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WHAT IS PRICE?
Price
PRICING STRATEGY
how does a company decide what price to charge for its products and services? what is the price anyway? doesnt price vary across situations and over time? some firms have to decide what to charge different customers and in different situations they must decide whether discounts are to be offered, to whom, when, and for what reason
we generally think of price in monetary terms may be more useful to think of what it costs us to acquire something of value
price is not always an important factor in influencing a sale; the customer wants more than a low price, may be willing to pay more the customer considers what he or she gets for the price paid; the seller must offer value price of a product or service communicates a message to the consumer about quality
what causes them to conclude that they paid too much or got a great deal?
some consumers are very interested in getting a low price and pay close attention to price; they are price sensitive. But, this is variable and personal many are interested in other elements of the purchase, including brand, quality, etc. there is a tendency to link quality with price consumers are often prepared to pay more if they expect to get added value adding value doesnt mean dropping price
MARKETING MIX
Revenue Producer
Cos t
Product
Price
Cos t
Place
Promotion
Cos t
PRICING
Forms
Price
Components
Functions
$31. 50
$33. 50
Bargainin g
PROFIT MAXIMIZATION
Profit Maximization
Setting prices so that total revenue is as large as possible relative to total costs.
11
RETURN ON INVESTMENT
Return on Investment
ROI =
12
99
Selective Pricing
Negotiate Prices
Monitor Customers
Pricing Department
Reference Prices
99 $1.
Price Endings
A BLACK T-SHIRT
Armani - $275
Gap - $14.90
H&M - $7.90
Low
Super Value
High
Product Quality
Premium Value
High Value
Med
Overcharging
Medium Value
Good-Value
Low
Rip-Off
False Economy
Economy
Costs that dont vary with sales or production levels. Executive Salaries Rent
Variable Costs
Costs that do vary directly with the level of production. Raw materials
Total Costs
Sum of the Fixed and Variable Costs for a Given Level of Production
Demand
The quantity of a product that will be sold in the market at various prices for a specified period.
The quantity of a product that will be offered to the market by a supplier at various prices for a specific period.
Supply
DETERMINING DEMAND
ELASTICITY OF DEMAND
Elastic Demand
Consumers buy more or less of a product when the price changes An increase or decrease in price will not significantly affect demand
Inelastic Demand
Unitary Elasticity
ELASTICITY OF DEMAND
Elasticity (E)
If E is greater than 1, demand is elastic. If E is less than 1, demand is inelastic. If E is equal to 1, demand is unitary.
Elasticity of Demand
28
EQUILIBRIUM PRICE
2.50 2.00 Price 1.50 Price Equilibrium S Shortage D 120 D Surplus S
1.00
.50 0
20
40
60
80
100
Quantity demanded
ESTIMATING COSTS
Demand
Profit Costs
ESTIMATING COSTS
Types of costs
Variable Costs
Total Costs
ESTIMATING COSTS
Accumulated Production
Experience Curve
(Learning Curve)
ESTIMATING COSTS
Target Costing
Market research
Design engineers
Worth to Customer
MARKUP PRICING
Variable cost per toaster $10 Fixed costs $300,000 Expected unit sales 50,000
TARGET-RETURN PRICING
10-20
Target-Return Pricing
PERCEIVED-VALUE PRICING
Customers perceived-value
Performance $$$ Warranty $ Customer support $ Reputation $$
VALUE PRICING
THOUSANDS OF
EDLP
Level of Qualit y
P C 1 1
P C 2 2
Pricing
Low
High
GOING-RATE PRICING
Commodities
AUCTION PRICING
English auction
(ascending bids)
Dutch auction
(descending bids)
Sealed-bid auction
DEFINITIONS
Market-Skimming
Setting
Pricing
a high price for a new product to skim maximum revenues layer by layer from segments willing to pay the high price.
DEFINITIONS
Market-Penetration
Pricing
Setting a low price for a new product in order to attract a large number of buyers and a large market share.
Line Pricing
Price points
Optional-Product Pricing
Pricing optional or accessory products sold with the main product Supplemental software, digital cameras, and printers sold with a new PC are examples
12- 49
Captive-Product Pricing
Pricing products that must be used with the main product High margins are often set for supplies Services: two-part pricing strategy Fixed fee plus a variable usage rate
By-Product Pricing
Pricing
High Price
(No possible demand at this price)
Ceiling price
Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price
Market skimming
Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price
Understand factors that affect price sensitivity Estimate demand curves Understand price elasticity of demand
Elasticity Inelasticty
MARKETING STRATEGIES
Conditions Under Which Consumers are Less Price Sensitive:
Product is more distinctive Buyers are less aware of substitutes Buyers cannot easily compare quality of substitutes The expenditure is a lower part of buyers total income The expenditure is small compared to the total cost
Part of the cost is borne by another party The product is used with assets previously bought The product is assumed to have more quality, prestige, or exclusiveness Buyers cannot store the product
MARKETING STRATEGIES
Conditions Under Which Demand is Less Elastic:
There are few or no substitutes Buyers do not readily notice the higher price
Buyers are slow to change their buying habits and search for lower prices Buyers think higher prices are justified
Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price
Types of costs and levels of production must be considered Accumulated production leads to cost reduction via the experience curve Differentiated marketing offers create different cost levels
costs: do not vary directly with changes in level of production Variable costs: vary with production Total costs: sum of fixed and variable costs a given level of production Average cost: cost per unit at a given level of production
Brand Qualit y
Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price
Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price
Markup pricing Target-return pricing Perceived-value pricing Value pricing Going-rate pricing Auction-type pricing Group pricing
Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price
Psychological pricing Gain-and-risk-sharing pricing Influence of other marketing mix variables Company pricing policies Impact of price on other parties
Differentiated Pricing
Promotional Pricing
Geographical Pricing
Barter
Compensation
PRICE CHANGES
Initiating Price Cuts is Desirable When a Firm:
Has excess capacity Faces falling market share due to price competition Desires to be a market share leader
PRICE CHANGES
If a firm can increase profit, faces cost inflation, or faces greater demand than can be supplied.
12- 67
segments show different intensities of demand Consumers in lower-price segments can not resell to higher-price segments Competitors can not undersell the firm in higherprice segments Cost of segmenting and policing the market does not exceed extra revenue
Cutting Prices
Competitor Moves
PRICE CHANGES
PRICE CHANGES
PRICE CHANGES
Competitors
PRICE CHANGES
share / profits will be negatively affected if nothing is changed. Effective action can be taken:
Reducing price Raising perceived quality Improving quality and increasing price Launching low-price fighting brand
price and perceived quality; selectively prune customers Raise price and perceived quality Partially cut price and raise quality Fully cut price, maintain perceived quality Maintain price, reduce perceived quality Introduce an economy model
Initiating price cuts Initiating price increases Reactions to price changes Responding to competitors price changes
Excess plant capacity Declining market share Attempt to dominate the market via lower costs Price/quality perceptions Low prices dont create market loyalty Competition may match or beat price cuts
Initiating price cuts Initiating price increases Reactions to price changes Responding to competitors price changes
Initiating price cuts Initiating price increases Reactions to price changes Responding to competitors price changes
Firms must monitor both customer and competitor reactions Competitor reactions are common when:
Few firms offer the product The product is homogeneous Buyers are highly informed
Initiating price cuts Initiating price increases Reactions to price changes Responding to competitors price changes
The degree of product homogeneity affects how firms respond to price cuts initiated by the competition Market leaders can respond to aggressive price cutting by smaller competitors in several ways
Reduce price