mktg ch11 pricing

8/8/2019 Mktg Ch11 Pricing

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Chapter 11: Pricing

Agenda:

Discuss the chapter



Pricing is Everywhere

You pay rent f or your apartment, tuition f or your education, and a fee to your dentist or physician.

The airline, railways, taxi and bus companies charge

you a fare

The local utilities call their price a rate

The local bank charges you interest f or the money youborr ow.

The guest lecturer is paid an honorarium

The government official takes a bribe to pass a lawwhich was his job anyway.



Pricing Brings In the Revenue

Pricing is the only element in the marketing mixthat brings in the revenues (all the rest are costs)

Pricing is the easiest of the 4 P¶s to change

Price affects consumer demand

Price communicates the value of the pr oduct

(and often ser ves as a signal f or quality)



Steps in the Price Planning Process



Step 1: Develop Pricing Objectives

Increase Salesor Market Share

Gain as much market share as possible. Price wars,penetration pricing. Common in competitive industrieswhere consumers perceive small differences in pr oducts:(Verizon, Sprint)

Obtain a certain

level of Pr ofits

Commonly used when firm wants to recover its investmentin a short period of time (fads to premium/prestige pr oducts)

(a high price, skimming strategy)

Objective

CompetitiveEffect

Price is intended to reduce effectiveness of competitorseff orts. Typically set at or below the competition(Southwest Air in Den ± to beat out United)

Customer Satisfaction

Image Enhancement Common with prestige pr oducts ± give the consumer the perception of high status. Use skimming pricing

Focus is on pr oviding consumers with value. For example,Saturn¶s (value) no haggle pricing (value is determined byconsumer)



Step 2: Estimate Demand

How much will people buy if the price goes up or down?

Examples of products that operate

on an elastic demand curve?

Examples of products that operate

on an inelastic demand curve?



Determining Price Elasticity of Demand

E =% change in price

% change in demand

If the absolute value of E is < 1.0, price is inelastic

If the absolute value of E is > 1.0, price is elastic

Price Elasticity

A measure of sensitivity of consumers to changes in price



Determining Price Elasticity of Demand(% change in demand/% change in price)

When analyzing price elasticity, you are concerned withthe absolute value, so ignore negative values

Elastic Demand 1 Elastic Demand 2 Inelastic Demand

Price Change

Demand Change

10 to 9 = 10%

27 to 31 = 15%4/27 = 15%

Elasticity 15%

-10%= -1.5

2.98 to 3.06 = 2.7%

1/10 = -10% .06/2.99 = 2.7%

30 to 27 = -10%3/30 = -10%

10%

-2.7%= -3.7

10 to 9 = 10%

1/10 = -10%

27 to 28 = 3.7%1/27 = 3.7%

3.7%

-10%= -.37

If the absolute value of E is < 1.0, price is inelastic

If the absolute value of E is > 1.0, price is elastic



Price Elasticity andCross Elasticity of Demand

Factors that affect elasticity:

availability of substitutesVS.

substitute pr oducts

if price increasesf or bananas

demand may increasef or apples

complimentary pr oducts

if price increases

f or h

ot dogs

demand decreases

f or h

ot dog buns

C ross elasticity of demand



Step 3: Determine Costs

Fixedcosts

Variablecosts

Totalcosts

Do not vary with

pr oduction or sales

levels

Rent Heat

Interest

Executive salaries

Vary with the level of

pr oduction

Packaging Raw materials

Sum of the fixed and

variable costs f or any

given level of pr oduction



Breakeven Analysis

A method f or determining the number of units that a firm must sell

at a given price to cover all of its costs (fixed and variable)

Q(BE) =Fixed Costs

Price ± Variable Costs Per Unit

Assume Fixed Costs = $56,000 Assume Variable Costs = $20/unit

PriceQuantityDemanded

TotalRevenue

TotalF-Costs

TotalV-Costs

TotalCosts

Break-EvenQuantity Pr ofit

$76 1,000 $76,000 $56,000 $20,000 $76,000 1,000 $0

$80 1,000 $80,000 $56,000 $20,000 $76,000 933 $4000

$90 900 $81,000 $56,000 $18,000 $74,000 800 $7000

1. Q(BE)56,000

76-20= 1000 2. Q(BE)

56,000

80-20= 933 3. Q(BE)

56,000

90-20= 800



Step 4: Evaluate the Pricing Environment

External (uncontr ollable) Factors to Consider When Setting Prices

1. The Economy

Recession: consumers are price-sensitive, switch brands

look f or the best price.

Inflation: prices and cost of living rise while money loses itspurchasing power (because cost of goods escalate). Here,customers are more insensitive to price increases.

2. The Competition

Oligopoly: small number of suppliers contr ol the market (airlines,

beer companies, wireless pr oviders). Price at the competition.

Monopolistic competition: many sellers who pr oduce similar pr oducts (toothpaste, jeans, restaurants). Focus on non-price

competition (features and benefits dictate price).



Step 5: Choose a Pricing Strategy

Based on Demand (estimate demand at different prices):Target Costing & Yield Management

Based on Cost: Cost Plus Pricing

Based on Competition: Price Leadership

Basedon Cust

omer Needs: Value Pricing & EDLP

New Pr oduct Pricing: Price Skimming & Price Penetration





Cost-plus pricing adds a standard markup to the cost of the pr oduct

Markup Pricing

Price = f (unit cost + desired markup)

Zappos desired markup on cost = 180% $52(1.80) = 94

Cost to Consumer? $52 + $94 = $146

MU on Cost: 9452

= 180% MU on Sell price: 94146

= 64%

Assume: unit cost of Joe¶s jeans = $52

Joe¶s Jeans





Benefits

± Simple

± Resellers (e.g., Zappos) are certain about costs

± Price competition (among resellers) is minimized (becausemark-up is standardized)

Disadvantages

± Ignores consumers¶ perception of value

± Ignores demand (if mark-up too high, demand may fall)

± Ignores competition (e.g., Levi, Gap, Diesel)





Target Costing: (TC = Anticipated selling price ± profit margin)

Uses marketing research to identify the cost of pr oducing a pr oductf or a certain market-buyer before the pr oduct is designed

Boeing customer requested heated floors. In order

to cover costs and make a reasonable profit, Boeing

estimated that the anticipated selling price would

be greater than $1million. The customer then declined.

First determine price, then work backward to design and pr oduce the

pr oduct, which will still pr oduce a desired pr ofit





Yield management (also known as revenue management)

Understanding, anticipating, and influencing consumer behavior

in order to maximize revenue or pr ofits fr om a fixed, perishable

pr oduct (such as airline seats or hotel r oom reser vations).

Off -peak fares vs. peak-fares

(same routes, different $)

Results in price discrimination: charging different customers

different prices f or the same g

oodor ser

vice




Based on Competition: Price Leadership

Tacit collusion (implied agreement) whereby one firm in an oligopolistic

industry sets a price (general industry price) with other firms f ollowing suit

United Airlines may set a standard off -peak

fare (between destinations) and all other

airlines follow suit




Basedon Cust


Value Pricing

Intr oduced in the 1990¶s

Originator of the concept is believed

to be Taco Bell

Give customers more value than they

expect f or the price paid

Not the same as penetration pricing, which

implies low price alone. Value pricing relates

to customer expectations (give more than

they expect f o

r price paid)




Basedon Cust


Everyday Low Pricing (EDLP)

Pr omises consumers a low price without

the need to

wait f or sale price e

vents

EDLP saves retail stores the eff ort and

expense needed to mark down prices, and

to pr omote ³sale events´

Believed to generate shopper loyalty.

Used heavily by Wal-Mart,

Pr o

cter & Gamble,W

inn-Dixie





Price Skimming

Firm charges a very high, premium price f or new pr oducts in theintr oductory stage of PLC

When rival pr oducts enter, firm then lowers price to be competitive

Focus is on a pr ofit objective

Appr opriate strategy when:

pr oduct has unique benefits (Rolex)

when there is a str ong price-perceived quality benefit (wine)

little chance of competition in the near future (iPad?)





Price Skimming

Apple used a price skimming strategywhen it intr oduced the iPhone in July, 2007

Company charged $599, making it themost expensive phone on the market.

In September, Apple dr opped the priceto $399 ± causing some consumers towant an iPology.

The 2 months of $599, helped Appleto recover R&D costs and make a pr ofit





Price Penetration

Firm charges a very low price f or new pr oducts (in the intr oductory

stage of PLC) to sell more in a short period of time

Objective is to gain market share

Used to discourage competitors fr om entering the market

Apple used a penetration strategy

when introducing music downloads

(for $0.99/song)

Some customers were angered when

some songs started selling for $1.29



Step 6: Develop Pricing Tactics

For Multiple Pr oducts

Selling two or more goods or ser vices as a single package f or one price

The single price is typically less than the total price of the items if purchased separately (³whole is less than the sum of its parts´)

Samsung Home Theater System:

Blue Ray DVD

3D-ready

Internet connectivity

Built-in WiFi

2 towers plus wireless rear satellite speakers

iPod and iPhone dock

Product Bundling




For Multiple Pr oducts

Pricing f or two items that must be used together

One item is priced low, and the other, which is essential to theoperation of the first, is priced very high

Captive Pricing

Razor: $4.95 Blades: $35.00




For the Trade

Trade or FunctionalDiscounts

Manufacturer (Coke) gives reseller (Price Chopper) a set

percentage discount off the list price (the suggested retail price

f or the end consumer to pay)

Given to resellers f or:

marketing the manufacturer¶s pr oducts (e.g., in-store pr omotions)

storing the manufacturer¶s pr oduct

transporting the manufacturer¶s pr oduct (to all of resellers¶ stores)




For the Trade

QuantityDiscounts

Manufacturer (Coke) gives reseller (Price Chopper) a discount

f or purchasing large quantities of the manufacturers¶ pr oducts

Cash Discounts

Manufacturer (Coke) gives reseller (Price Chopper) a cash

discount f or paying their bill quickly

3/10 net 30: 3 percent cash discount if bill is paid in 10

days, otherwise the non-discounted bill is due in 30 days




For the Trade

Seasonal Discounts

Pr ovide resellers (Home Depot) price discounts f or buying pr oducts

off-season and either:

1. Storing the pr oduct at the resellers location until the right time

of year or,

2. Pass the discount along to the consumer with ³off-season sales´



Pricing and E-Commerce

Dynamic Pricing

Cost of changing a price online is essentially zer o, hence

Online, sellers can adjust prices quickly (i.e., use dynamic pricing)

to meet changing needs in the marketplace

Used extensively with online auctions

Both types of sites adjust prices on the basis of supply and demand




On-line Shoppers

Shopbots: offer price comparisons at a number of e-tailers




Freenomics

http://www.wired.com/techbiz/it/magazine/16-03/ff_free?currentPage=all

Free: Why $0.00 is the future of Business

The more people you can get to participate in the marketplace, the

more pr ofitable the marketplace will be

How to get more people: Give things away f or free!

Radiohead music giveawayon MySpace

built a fan base

sold concert tickets sold merchandise

Ryanair: London to Barcelona, $20

a la carte f ood and beverage

fee f or preboarding fee f or checked baggage



Psychological Issues in Setting Prices

Reference Prices

Internal reference price

expected price

price last paid

reser vation price

External reference price comparison price

what I expect to pay (j eans <$50)

what I paid last time (j eans = $45)

what is t he most I¶ m w illing to pay ($50)

standards the co

mpany tells yo

u

P rice listed on sales tag as ³ original´ price, whic h subsequent markdow ns have been made

Compare to competitor ¶ s price



Psychological Issues in Setting Prices

Price-Perceived Quality Relationship

High-price equals high-quality Low-price equals low-quality

Research has f ound:

f or most pr oducts, consumers have both an upper- and a lower-price

threshold; if you go beyond either, demand will dr op

price-quality relationship holds mainly f or pr oducts whose quality

is difficult to assess

Experience goods ± you have to try the pr oduct bef ore you canassess its quality (e.g., hair cut, legal advice)

Credence goods ± even after you have purchased and used the pr oductquality is still hard to assess (e.g., vitamin supplements, car repair )



Psychological Price Strategies

Research has f ound, increased sales occur with odd prices (US)

60% of prices in advertising material end in the digit 9

30% end in the digit 5

7% end in the digit 0

3% end in the remaining seven digits (1,2,3,4,6,7,8)

Does not hold f or all pr oducts/ser vices. In some cases, even is better

doctor¶s fees

luxury items (jewelry, resort accommodations)

lottery tickets

Odd-Even Pricing



Deceptive Pricing

Bait and Switch

Illegal pricing scheme

Adv

ertise an item at av

ery lo

w price (bait) to

lure custo

mers to

sto

re,then switch them to a higher-priced item

Encouraging consumers to buy a higher-priced item is ok, but illegal

to advertise lower-priced time when it¶s not legitimate

Advertised Older model: $9000 Switch to newer model: $15000



Unfair Pricing

Loss Leader Pricing

A loss leader may be placed in an inconvenient part of the store so that

consumers must walk past other goods which have higher profit margins

A loss leader is usually a product that customers purchase frequently.

thus they are aware of its usual price

Take a loss on a leader brand (e.g., Coke) to get customers to the store

Unfair because it hurts competition among smaller resellers, who

cannot compete on such low (leader) prices

Some characteristics of loss leaders:



Illegal Business to Business Pricing

Price Discrimination

It is a violation of the Robinson-Patman Act (1936) f or manufacturers

to sell their pr oducts to similar retailers at different prices based solely

o

n thevo

lumeo

f pr o

ducts purchased.

Example:

In 1994, the American Booksellers Association (ABA; independent

booksellers) filed a federal complaint against Houghton Mifflin Company

and other book publishers ± alleging that the publishers violated theRobinson-Patman Act by offering price discounts to large national chains

(e.g., Borders, Barnes and Nobel)

ABA won and the publishers paid millions (~$25M) to ABA members.




Price Fixing

Two or more companies conspire to keep prices at a certain (typicallyvery high) level, leading to increased pr ofits f or the companies

The companies involved in price fixing are sometimes referred to asa cartel.

Example:

November, 2008, US Justice Department f ound the 3 largest flat-screen

pr oducers ± LG of South Korea, Sharp of Japan, and Chunghwa of Taiwan ±

guilty of price fixing. The 3 companies pled guilty and agreed to pay

$585 million in criminal fines f or their r ole in fixing the price of liquid

crystal display panels. Payment will go to American companies affected

by the price-fixing (e.g., Dell, Apple, Motor ola)




Predatory Pricing

Example:

Predatory pricing is the practice of selling a pr oduct or ser vice

at a very low price, intending to drive competitors out of the

market and create barriers to entry f or potential new competitors

In September, 2000, Wal-Mart was charged with predatory pricing in

Wisconsin, whereby the complaint alleged that Wal-Mart sold butter, milk,

laundry detergent, and other staple goods below cost in stores in Beloit,Oshkosh, Racine, Tomah, and West Bend in order to f orce other stores out

of business and gain a monopoly in these local markets.

The case was settled out of court with no fines

mktg ch11 pricing

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