pricing the product. 2 chapter objectives explain the importance of pricing and how prices can take...
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Pricing the Product
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Chapter Objectives
• Explain the importance of pricing and how prices can take both monetary and nonmonetary forms
• Understand the pricing objectives marketers typically have in planning pricing strategies
• Describe how marketers use costs, demands, and revenue to make pricing decisions
• Understand some of the environmental factors that affect pricing strategies
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Chapter Objectives (cont’d)
• Understand key pricing strategies
• Explain pricing tactics for single and multiple products, and for pricing on the Internet
• Understand the opportunities for Internet pricing strategies
• Describe the psychological, legal, and ethical aspects of pricing
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Real People, Real Choices
• Taco Bell (Danielle Blugrind)• In order to differentiate itself
from the competition, Taco Bell needed to update its value pricing menu.Option 1: price entire menu
at $1.29
Option 2: price items at 99
cents and $1.29
Option 3: price items at
99 cents, $1.19, and $1.29TACO BELL
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“Yes, but what does it cost?”
• Price: the assignment of value, or the amount the consumer must exchange to receive the offeringMoney, goods, services, favors,
votes, or anything else that has value to the other party
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Figure 11.1:Steps in Price Planning
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Step 1: Develop Pricing Objectives
• Sales or market share objectives• Profit objectives • Competitive effect objectives • Customer satisfaction objectives• Image enhancement objectives
ROLLS-ROYCE
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Step 2: Estimate Demand
• Demand: customers’ desires for a productHow much of a product are
customers willing to buy as its price goes up or down?
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Demand Curves
• Law of demand: as price goes up, quantity demanded goes down.
• For prestige products, a price increase may actually result in an increase in quantity demanded.
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Figure 11.2: Demand Curves for Normal and Prestige Products
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Shifts in Demand Curve
Changes in marketing strategy (improved product, new advertising) or non-marketing activities can cause upward or downward shifts in demand.
At a given price, demand is greater or less than before the shift.
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Figure 11.3: Shift in Demand Curve
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Estimating Demand
• Marketers predict total demand by estimating potential buyers for a product, then multiplying number of buyers times average amount of each buyer’s purchase.
• Then they predict what the company’s share of the total market will be.
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Price Elasticity of Demand
• The percentage change in unit sales that results from a percentage change in price.
Figure 11.5: Price Elastic and Inelastic Demand Curves
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Elastic Demand
• A change in price results in a substantial change in quantity demanded. If price is increased, revenues decrease, and vice-versa.Non-necessities (pizza) generate elastic demand.Availability of close substitute products facilitates elastic demand.
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Inelastic Demand
• A change in price has little or no effect on quantity demanded. If price is increased, revenues increase. The demand for necessities (food and electricity) is
generally inelastic.
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Cross-elasticity of Demand
• Changes in prices of other products affect a product’s demand.Products are substitutes: increase in price of one will
increase demand for other (bananas vs. strawberries).
One product is essential for use of second: increase in price of one decreases demand for other (increasing price of gas lowers demand for tires).
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Group Activity
• Your group are marketers for a candy bar manufacturer. You feel it’s time to increase price, but you’re concerned the increase might not be profitable.--How would you investigate elasticity of demand?
--What findings would lead you to increase price?
--What findings would lead you not to increase it?
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Step 3: Determine Costs
• Variable costs: costs of production that are tied to and vary depending on the number of units produced. Average variable costs may change as the number of
products produced changes.
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Figure 11.6: Variable Costs at Different Levels of Production
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Step 3: Determine Costs (cont’d)
• Fixed costs: costs of production that don’t change with number of units producedRent, cost of owning/maintaining factory, utilities,
equipment, fixed salaries of firm’s executives
Average fixed cost: fixed cost per unit (total fixed costs divided by number of units produced) will decrease as number of units produced increases.
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Step 3: Determine Costs (cont’d)
• Total costs: total of fixed costs and variable costs for a set number of units produced.
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Break-Even Analysis
• A method for determining the number of units a firm must produce and sell at a given price to cover all its costs.
• Break-even point: point at which a firm doesn’t lose any money and doesn’t make any profit.
Song AirlinesVideo
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Figure 11.7: Break-Even Analysis
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Break-Even Analysis (cont’d)
• Break-even point (in units) = (total fixed costs) divided by (contribution per unit)Contribution per unit: the difference between the price
the firm charges for a product and the variable costs
• Break-even point (in dollars) = (total fixed costs) divided by [1 - (variable cost per unit divided by price)]
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Marginal Analysis
• A method that uses cost and demand to identify the price that will maximize profits. Marginal cost: increase in total costs from producing
one additional unit of a productMarginal revenue: increase in total income or revenue
from selling one additional unit of a product (decreases with each additional unit sold)
Profit is maximized where marginal cost is exactly equal to marginal revenue.
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Figure 11.8: Marginal Analysis
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Marketing Math Activity
• You and your friend have decided to go into business together manufacturing handbags. --You know fixed costs will be $120,000 a year, and
you expect variable costs to be $28 per bag. --If you plan to sell the bags to retail stores for $35,
how many must you sell to break even?
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Step 4: Evaluate the Pricing Environment
• The economyBroad economic trends Recessions, Inflation
• The competition• Consumer trends
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Step 5: Choose a Price Strategy
• Pricing strategies based on costSimple to calculate and
relatively risk free
Cost-plus pricing: total all product costs and add markup
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Step 5: Choose a Price Strategy (cont’d)
• Pricing strategies based on demandBased on estimate of quantity a firm can sell at
different pricesTarget costing: identify quality and functionality
customers need and price they’re willing to pay before designing product.
Yield management pricing: charge different prices to different customers to manage capacity
PRICELINE.COM
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Step 5: Choose a Price Strategy (cont’d)
• Pricing strategies based on the competitionPricing near, at, above, or below the competitionPrice leadership strategy: industry giant announces
price, and competitors get in line or drop out
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Discussion
• In what ways is a price leadership strategy good or bad for consumers?
• Should governments allow price leadership?
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Step 5: Choose a Price Strategy (cont’d)
• Pricing strategies based on customers’ needsValue pricing or everyday low pricing (EDLP): pricing
strategy in which a firm sets prices that provide ultimate value to customers.
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Step 5: Choose a Price Strategy (cont’d)
• New-product pricingSkimming price: a very high premium
price
Penetration pricing: a very low price to encourage more customers to purchase
Trial pricing: low price for a limited period of time
HP FINANCIAL CALCULATORS
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Discussion
• In pricing new products, marketers may choose a skimming or a penetration pricing strategy. --What is the advantage or disadvantage of this
practice for consumers? --For the industry as a whole?
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Step 6: Develop Pricing Tactics
• Pricing for individual productsTwo-part pricing: offering two
separate types of payments to purchase the product
Payment pricing: breaking total price into smaller amounts payable over time
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Step 6: Develop Pricing Tactics (cont’d)
• Pricing for multiple productsPrice bundling: selling two or more goods or services as a
single package for one price
Captive pricing: pricing two products that work only when used together
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Step 6: Develop Pricing Tactics (cont’d)
• Distribution-based pricingF.O.B. (free on board) origin pricing
F.O.B delivered pricing
Basing-point pricing
Uniform delivered pricing
Freight absorption pricing
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Step 6: Develop Pricing Tactics (cont’d)
• Discounting for channel membersList price (suggested retail price): price that
manufacturer sets as appropriate for end consumer to pay
Trade or functional discounts: set percentage discounts off list price for each channel level
Quantity discounts: reduced prices for purchases of larger quantities
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Step 6: Develop Pricing Tactics (cont’d)
• Discounting for channel members (continued)Cash discounts: enticements to customers to pay bills
quickly (2% 10 days, net 30 days)
Seasonal discounts: price reductions offered during certain times of year
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Pricing and Electronic Commerce
• Dynamic pricing strategies: seller easily adjusts price to meet changes in marketplace.Cost of changing prices on Internet
is practically zero.
Firms can respond quickly and frequently to changes in costs, supply, and/or demand.
CHEAPTICKETS.COM
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Pricing and Electronic Commerce (cont’d)
• Online auctions (eBay.com)E-commerce allows shoppers to purchase products
through online bidding.
• Pricing advantages for online shoppersConsumers gain control. Search engines and “shopbots” make customers
more price-sensitive.Consumers have more negotiating power.
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Psychological Issues in Pricing
• Buyer’s pricing expectation Internal reference price: consumers use a price/price
range to evaluate product’s cost.• Assimilation effect • Contrast effect
Price/quality inferences: consumers assume higher-priced product has higher quality.
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Discussion
• Consumers often make price-quality inferences about products.--What are some products for
which you make price-quality inferences?
--Do your inferences make sense?
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Psychological Pricing Strategies
• Odd-even pricing: prices ending in 99 rather than 00 lead to increased sales.
• Price lining: items in a product line sell at different price points.
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Legal and Ethical Considerations in Pricing
• Deceptive pricing practicesGoing-out-of-business sale Bait-and-switch
• Unfair sales actsLoss-leader pricing Unfair sales acts
• Illegal business-to-business price discrimination
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Discussion
• In loss-leader pricing, retailers advertise and sell an item below cost to get customers into the store. --Do you consider this an unethical practice? --Who benefits and who is hurt by it? --Should the practice be made illegal (some states
have done so)? --How is loss-leader pricing different from bait-and-
switch pricing?
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Legal and Ethical Considerations in Pricing (cont’d)
• Price fixing: two or more companies conspire to keep prices at a certain levelHorizontal price fixing Vertical price fixing
• Predatory pricing: company sets a very low price for purpose of driving competitors out of business
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Real People, Real Choices
• Taco Bell (Danielle Blugrind)• Danielle chose option 3:
price items at 99 cents, $1.19, and $1.29By carefully tuning its pricing strategy,
Taco Bell is reclaiming its position as purveyor of fast-food value for the money.
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Marketing Plan Exercise
• A new seaside resort offers luxury rentals for a few days, a week, or longer. Consider possible pricing strategies -- cost-plus, yield management, everyday low pricing, skimming, and penetration and trial pricing. --What pricing strategy do you recommend for the resort ? --What pricing tactics do
you suggest?
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Marketing in Action Case:You Make the Call
• What is the decision facing True Religion?
• What factors are important in understanding this decision situation?
• What are the alternatives?
• What decision(s) do you recommend?
• What are some ways to implement your recommendation?
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Keeping It Real: Fast-Forward to Next Class, Decision Time at General Motors R*Works
• Meet Vince O’Brien, VP-Regional Managing Director for General Motors R*Works
• R*Works: regional promotional agency for GM; manages partnerships with sports organizations
• The decision: How to get dealers to support R*Works ski mountain promotional partnerships?