Pricing:
1. What is the relationship between price and demand? Why is it important for a firm to price at the point at which marginal revenue is equal to marginal cost?
a. As the price of a given product or service offering goes UP, the quantity demanded for that offering will decrease, according to the rules of economics. It is important for a firm to price at the point at which marginal revenues equal marginal costs to at least breakeven. You want to cover all of your costs with your revenue, and any other sales after that would be your profit.
2. Why should a firm consider fairness when pricing its goods?
a. A firm should consider fairness when it comes to pricing its goods because oftentimes, a fair price is looked at as one of the most important attributes of the offering. It can create positive and or negative attitudes towards the product. If something is priced higher than what its quality is perceived to be, it will be responded to negatively and vise versa. However, pricing also tells you a lot about the quality of a product/service. There should be a very close relationship between very good quality and higher prices. Sometimes that high price is what develops the perception of high quality for certain brands (such as Apple).
3. How has the Internet enhanced opportunities for dynamic pricing strategies?
a. The Internet has enhanced dynamic pricing in 2 ways:
i. Decreased Menu Costs – changing prices is easy (no costs of changing price tags, catalogs etc)
ii. Interactivity – buyers and sellers from all around the world can interact and negotiate prices
4. Why would a firm want to implement a price-discrimination strategy?
a. Where the company sells goods or services at two or more prices, based on segment differentiation
b. The Internet gives the ability to recognize a consumer, then customize prices, segmenting sometimes to a segment of one
i. Ex. anyone who has previously purchased 10 items gets a discount
5. What is the difference between static and dynamic markets? Why must a firm consider its pricing strategies within the context of a dynamic market?
a. Static!!!
i. Occurs when sellers set the price, and buyers must take it or leave it
ii. Everyone pays the same
iii. This strategy is very common in retailing
iv. 2 types of fixed price strategy are
1. Price leadership: A price leader is most often, but not always, the lowest-priced product entry in a particular category. The price leader is the one that sets the price levels for the market. Others follow the leader with comparative pricing (usually higher).
2. Promotional pricing
b. Dynamic!!!
i. Dynamic pricing is fluid pricing
ii. Dynamic pricing is one of the most significant contributions the Internet has made to pricing strategy.
1. Decreased “menu” costs on the web – changing prices is easy (no costs of changing price tags, catalogs etc)
2. Interactivity – buyers and sellers from all around the world can interact and negotiate prices
iii. Variety of auction types
1. “English” auction – such as e-Bay where the price starts low and is then driven up
2. “Dutch” auction – the auctioneer announces a high price for the product, then gradually reduces it until a buyer will accept it
3. e-Bay has a variant of this, where a seller has multiples of the same product to sell
4. First-Price sealed bid auction (purchaser does not know the amount of the other bids)
5. Priceline is an example of this type of auction