Download Explain the relationship between price, quality, and demand

7. Price
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After carefully studying this chapter, you should
be able to:
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Define and explain price and value;
Explain the relationship between price, quality, and
demand,;
Explain the use of pricing within the marketing mix.
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A low price will not sell a bad product.
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A high price will not kill an excellent product.
7.1 Price and value
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People normally say that they buy buy the
cheapest.  This is not true.
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People normally buy on value, not price.
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So, what’s the difference between price and value?
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Price
The money or other consideration for which a thing is
bought or sold.
(Source: Concise Oxford Dictionary)
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Value
The intangible package of benefit that the decisionmaking unit believes attached to the product offer.
(Source: Worsam)
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Simply speaking, good value means matching
consumer needs. See p.126
7.2 Value
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A person was surprised to find a defect in a product bought
from M&S.
His reaction – ‘I am surprised, they are always so reliable.’
His action – Took the product back to the store.
Store action – immediate apology and exchange.
His reaction – ‘I always knew they were good to deal with.’
His belief – Became an even more loyal customer of M&S.
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Another person wanted a computer. He found that:
– The HP and Lemel were identical except the different badges.
– Both had the same guarantees.
– Spare parts for each cost the same.
– Both were serviced in the home by the same engineers.
– The HP cost NT 35,000. The Lemel cost NT 25,000.
– He bought the HP.
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The computer purchase had little to do with price.
It was driven by the belief that HP has a higher
status.
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For the buyer, the HP brand has more value.
Remember
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value is within the perception of the individual.
It is what he or she believes.
It is not necessarily what is true; not even what is logic.
7.2.1 Value factors
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Value is made up of a range of factor. Some of the
most important and most common ones are:
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Status
Product in use
Life
Price and value
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Status
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We all place a value on status to some degree.
We all have a sense of status.
Napoleon: ‘Give me enough medals and I will conquer
the world.’
Why do people choose a brand over anther, even there
is no difference in performance and quality?
 To display one’s taste, wealth, or fashion sense – all
status factors.
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Product in use
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A product offer has to meet user needs.
A DMU would do pre- and post- purchase estimations.
Some examples of the features of a product in use:
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Delivery; installation; guarantee; instructions; service; spares
Which washing machine would you buy?
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A - $400 – in-store price. Carry away yourself.
B - $500 – Delivered and installed. Checked. User Instructed.
What would you consider about the product in use.
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Life
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A product’s long life may be a product benefit – but not
necessarily a consumer benefit.
Consumers want a product offer to work well for as
long as they need it.
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Why pay for an expensive, top-quality briefcase that you will
only use a few times a year?
Why pay for a long-term insurance when making a short trip?
People like new things, follow the trends and want
changes.
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Price as value
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When buying, people often ask: ‘Is if value for money?’
But they actually mean: ‘Is it value for my money?’
The buying behavior changes when people are not
spending their own basic money.
Think about this: how would you spend money that
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Has been given you as a present?
You have won in a lottery?
Belongs to your boss?
7.2.2 Price, quality, and demand
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People would balance what price they think is reasonable
for the quality of what they buy.
Demand is usually associated with a season or a stage in a
person’s life cycle.
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Toys are normally in great demand in the month before Christmas.
Push chairs would be in demand when a family’s first baby is a
few month old.
Hairdressers…
It is the marketers job to estimate demand.
7.3 Price
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Price determines the revenue, which is expected to
meet costs.
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There are five key factors of price:
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The only P to provide income
Reflects corporate objectives
Supports image
Helps achieve profits
Provides cash for research and development
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The only P to provide income
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The 7Ps:
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Product
Price
Place
Promotion
Physical evidence
People
Process
Only price can provide income.
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Reflects corporate objectives
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Pricing strategy must follow the overall image of the
organization.
If a corporate aims to establish itself in the top-end
market, then the price of its product must reflect this.
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Rolls Royce and Rolex must be priced highly to support their
brand image.
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Supports image
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Promote as ‘quality’, and price at a quality level.
Promote as ‘exclusive’, and the price must help
maintain the exclusivity.
Promote as ‘economy’, and the price has to be low.
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Helps achieve profits
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Let’s see how price can affect profits.
Think about this, which of the following is better?
To sell 100 units at $20 at 20% profit
or
To sell 1,000 units at $10 at 10% profit
100 x $20 = $2,000 at 20% profit = $400
1,000 x $10 = $10,000 at 10% profit = $1,000
Or perhaps we could sell 500 at at $15 at 15% profit?
500 x $15
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= $7,500 at 15% profit = $1,125
In fact, which is better can only be decided in line with
corporate and marketing long-term objectives.
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Perhaps we want to build the market? Then we might need to
lower the price to build the volume.
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Provides cash for research and development
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R&D is vital to long-term success. We’ve seen in the
PLC that everything will be replaced some day.
But R&D normally costs a lot.
So, it is important to price correctly so that enough profit
can be generated to support the R&D of other new
product offers.
7.3.1 Pricing strategies and tactics
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The most common pricing strategies are:
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Cost plus
Psychological
Opportunity
Penetration
Skimming
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Cost Plus
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First, total all costs. Then add up a profit margin.
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The added margin varies with the type of product.
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FMCG like bread have lower profit margins to encourage sales.
Luxury products will have very high margins.
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Psychological
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To price at the edge of a price point.
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Don’t put the price up from $2.99 to $3.02.
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$2.99 seems far less than $3.00; $999 seems far less than
$1,000
Go up to $3.09 or even $3.19. They feels the same as $3.02.
But $3.10 or $3.20 seems a lot more expensive.
On reductions, use real numbers rather than percentages.
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$19.99 now $18.99 seems more generous than offering a 5%
discount.
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Opportunity
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Managers and first-line sales staff have to be sensitive
about the market conditions, and be authorized to make
decisions.
Eg. You are a sales at a car rental company:
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Business is good. Most cars are out. Your competitors are also
short of vehicles. A customer asks a price. You quote the
highest on your list.
Business is bad. Most cars are in. Competitors also have cars.
You offer a discount, or even offer an upgrade to a higher
standard car for the same price.
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Penetration
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In order to penetrate a market, the initial price is kept
deliberately low. The aim is to encourage purchase, and
so get into the market.
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However, it can be difficult to increase prices later. So a
penetration policy is often set up as a special offer.
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‘Normally $500, special price $299 –s short time only!’
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Price skimming
Price level
PLC stage
Very high
Launch
Growth 1
Growth 2
Growth 3
Maturity
Very low
Decline
Sales volume
7.3.2 Price negotiation
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The most common pricing strategies are:
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Bonus
Discount
Sale or return
Special offer
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Bonus
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A bonus is a reward paid for some action.
Introductory bonuses are a regular way of encouraging
a retailer to handle a new product.
Discount
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A bonus is a price reduction made for a special reason.
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Sales or return
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Goods will be taken back if they don not sell.
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This encourages the stockist to handle a new product offer, but
it gives no incentive for the stockist to feature the product offer.
It is better to negotiate a partial return (ie. Up to 50% will be
taken back if it doesn’t sell.)
Special offer
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A sales promotional tool that is valid for a time.