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Transcript
Marketing Chapter 13 Pricing Concepts for Establishing Value Dhruv Grewal Michael Levy McGraw-Hill/Irwin Copyright © 2008 by the McGraw-Hill Companies, Inc. All rights reserved. 13-2 Panera Bread Patrons spend on average $4 more Offers upscale food and ambiance Consumers willing to pay more will choose Panera, others will choose other options © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Price Benefits vs. Sacrifice © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Price is a Signal Prices can be both too high and too low Price too low may signal poor quality Price set too high might signal low value © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Price’s Role in the Marketing Mix Price is usually ranked as one of the most important factors in purchase decisions Price is the only marketing mix element that generates revenue © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Test Your Knowledge The key to successful pricing is to match the product or service with the consumer’s _______________. A) income level B) value perceptions C) shopping habits D) brand consciousness The 5 C’s of Pricing © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 1st C: Company Objectives © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Profit Orientation Target return pricing Profit Orientation Target profit pricing Maximizing profits © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Sales Orientation Focus on increasing sales More concerned with overall market share Does not always imply low setting low prices © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Competitor Orientation Competitive parity Status quo pricing Value is not part of this pricing strategy © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Customer Orientation Focus on customer expectations by matching prices to customer expectations © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Test Your Knowledge Which of the following is NOT an example of how a firm might invoke the concept of value? A) Set a “no-haggle” price B) Set prices to match consumer expectations C) Change prices to meet those of the competition D) Offer very high-priced, “state-of-the-art” products or services Implementing Pricing Strategies to Achieve Objectives How can a consumer’s perception of value affect a firms pricing strategy? Case in Point: Ursinus College Challenge Answer Results College was losing applicants. Raise tuition. A consultant had found that the tuition was too low compared to other schools of similar quality and thus signaling lower quality. Tuition was raised by 17.6 percent and within 4 years the size of the freshman class had increased 35%. 2nd C: Customers © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Demand Curves and Pricing Demand curves Knowing demand curve enables to see relationship between price and demand. © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Demand Curves Not all are downward sloping Prestige product or services have upward sloping curves. © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Price Elasticity of Demand Elastic (price sensitive) Inelastic (price insensitive) Consumers less sensitive to price increases for necessities © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Price Elasticity of Demand © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Entrepreneurial Marketing 13.1: JetBlue Provides Value Founder David Neelam decided to focus on creating value Emphasize those services that mattered most New model = low prices + high customer service © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Factors Influencing Price Elasticity of Demand Crossprice elasticity Income effect Substitution effect © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Test Your Knowledge Consumers are generally less sensitive to price increases for which of the following items? A) milk B) steak C) cars D) clothing Substitution Effect Consider Pete, college student on a budget Old Spice Sport Deodorant user At the store he notices that Old Spice is more expensive Pete decides to give another brand a try and save money © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Substitution Effect How can a firm win market share in the highly competitive technology arena? Case in Point: HD DVD Players Challenge To win the market for this new technology. Answer Toshiba introduces a $500 HD DVD player to compete with Sony’s Blu-ray technology DVD players retailing for $1000 - $1800. Results Toshiba has undercut the market on price and has convinced some companies to produce HD DVD’s rather than Blu-ray versions. The winner is not yet determined. Cross-Price Elasticity Consider Kendra, selfsupporting college student Buys a new printer on sale for a great price Learns it requires special ink cartridges* that cost more than the printer *complementary products © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 3rd C: Costs Variable Costs – Fixed Costs – Vary with production volume Unaffected by production volume Total Cost – Sum of variable and fixed costs © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Test Your Knowledge In general, prices should not be based on cost because consumers make purchase decisions based on their _______________. A) cross-price elasticity B) Internet research C) substitution effect D) perceived value Break Even Analysis and Decision Making © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Break Even Analysis © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Break Even to Achieve Target Profit © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Test Your Knowledge When a firm’s profits hits the break-even point, their profits are _____________. A) less than expected B) more than expected C) zero D) undetermined 4th C: Competition © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Ethical Dilemma 13.1: Do Protectionist Laws Hurt or Help Consumers Keep some companies from conducting business in a particular region The Wright Amendment Prohibits Southwest from flying directly from Dallas Love Field to certain places © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 5th C: Channel Members Manufacturers, wholesalers and retailers can have different perspectives on pricing strategies Manufactures must protect against gray market transactions © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Macro Influences on Pricing The Internet Increased price sensitivity Growth of online auctions © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Economic Factors Local economic conditions Increasing disposable income Economic factors Increasing globalization Crossshopping © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Increasing status consciousness Economic Factors How can a large retailer gain market share in an environment where even status-conscious shoppers want to shop cheap? Case in Point: Wal-Mart Answers the Need for Lower Priced Drugs Challenge Answer Results Stem the rising cost of prescription drugs for consumers. Wal-Mart announced that it had lowered the cost on 291 generic drugs to $4/prescription. Initially launched in Florida, Wal-Mart plans to expand the program throughout the US. Target matched the program and KMart has launched a competing program that may in fact be cheaper. Chapter 13 Glossary Competitive parity: A firm’s strategy of setting prices that are similar to those of major competitors. Complementary products: Products whose demand curves are positively related, such that they rise or fall together. Cross-price elasticity: The percentage change in demand for product A that occurs in response to a percentage change in price of product B. Cross-shopping: The pattern of buying both premium and low-priced merchandise or patronizing both expensive, status-oriented retailers and price-oriented retailers. Demand curves: Shows how many units of a product or service consumers will demand during a specific period at different prices. Gray market: Employs irregular but not necessarily illegal methods; generally, it legally circumvents authorized channels of distribution to sell goods at prices lower than those intended by the manufacturer. Income effect: Refers to the change in the quantity of a product demanded by consumers due to a change in their income. © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin Chapter 13 Glossary (continued) Maximizing profit: A pricing strategy that relies primarily on economic theory; identifies the price at which profits are maximized by using a specific mathematical model that captures all the factors required to explain and predict sales and profits. Prestige products or services: Those that consumers purchase for status rather than functionality. Status quo pricing: A competitor-oriented strategy in which a firm changes prices only to meet those of competition. Substitution effect: Refers to consumers’ ability to substitute other products for the focal brand, thus increasing the price elasticity of demand for the focal brand. Target profit pricing: A pricing strategy implemented by firms when they have a particular profit goal as their overriding concern; uses price to stimulate a certain level of sales at a certain profit per unit. Target return pricing: A pricing strategy implemented by firms less concerned with the absolute level of profits and more interested in the rate at which their profits are generated relative to their investments; designed to produce a specific return on investment, usually expressed as a percentage of sales. © 2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin