates entities. This transfer may be commercial, financial or technical. According to the OECD, two companies are associated if one of the enterprises participates directly or indirectly in the governance, management, control or the capital of the other or if the same persons participate directly or indirectly to the management, control or the capital of both enterprises. They can be defined simply as transactions prices between companies of the same group and resident in different states. This type of transactions involves intra-group transactions crossing borders. Example: Within a MNE group, a subsidiary A established in France sells computers to another subsidiary B established...
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...Value-Based Pricing PROC 5830 - Pricing Webster University Introduction If you own and operate a store and customers are not coming in, what is the first thing you do? You hold a sale. Once you slash your prices by 25 percent or give shoppers who buy one item the chance to buy another item for 50 percent off, your merchandise will start flying off the shelves. While slapping a price tag on your product or service seems like a one-minute job, it is actually a lot harder than it looks. Set your prices too high, and you lose sales. Set them too low, and you lose money. Value-Based Pricing Value-based pricing is a method of pricing products in which companies first try to determine how much the products are worth to their customers. The goal is to avoid setting prices that are either too high for customers or lower than they would be willing to pay if they knew what kind of benefits they could get by using a product. Products are priced based on the value it creates for the customer. This is usually the most profitable form of pricing. Inappropriate pricing strategy can shrink profitability, warp customer relationships, and destroy even a well-known brand. Therefore, companies have to focus on value creation over the long-term by honoring the needs of customers. For customers, the benefit of a product or service versus the price of the product or service is what matters most in the purchasing decision. Taking this fact into consideration companies...
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...ATLANTIC COMPUTER: A BUNDLE OF PRICING OPTIONS Situation Analysis Atlantic Computer is a manufacturer of servers and high-tech products. Two market segments exist in the server industry: High performance and Basic Servers. Atlantic Computers has held a 20% share of the High Performance market with their Radia servers being their premier product. However, the market for Basic servers is growing and this has caused Atlantic Computers to develop and introduce a Basic Server called the Tronn and a software tool called the “Performance Enhancing Server Accelerator” (PESA). The Tronn was developed mainly for the emerging US market opportunity for basic servers. The PESA would allow the Tronn to perform up to four times faster than its standard speed and make frequently requested information more accessible. Thus, bundling the Tronn and PESA made more sense. Atlantic is not concerned that the Tronn will be considered a substitute for its High Performance servers. Primary Concerns: What pricing strategy should Atlantic Computers implement to price the Atlantic Bundle? Model Customer In order to decide which pricing strategy to use, it is best to identify and use the basic server needs of a model customer. In this case, DayTraderJournal.com will be used as the model customer. DayTrader.com is seeking four basic servers for their new website where day traders will be able to review articles and relevant training information. Their top requirements for a basic server purchase...
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...society. In a market economy, the price system allocates these resources. That is, prices furnish the guideposts that indicate how resources should be used. Prices determine what products and services should be produced and in what amounts. Prices determine how these products and services should be produced. And prices determine for whom the products and services should be produced. Thus prices affect both incomes and spending behavior. For the consumer with a given income level, prices influence what to buy and how much of each product to buy. For business firms, profits are determined by the difference between revenues and costs, with revenues determined by multiplying price per unit sold by the number of units sold. Price changes also play a major role in a market economy. When the quantity demanded for a product or service is greater than the supply available, buyers bid the price up. If costs remain the same per unit sold, the higher price leads to greater profits and an incentive to invest in resources to produce even greater quantities of the product. Thus, the producers are able to bid more for raw material resources, thereby directing resources into their industry. In addition, higher prices may also stimulate a greater rate of innovation and the development of new technology. On the other hand, if available supply is greater than demand, pressures build to decrease prices and reduce output. These pressures lead producers to convert their resources to alternative uses. Thus...
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...points Customer-driven pricing may depress profits because _____. Answer Selected Answer: customers will only pay so much for a product Correct Answer: pricing for short term sales objectives often undermines perceived value by customers • Question 2 2 out of 2 points Cost-plus pricing is effectively opposite of a prudent pricing strategy because _____. Answer Selected Answer: it leads to overpricing in weak markets and underpricing in strong markets Correct Answer: it leads to overpricing in weak markets and underpricing in strong markets • Question 3 2 out of 2 points Proactive, value-based, and profit-driven principles are typically embodied by _____. Answer Selected Answer: successful pricing strategies Correct Answer: successful pricing strategies • Question 4 2 out of 2 points A problem with customer-driven pricing is _____. Answer Selected Answer: pricing is based on willingness-to-pay and the ignorance of the value of the product Correct Answer: pricing is based on willingness-to-pay and the ignorance of the value of the product • Question 5 2 out of 2 points A company that is willing to be a smaller company in order to be profitable is employing the _____ principle of strategic pricing. Answer Selected Answer: profit-driven Correct Answer: profit-driven • Question 6 0 out of 2 points Strategic pricing is proactive in _____. Answer...
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...autumn term 2010 Prerequisites Program course from the customer's perspective Learning outcomes After completing the course students are expected Expected learning outcomes The student shall Have broad knowledge of * Competition Profile * Differences Between Product, Service & Experience * Product Life Cycles * Differentiation versus Commodification * Innovation and Product Development * Branding * Pricing Methods * Pricing Tactics Be able to apply * Competition profile as "brief" for product development * Strategies for Product Development * Management of Product Development * Pricing Understand * Differentiation and Commodification * Innovation and product development * Differences between products, services and experiences * Separation, "Detachment", the needs and solution information * Differentiation and Commodification * Innovation and product development * Differences between products, services and experiences * Separation, "Detachment", the needs and solution information * Innovation, product development against, for, with and by customer * Branding * Contents Content From need to offer; from value analysis of competitive profile; competitive profile as a brief for innovation and product Competition, competition profile (Unique Selling Points, Matching Points, Non Selling Points) Competition profile as "brief" for product development * Product...
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