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? 1+1=3! Dr. S. Borna MBA 671 Note: A quick change in a single element of the marketing mix cannot overcome basic and pervasive competitive weakness in a poorly conceived or poorly executed strategy. Table analogy one more time! Strategy Promotion Price Product Place Corporate Level SBU Level P.L. Reasons for Price Emphasis Historical Reasons Technical Reasons Social Reasons: (Price mechanism as an elegant rational for the efficient competitive market system) During the 1960s, according to a survey, marketing executives did not rate pricing among the top five variables critical to a firm’s marketing success. PRICING AS AN ACTIVE ELEMENT OF MARKETING MIX TO PROMOTE EXISTING OR NEW PRODUCTS TO ENHANCE THE IMAGE TO INCREASE SALES Major considerations in setting a price Price too high: Little or no demand Price ceiling Nature of demand in target market Business and marketing strategy Product differentiation Competitors’ prices Price Floor (too low, no profit) In Setting price the manager should be aware of the following constraints: •SBU and marketing strategies •Target market characteristics •Product characteristics •Competitor characteristics •Economic trends, legal restrictions Situations Where Price Decisions Are of Great Importance: 1. When a firm must set a price for the first time 2. When circumstances lead a firm to consider a price change 3. When competition initiates a price change A step-by-step procedure for Setting Pricing Policy 1. Selecting the pricing objective 2. Determining demand 3. Estimating costs 4. Analyzing competitors’ costs, prices, and offers 5. Selecting a pricing method 6. Selecting final price Possible Pricing Objectives Target return profit oriented Maximize profits Dollars or unit sales growth growth oriented Growth in market share Possible Pricing Objectives cont. status quo Meeting competition Non-price competition Social Objectives: Firm is not a for-profit organization Setting Price for the First Time 1. Setting Price in Theory 2. Setting Price in Practice Three Approaches -Cost orientation -Demand orientation -Competition orientation Setting Price in Theory The problem of determining the demand curve The problem of determining the cost functions Step two Estimate Demand and price elasticity of demand Methods for Estimating Demand Some practical methods: 1. Estimating demand in a laboratory setting 2. Estimating demand in an actual retail setting 3. Estimating demand in different test markets Step Three Determine Costs and their relationship to volume Estimating Cost 1. Fixed cost per unit 2. Variable cost Step Four Analyzing competitors’ costs, prices and offers Step Five Select A Method for Calculating Price The Problem of Objectives 1. 2. 3. 4. Market Penetration Market-Skimming Product-Line Promotion The Problem of Marketing Mix Reaction Setting Price in Practice Cost Oriented Approach to Pricing: Markup on Cost Markup on Price Target-Return Pricing An Example of Mark-up on Cost Purchase Price (Cost) $400 Markup on Cost 20% Selling Price ? 400 x .20= 80 Markup on cost 400 + 80 =480 Final Price An Example of Markup on Price Purchase Price $1600 Markup on Price 30% Selling Price? 70% 30% 1600 1600 P= = =2285.71 1-.30 .7 30% 685.71 2285.71 70% 1600 Competition-Oriented Pricing Going-Rate Pricing Sealed-Bid Pricing Step six Select a final Price Discount Policies Quantity Discounts Cumulative Discounts Seasonal Discounts Cash Discounts Adapt price structure to meet variation in demand and cost across geographic territories, market segments etc. Geographic Pricing Policies F.O.B. Zone Pricing Uniform Delivered Pricing Freight Absorption Pricing Basing-Point Pricing Muncie $10 $5 Louisville NY $13 $25 Chicago Discriminatory Pricing Customer Segment Product-form Location Time Promotional Pricing: Cash Rebates Low Interest Financing Loss-Leader Pricing When Circumstances Lead a Firm Consider a Price Change (initiating a Price Change) Reasons for a price cut: Excess capacity Declining market share Market domination (AA as an example) A reduction in price may lead to: Low-quality trap Fragile market share trap (customers may switch) Shallow-pockets trap (Case of American Airlines) Reasons for increasing price: Overdemand cost inflation Methods for increasing price: Reduction of discounts Use of escalator clauses delayed quotation pricing etc. Key Questions: Customers’ reactions and interpretation Competitors’ response Initiating Price Changes Consumers’ Reactions to Price Change Price Elasticity of Demand E = qp Q2-Q1 Q1+Q2 P2-P1 P1+P2 Perceptual Factors in Buyer’s Response Application of Weber’s Law jnd = I I =K Meeting Price Change Do Nothing Policy (maintain p.) Meet The Price Change Other Alternatives Increase quality and or price Introduce low-price fighter brand Price-Reaction Program for Meeting a Competitor’s Price Cut Has competitor cut his price? No Hold our price at present level; continue to watch competitor’s price No No Yes Is the price Is it likely to be How much has likely to permanent Yes his price been significantly Yes aprice cut? cut? hurt our sales? By less than 2% Include a cents-off coupon for the next purchase By 2-4% Drop price by half of the competitor’s price cut By more than 4% Drop price to competitor’s price Legal Issues in Pricing Price Fixing Price Discrimination Deceptive Pricing Discrimination is permitted if: 1. There is cost differences 2. To meet lawful competition 3. Different uses of product, sales at different time period Bait and Switch Pricing Review Setting the Price Adapting the Price Initiating & Responding to Price Changes