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Transcript
Financial aspects of marketing HOW DO WE DETERMINE THE PRICE? PROFIT = $.85 Pricing considerations Demand PRICE Costs Elements of price • Price is the value that customers give up or exchange to obtain a desired good or a service • Payment may be in the form of money, goods, services, favors, votes, or anything else that has value to the other party • Money is most frequently exchanged • Amount paid not always as listed or quoted price due to discounts or extra fees. • Develop price equation • Price = list price – (incentives + allowances) + extra fees • Ex. Bugatti • Price = $1,400,000 – ($100,000+$4,350) + ($98,350 + $1,000 + $5,000 +$41,974) = $1,441,974 Price indicates value Because price has a psychological impact on customers, marketers can use it symbolically Pricing high – emphasizes quality Pricing low – emphasizes a bargain • 84% of people indicate that “higher price means higher quality” • Value = perceived benefits / Price • Value Pricing – method of increasing value while keeping the price consistent or decreasing it. Price and the Marketing Mix (4Ps) • Price is the only P which represents revenue rather than an expense • Price directly effects profits • PROFIT = TOTAL REVENUE –TOTAL COST • PROFIT = (Unit price x Quantity sold) – (Fixed cost + Variable cost) • Price effects quantity sold • Price indirectly effects costs (since quantity sold effects costs) • As such, pricing is one of the most important decisions marketer makes. Objectives To understand the role of price To identify the characteristics of price and nonprice competition To explore demand curves and price elasticity of demand To examine the relationships among demand, costs and profits To describe key factors that may influence marketers’ pricing decisions To consider issues affecting the pricing of products for business markets Discussion Point – what frequently drives behavior? Price Competition Price competition – Emphasizing price as an issue and matching or beating competitors’ prices: To compete effectively on a price basis, a firm should be the low-cost seller Must be willing and able to change prices frequently to meet competitors’ pricing May lead to price wars Nonprice Competition Nonprice competition – Emphasizing factors other than price to distinguish a product from competing brands: A major advantage is a firm can build customer loyalty Only effective if: A company can distinguish its brand from others Buyers are able to perceive these distinguishing characteristics and view them as important Distinguishing characteristics should be hard to copy The company should promotes distinguishing characteristics to set itself apart from competition Price and Nonprice Competition L’Oréal products compete on the basis of nonprice competition, which emphasizes product quality The Demand Curve Demand curve – A graph of the quantity of products expected to be sold at various prices if other factors remain constant – D1 Demand depends on other factors in the marketing mix including quality, promotion and distribution and also: Consumer tastes - changing taste changes demand Price and availability of similar products – if more people buy our product, less will buy our competitor’s product Consumer Income – greater income, greater demand An improvement in any of these factors may cause a shift to demand curve D2 Estimating Demand for Dog Beds per week Number of households in market 112,600,000 Average # of dog beds per household per year .4 Total annual market demand 45,040,000 Predicted market share 4% Estimated annual company demand 1,801,600 Estimated weekly demand 34,646 Variety of Demand Curve Many types of demand exist and not all conform to the classic demand curve Prestige products tend to sell better at high prices, partly because the expense makes the buyers feel elite For a certain price range, P1 to P2, demand goes up After a certain point, raising the price backfires and demand goes down – P2 to P3 Demand Fluctuations Factors that can influence demand: Changes in buyers’ needs Variations in the effectiveness of other marketing mix variables The presence of substitutes Dynamic environment Changes in demand for some products is predictable but with other products demand may be less predictable Some organizations anticipate demand fluctuations and develop new products and prices to meet customers’ changing needs Assessing Elasticity of Demand Price elasticity of demand – A measure of the sensitivity of demand to changes in price Demand for electricity is inelastic, when price increases from P1 to P2, demand decreases a small amount Demand for recreational vehicles is elastic, when price goes up from P1 to P2, quantity demanded decreases a great deal Assessing Price Elasticity If marketers can determine the price elasticity of demand, setting a price is much easier By analyzing total revenues as prices change, marketers can determine whether a product is price elastic: If demand is elastic, a change in price causes and opposite change in total revenue If demand is inelastic, total revenue changes in the same direction Price elasticity of demand = % change in quantity demanded %change in price Discussion Point The Chicago White Sox use dynamic pricing when selling single-game tickets They adjust the price according to what team is visiting, the day of the week, the weather etc, This allows them to generate higher ticket sales during slow times and greater profit during peak times ? How does dynamic pricing allow a team to judge the price elasticity of demand for a particular game and then use this information in future pricing decisions? ? What other marketing mix variables must teams consider when using dynamic pricing? Why? Demand, Cost and Profit Relationships Analysis of demand, cost and profit is important Customers are becoming less tolerant of price increases, forcing manufacturers to find new ways to control costs Companies must set prices that not only cover its costs but also meet customers’ expectations Two approaches to understanding demand, cost, and profit relationships are Marginal analysis Break-even analysis Marginal Analysis Marginal analysis examines what happens to a firm’s costs and revenues when production (or sales volume) changes by one unit Fixed costs – costs that do not vary with changes in the number of units produced or sold Average fixed cost – the fixed cost per unit produced Variable cost – costs that vary directly with changes in the number of units produced or sold Average variable cost – the variable cost per unit produced Marginal Analysis Total cost – the sum of average fixed and average variable costs times the quantity produced Average total cost – the sum of the average fixed cost and the average variable cost Marginal cost (MC) – the extra cost incurred by producing one more unit of a product Marginal revenue (MR) – the change in total revenue resulting from the sale of an additional unit of product Marginal Cost Analysis Marginal Analysis Any unit for which MR exceeds MC adds to a firm’s profits Any unit for which MC exceeds MR subtracts from profits The firm should produce at the point where MR equals MC because that is the most profitable level of production Marginal Analysis Marginal Analysis Method for Determining the Most Profitable Price* Marginal Analysis Combining the Marginal Cost and Marginal Revenue Concepts for Optimal Profit Break-Even Analysis Break-even point – the point at which costs of producing a product equal the revenue made from selling the product Determining the Break-Even Point Break-Even Analysis Knowing the number of units necessary to breakeven is important in setting the price If a product priced at $100 per unit Has an average variable cost of $60 per unit The contribution to fixed cost is $40 If total fixed costs are $120,000, the break-even point in units is determined as follows = fixed costs Break-even point per-unit contribution to fixed costs = fixed costs price – variable costs = $120,000 $40 = 3,000 units Break-Even Analysis To use break-even analysis effectively, a marketer should determine the break-even point for each of several alternative prices This makes it possible to compare the effects on total revenue, total costs and the break-even point for each price This approach assumes the quantity demanded is basically fixed and the major task is to set prices to recover costs Factors Affecting Pricing Decisions Pricing decisions can be complex because of the number of factors to consider: There is considerable uncertainty about the reactions to price among buyers, channel members and competitors Price is a major issue when assessing a brand’s position relative to competing brands Factors Affecting Pricing Decisions Most factors that affect pricing decisions can be grouped into one of eight categories: Factors Affecting Pricing Decisions Organizational and Marketing Objectives Prices should be consistent with the organization’s goals, mission and marketing objectives Pricing Objectives (increase mkt share – prices down!) The pricing objectives a marketer uses have considerable bearing on determination of prices Costs A marketer should analyze all costs so they can be included in the total cost associated with a product Other Marketing Mix Variables All marketing mix variables are highly interrelated Factors Affecting Pricing Decisions Channel Member Expectations A marketer must consider what members of the distribution channel expect such as discounts for large orders and prompt payment Customers’ Interpretation and Response Marketers must consider this question: How will our customers interpret our prices and respond to them? Interpretation refers to what the price means or what it communicates to customers Customer response refers to whether the price will move customers closer to purchase and the degree that price enhances their satisfaction with the purchase and after the purchase Factors Affecting Pricing Decisions Customers’ Interpretation and Response Customers compare prices with internal or external reference prices Internal reference price – a price developed in the buyer’s mind through experience with the product External reference price – a comparison price provided by others such as retailers or manufacturers Relative to price, consumers can be characterized according their degree of: Value consciousness – concerned about price and quality of a product Price consciousness – striving to pay low prices Prestige sensitivity – drawn to products that signify prominence and status Factors Affecting Pricing Decisions Competition A marketer must know competitors’ prices, adjust their own prices and assess how competitors will respond Legal and Regulatory Issues Price discrimination is employing price differentials that injure competition by giving one or more buyers a competitive advantage, could be prohibited by law Price fixing External Reference Price Advertisements provide information that customers use to establish or change their reference prices Pricing for Business Markets Establishing prices for business markets sometimes differs from setting prices for consumers Differences in the size of purchases, geographic factors and transportation considerations require sellers to adjust prices There are several issues unique to pricing business products Discounts Geographic pricing Transfer pricing Price Discounting Trade (functional) discounts – a reduction off the list price a producer gives to an intermediary for performing certain functions Cash discounts – price reduction given to buyers for prompt payment or cash payment Seasonal discounts – price reduction given to buyers for purchasing goods or services out of season Allowances – concession in price to achieve a desired goal Quantity discounts – Deductions from the list price for purchasing in large quantities Can be either: Cumulative discounts which are quantity discounts aggregated over a stated time period Noncumulative discounts which are one-time price reductions based on the number of units purchased, the dollar value of the order, or the product mix purchased Geographic Pricing Geographic pricing – reductions for transportation and other costs related to the physical distance between buyer and seller F.O.B. (free on board) factory – is the price of merchandise at the factory before shipment F.O.B. destination – is a price indicating the producer is absorbing shipping costs Uniform geographic pricing – is charging all customers the same price, regardless of geographic location Transfer Pricing Transfer pricing – Prices charged in sales between an organization’s units Four methods to determine price Actual full cost is calculated by dividing all fixed and variable expenses for a period into the number of units produced Standard full cost is calculated based on what it would cost to produce the goods at full plant capacity Cost plus investment is calculated as full cost plus the cost of a portion of the selling units’ assets used for internal needs Market-based cost is calculated at the market price less a small discount to reflect the lack of sales effort and other expenses Objectives To describe the six major stages of the process used to establish prices To explore issues related to developing pricing objectives To understand the importance of identifying the target market’s evaluation of price To examine how marketers analyze competitors’ prices To describe the bases used for setting prices To explain the different types of pricing strategies Six major stages of the process used to establish prices 1. Development of Pricing Objectives Goals that describe what a firm wants to achieve through pricing Should be consistent with organizational and marketing objectives Can be short- or long-term and marketers can employ multiple pricing objectives Pricing Objectives and Typical Actions Taken to Achieve Them Discussion Point Pricing Objective ?What is the pricing objective for the retailer in this advertisement? 2. Assessment of the Target Market’s Evaluation of Price Importance of price depends on: Type of product (elasticity of demand?) Type of target market (adults spend more on shoes than kids) Purchase situation (food price at the airport versus close to home) Value combines a product’s price and quality attributes Customers use value to differentiate between competing brands Examples of Perceptions of Product Value 3. Evaluation of Competitors’ Prices Marketers should use competitors’ prices to help them establish their own prices Competitors’ prices may be closely guarded Pricing above competition creates an exclusive image Pricing below competition can increase market share 4. Selection of a Basis for Pricing The three major dimensions on which prices can be based are: Cost Demand Competition An organization usually considers multiple dimensions: Type of product Market structure of the industry Brand’s market share position relative to competing brands Customer characteristics Cost-Based Pricing Cost-Based Pricing Adding a dollar amount or percentage to the cost of the product Cost-Plus Pricing Determine the seller’s cost and add a specified dollar to it Is used when production costs are difficult to predict Markup Pricing Adding a predetermined percentage of the cost to the price of the product Markup Pricing Markup can be stated as a percentage of cost of making the product or a percentage of selling price Markup as % of Cost = Markup as % of Selling Price Markup 15 = 45 Cost = 33.3% Markup 15 = = Selling Price 60 = 25.0% Demand-Based Pricing Customers pay a higher price when demand for the product is strong and a lower price when demand is weak Marketers must be able to calculate how much customers will buy at different price points Demand-Based Pricing Car rental companies often engage in demand-based pricing ? How does demandbased pricing work? Non-Price Factors Affecting Demand Market Degree of competition Competitor action/reaction General economic conditions Product Quality Range Nature-essential/luxury Substitutes Support Service at point of sale and after Advertising/promotion Distribution Methods Competition-Based Pricing Pricing influenced primarily by competitors’ prices Importance of this method increases when: Competing products are homogeneous Organization is serving markets in which price is a key consideration May necessitate frequent price adjustments 5. Selection of a Pricing Strategy A pricing strategy is an approach or course of action designed to achieve pricing and marketing objectives Differential Pricing Differential Pricing Charging different prices to different buyers for the same quality and quantity of product Negotiated Pricing Establishing a final price through bargaining between seller and customer Secondary-Market Pricing One price for primary target market and a different price for another market Periodic Discounting Pricing Temporary reduction of prices on a patterned or systematic basis Random Discounting Pricing Temporary reduction of prices on an unsystematic basis New-Product Pricing Setting the price for new products is one of the most fundamental decisions in the marketing mix Price Skimming Charging the highest possible price that buyers who most desire the product will pay Penetration Pricing Setting the price below those of competing brands to penetrate a market and gain a significant market share quickly 21-71 Product-Line Pricing Product-Line Pricing Establishing and adjusting prices of multiple products within a product line The goal is to maximize profits for an entire product line Captive Pricing Pricing the basic product in a product line low, while pricing related items higher Product-Line Pricing Premium Pricing Pricing the highest-quality or most versatile products higher than other models in the product line Bait Pricing • Pricing an item in a product line low with the intention of selling a higher-priced item in the line Price Lining • Setting a limited number of prices for selected groups or lines of merchandise Psychological Pricing Psychological Pricing Techniques Pricing that attempts to influence a customer’s perception of price to make a product’s price more attractive Reference Pricing Pricing a product at a moderate level and displaying it next to a more expensive model or brand Bundle Pricing Packaging together two or more complementary products and selling them at a single price Multiple-Unit Pricing Packaging together two or more identical products and selling them at a single price Everyday Low Prices (EDLP) Pricing products low on a consistent basis Odd-Even Pricing Ending the price with certain numbers to influence buyers’ perceptions of the price or product Customary Pricing Pricing certain goods on the basis of tradition Prestige Pricing Setting prices at an artificially high level to convey prestige or a quality image Sample Prestige Product Prices Professional Pricing Fees set by people with great skill or experience in a particular field (doctor or lawyer) Professional prices do not relate to the time or effort expended A standard fee Professionals have an ethical responsibility not to overcharge customers Types of Promotional Pricing Price is often coordinated with promotion Price Leader Products priced below the usual markup, near cost, or below cost Management hopes sales of regularly priced merchandise will offset the reduced revenues from the price leaders Special-Event Pricing Advertised sales or price-cutting is used to increase sales volume and is linked to a holiday, a season, or other event Comparison Discounting The pricing of a product at a specific level and simultaneously comparing it to a higher price 6. Determination of Price: Pricing Strategy The final step in the price-setting process Pricing Strategy: Yields a certain price, which may need refining Helps in setting final price In absence of government controls, pricing remains flexible and a convenient way to adjust the marketing mix