marketing concepts price mktg 3110-004 spring 2014 mrs. tamara l. cohen classes #18-19
TRANSCRIPT
Marketing ConceptsMarketing Concepts
PricePrice
MKTG 3110-004Spring 2014
Mrs. Tamara L. Cohen
Classes #18-19
KEY TERMSKEY TERMS
• price
• barter
• value
• total revenue
• average revenue
• marginal revenue
• total cost
• fixed cost
• variable cost
• marginal cost
• price fixing
• price discrimination
• predatory pricing
KEY CONCEPTSKEY CONCEPTS
• demand curve
• price elasticity of demand
• break-even analysis
• discounts
• allowances
• FOB pricing
• uniform delivered pricing
PRICING PRICING STRATEGIESSTRATEGIES
• Skimming pricing• Penetration pricing• Prestige pricing• Price lining• Odd-even pricing• Target pricing• Bundle pricing• Yield-management pricing
• Standard mark-up pricing• Cost-plus pricing• Experience curve pricing
• Target profit pricing• Target return-on-sales
pricing• Target return-on-
investment pricing
• Customary pricing• Above-, at-, or below-
market pricing• Loss-leader pricing
• One-price policy• Flexible-price policy
= amount of money charged for a product or service
= sum of all values the consumer exchanges for the benefits of owning or using a product or service
≠ cost
PRICE is • the only element in the marketing mix that produces
revenue; all other elements represent costs• one of the most flexible elements of marketing mix:
price can be changed quickly• the biggest problem for many marketing executives• historically the major factor affecting buyer choice
(but this has waned in recent years)
What is PRICE?What is PRICE?
““PRICE” has many PRICE” has many namesnames
Tuition
Rent
Interest
Premium
Fee
Dues
Fare
Salary
Wage
Commission
$1$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
The PRICE you see is The PRICE you see is not the PRICE you paynot the PRICE you pay
PRICE = LIST PRICE – DISCOUNTS + FEES
What about TAXES?$ ?
PRICE as an indicator PRICE as an indicator of VALUEof VALUE
value = consumer’s perceived benefit from product/service
Value =
Perceived Benefits
Price
“Give people something of value, and they’ll happily pay for it.”
Value PricingValue Pricing
McDonald’s began its Supersize program in the 1990s. Other fast foods followed. All were discontinued by 2006.
concentrated soap powder
Profit equationProfit equation
PROFIT = TOTAL REVENUE – TOTAL COST
unit price fixed cost
x +
quantity sold variable cost
6 steps in setting 6 steps in setting priceprice
6 steps in setting 6 steps in setting priceprice
6 steps in setting 6 steps in setting priceprice
6 steps in setting 6 steps in setting priceprice
6 steps in setting 6 steps in setting priceprice
6 steps in setting 6 steps in setting priceprice
Step 1: Step 1: Identify pricing Identify pricing objectivesobjectives & constraints & constraints
Objectives:• Profit - long-run and/or short-run or not at all
• Sales
• Market share
• Unit volume
• Survival
• Social responsibility
Step 1: Step 1: Identify pricing Identify pricing objectives & objectives & constraintsconstraints
Constraints:
• Market size / demand
• Newness / life cycle
• Strength / status versus competition
• Cover costs of production & marketing
• Lag time
• Type of competitive market
Pricing, product, & advertising strategies Pricing, product, & advertising strategies available to firms in 4 types of competitive available to firms in 4 types of competitive
marketsmarkets
Step 2:Step 2: Estimate Estimate demanddemand & & revenuerevenue
The demand curve shows us that for most products and services:
When prices are high, few consumers are willing to buy.
When prices drop, more consumers are willing to buy.
When prices are low, many consumers are willing to buy.
Step 2:Step 2: Estimate demand & Estimate demand & revenuerevenue
Total Revenue (TR) = total money received from sale of product
TR = P x Q where P = unit price of product
and Q = quantity of product sold
Average Revenue (AR) = average amount of money received for selling one unit of a product = PRICE of that unit
AR = TR ÷ Q = P
Marginal Revenue (MR) = change in total revenue from producing & marketing one additional unit of product
MR = change in TR ÷ 1 unit increase in Q
= ΔTR ÷ ΔQ = slope of TR curve
Price Elasticity of DemandPrice Elasticity of Demand
• measures sensitivity of consumer demand to changes in product’s price Price elasticity of demand = E =
% change in quantity demanded % change in price
INELASTIC demand: A slight change in
price has very little effect on demand.
ELASTIC demand: A slight change in
price has a big effect on demand.
Elasticity examplesElasticity examples
INELASTIC
• Necessities
e.g. toothpaste;
open-heart surgery• Gasoline price strategy
e.g. Gas prices tend to rise in summer, but this doesn’t stop many people from driving extensively
ELASTIC
• Luxuries
e.g. yacht;
skiing vacation• Public policy implications
e.g. Increase price of cigarettes in NY via higher excise tax causes less smoking by teens, who often have limited spending money, i.e. price elastic re cigarettes
Step 3:Step 3: Determine cost, Determine cost, volume & profit volume & profit
relationshipsrelationshipsTotal Cost (TC) = total expense to produce & market a product
Fixed Cost (FC) = company’s expenses that are stable, and do not change with quantities of product produced & sold
Variable Cost (VC) = company’s expenses that change directly with the quantity of product produced & sold
TC = FC + VC
Marginal Cost (MC) = change in total cost from producing one more unit of product
MC = change in TC ÷ 1 unit increase in Q = ΔTC ÷ ΔQ = slope of TC curve
Break-Even AnalysisBreak-Even Analysis
= analysis of relationship between total cost and total revenue to determine profitability at various levels of production
Break-Even Point = quantity where TC = TR (i.e. Total Cost = Total Revenue)
Profit will come from units sold AFTER Break-Even Point.
Profit is maximized where MC = MR (i.e. Marginal Cost = Marginal Revenue)
Break-even analysis chart for a picture Break-even analysis chart for a picture frame store shows the break-even point at frame store shows the break-even point at
400 pictures400 pictures
4 approaches for selecting approximate 4 approaches for selecting approximate price levelprice level
4.1 4.44.34.2
Step 4:Step 4: Select an Select an approximate price levelapproximate price level
Demand-oriented approaches to pricing:
1. Skimming
2. Penetration
3. Prestige
4. Price lining
5. Odd-even
6. Target
7. Bundle
8. Yield management
4.14.1 DEMAND-oriented DEMAND-oriented pricing approachpricing approach
1. Skimming
2. Penetration
3. Prestige pricing
4. Price lining
4.14.1 DEMAND-oriented DEMAND-oriented pricing approach pricing approach (cont.)(cont.)
5. Odd-even pricing
6. Target pricing
7. Bundle pricing
8. Yield-management pricing
4.24.2 COST-oriented COST-oriented pricing approachpricing approach
1. Standard mark-up pricing
2. Cost-plus pricing
3. Experience curve pricing
4.34.3 PROFIT-oriented PROFIT-oriented pricing approachpricing approach
1. Target profit pricing
2. Target return-on-sales pricing
3. Target return-on-investment pricing
4.44.4 COMPETITION-oriented COMPETITION-oriented pricing approachpricing approach
1. Customary pricing
2. Above-, at-, or below-market pricing
3. Loss-leader pricing
Step 5:Step 5: Set the List or Quoted Set the List or Quoted PricePrice
One-price policy = fixed pricing
Flexible-price policy = dynamic pricing
Effects on PricingEffects on Pricing
Company effects• product substitutes & complementary products• product line pricing
Customer effects• beware of setting different kinds of middlemen
against one another
Competitive effects• price war (successive price cutting by
competitors)
Step 6:Step 6: Adjust the List or Quoted Adjust the List or Quoted PricePrice
Discount = straight reduction in price on purchases during stated period of timeAllowance = promotional money paid by manufacturers to retailers in return for featuring manufacturer’s products
FOB pricing = geographical pricing strategy where goods are placed Free On Board (FOB) a carrier; customer pays freight from factory to destinationDelivered pricing = geographical pricing strategy where company charges same price plus freight to all customers, regardless of locationCIF pricing = geographical pricing strategy where price includes Cost + Insurance + Freight (CIF)
3 special adjustments to list or quoted price 3 special adjustments to list or quoted price include discounts, allowances, & include discounts, allowances, & geographical adjustmentsgeographical adjustments
Several pricing practices are affected by legal & Several pricing practices are affected by legal & regulatory restrictions, which benefit both regulatory restrictions, which benefit both
consumers & firmsconsumers & firms
Laws & Regulations in Laws & Regulations in PricingPricing
price fixing = conspiracy among companies to set prices for a product; illegal in the US (Sherman Act & Consumer Goods Pricing Act)
price discrimination = charging different prices to different buyers for the same products; illegal in the US (Robinson-Patman Act)
predatory pricing = charging a very low price in order to drive competitors out of business; illegal in the US (Sherman Act & Federal Trade Commission Act)
5 most common deceptive pricing 5 most common deceptive pricing practicespractices
Next class March 26 & 31 : Place
Preparation: Read ch.15 pp.378-9; pp.392-3; p.395 ch.16 pp.404-5; pp.423
Homework #7: Retailer Comparison