principles of marketing chapter 9: pricing understanding & capturing value

Principles of Marketing

Chapter 9:Pricing

Understanding & Capturing Value

What’s a Price?

• Price:Narrow sense:

• The amount of money charged for a “product”

Broader sense:• Sum of all values given up to gain benefits of having or

using a product Includes:

• Opportunity costs• Travel costs• Search costs, etc.

Dr. James Carver – Auburn University

Organization Slide

• Part I:The “process” of calculating

• Focused on “Cost-Plus” method Adding a standard markup to the cost of a product

• Part II:Conceptual topics, etc.


Part 1


Using Markups

• MarkupSelling price of the merchandise less its cost

• Equivalent to the good’s gross margin.

The basic markup equation: MU$ = SP - C• Where:

C = Dollar cost of merchandise (per unit) MU = Dollar markup (per unit) SP = Selling price (per unit)


Markup Percentages

• Markup on Selling Price:MUSP = MU$ / SP

• Which is also equal to MUSP = (SP – C) / SP

This is always “markup” unless I explicitly ask for markup on cost

• Markup on Cost:MUC = MU$ / C

• Which is also equal to MUC = (SP – C) / C


Break-Even Analysis

• Breakeven point:The point where the total revenue from the

quantity sold just equals the firm’s total costsFormula:

• GM = FC + VC + Π Where:

• GM = gross margin• FC = fixed cost• VC = variable cost• Π = profit (which is equal to zero in break-even problems)


Part 2


Increasing Focus on Non-Price Variables

• Price sensitivity has decreasedDue to increased desire for values like:

• Convenience, personalization, etc.

• Yet remains one of most important elementsBecause:

• It’s extremely flexible (i.e., easily changed)• It’s the only “mix” variable that produces revenue


Controllable Factors in Pricing

• Many firms focus too much on price.

Conditions customers to only purchase on sale.Overlooks the relationship price has with the other

variables of the marketing mix.

Two controllable factors in pricing are:1. Cost paid for (or to produce) goods

2. Desired gross margin


“Law of Demand”and Price Sensitivity


$

Q



$

Q

Perfectly Elastic



$

Q

Perfectly Inelastic

Pricing Freedom as a Function of Market Type

• Competition generally falls into one of four categories:

1. Pure Competition

2. Pure Monopoly

3. Monopolistic Competition

4. Oligopolistic Competition


Pure Competition

• Occurs when a market has:• Homogenous products,• Many buyers and sellers,• Buyers and sellers have perfect knowledge, and• There’s ease of entry for both buyers and sellers.

In such a situation:• Firms face horizontal demand curve• Must sell product at ‘‘market’’ or equilibrium price• Extremely rare


Pure Monopoly

• Occurs when there is only one seller for a product or service.

Yet this does not mean one can simply sell at whatever price s/he wants…

• Not perfectly inelastic for two reasons:1. Law of diminishing returns (i.e., declining marginal utility)

• Hot fudge sundae example

2. To sell more units, one must lower the selling price.• Not all consumers have same utility for any one good


Monopolistic Competition

• Occurs when a market has:• Heterogeneous products, • Products are viewed as substitutes for each other, and• Sellers recognize that they compete with sellers of these

substitute products.

Here, firms attempt to differentiate themselves with the products or services they offer

• Most common form of competition in America Particularly at the national-level


Oligopolistic Competition

• Occurs when a market has:• Essentially homogeneous products (e.g., gas),• Relatively few sellers (top 4 firms account for 60-80%),

Or, many small firms who follow the lead of a few larger firms,

• Any action taken by is expected to be noticed and reacted to by the other sellers.

Likely to lead to:• Similar prices as everybody knows what others are

doing.


Pricing Objectives and Policies

• Should be made after careful consideration of the firm’s…

1. Mission statement,

2. Goals/objectives,

3. Strategy, and

4. Marketing Mix


Specific Pricing Strategies

•Customary pricing •Multiple-unit pricing

•Variable pricing •Bundle pricing

•Flexible pricing •Bait-and-switch pricing

•One-price policy pricing •Private label pricing

•Odd pricing •Hi-low pricing

•Price lining •Leader pricing




Customary pricing

The retailer sets prices for goods and services and seeks to

maintain those prices over an extended period of time.

Variable pricing Recognizes that differences in demand and cost necessitate

that the retailer change prices in a fairly predictable

manner.

Flexible pricing Encourages offering the same products and quantities to

different customers at different prices (common for products sold using personal selling).

One-price policy Establishes that the retailer will charge all customers the

same price for an item. Not only does it speed up transactions, but also it reduces the need for highly skilled salespeople.

Odd pricing Practice of setting retail prices that end in the digits 5, 8, 9—such as $29.95, $49.98, or $9.99.


• Price Lining• Established to help customers make merchandise

comparisons and involves establishing a specified number of price points for each merchandise classification.

Trading up - Occurs when a firm uses price lining, and a salesperson moves a customer from a lower priced line to a higher one.

Trading down - Occurs when a firm uses price lining, and a customer initially exposed to higher-priced lines expresses the desire to purchase a lower-priced line.




Multiple-unit pricing

Price of each unit in a multiple-unit package is less than the price of each unit if it were sold individually.

Bundle Pricing Selling distinct multiple items offered together at a special price.

Bait-and-switch

pricing

Advertising or promoting a product at an unrealistically low price to serve as ‘‘bait’’ and then trying to ‘‘switch’’ the customer to a higher-priced product.

Private-label brand pricing

A private-label brand can be purchased by a retailer at a cheaper price, have a higher markup percentage, and still be priced lower than a comparable national brand.

High-low pricing Use of high every day prices and low leader ‘‘specials’’ on items typically featured in weekly ads.


• Leader pricing

Used when a high-demand item is priced low and heavily advertised in order to attract customers into the store.

Loss leader - Extreme form of leader pricing where an item is sold below a firm’s cost.

• Example: Turkeys at Thanksgiving time


principles of marketing chapter 9: pricing understanding & capturing value

Documents

q slide

inelastic slide

organization slide

value slide

cost markup

sp c c

sp c

sp c sp