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Transcript
MARKETING Real People, Real Choices Fourth Edition CHAPTER 11 Pricing The Product Yes, But What Does It Cost? • Price is the value that customers give up or exchange to obtain a desired product • Payment may be in the form of money, goods, services, favors, votes, or anything else that has value to the other party 11-2 Opportunity Costs • The value of something that is given up to obtain something else also affects the “price” of a decision. • Example: the cost of going to college is charged in tuition and fees but also includes the opportunity cost of what a student cannot earn by working instead. 11-3 Steps in Price Planning • • • • • • Develop pricing objectives Estimate demand Determine costs Evaluate the pricing environment Choose a pricing strategy Develop pricing tactics 11-4 Types of Pricing Objectives • Sales or market share objectives (e.g. long distance telephone services) • Profit objectives – Work back from a desired profit level • Competitive effect objectives (e.g. Jet Blue and Delta) • Customer satisfaction objectives (e.g. Saturn and firm pricing) • Image enhancement objectives – prestige products like Rolex, Rolls Royce, etc. 11-5 Estimating Demand • Demand refers to customers’ desire for products – How much of a product do consumers want? – How will this change as the price goes up or down? 11-6 Demand Curves • Shows the quantity of a product that customers will buy in a market during a period of time at various prices if all other factors remain the same • Vertical axis represents the different prices a firm might charge • Horizontal axis shows the number of units demanded • Upward and downward shifts in demand curves 11-7 The Price Elasticity of Demand • How sensitive are customers to changes in the price of a product? • Price elasticity of demand is a measure of the sensitivity of customers to changes in price • Price elasticity of demand = Percentage change in quantity demanded / Percentage change in price • Elastic / Inelastic demand / Unit Elasticity 11-8 Other types of demand elasticities • Income elasticity of demand – Percentage change in demand as a result of percentage change in incomes • Cross elasticity of demand – Percentage in demand for a product as a result of percentage change in price of a substitute (e.g. if price of Pepsi goes up the demand for Coke will increase) OR – Percentage in demand for a product as a result of percentage change in price of a complementary product (e.g. if price of gas goes up demand for tires may come down) 11-9 Estimating Demand • Identify demand for an entire product category in markets the company serves • Predict what the company’s market share is likely to be • Marketing research to find out price elasticity of demand 11-10 Types of Costs_1 • Variable costs – per-unit costs of production that will fluctuate, depending on how many units or individual products a firm produces • Fixed costs – do not vary with the number of units produced. Costs remain the same regardless of amount produced 11-11 Types of Costs_2 • Average fixed cost is the fixed cost per unit produced (total fixed costs / number of units produced) • Total costs = variable costs plus fixed costs 11-12 Break-Even Analysis • Technique used to examine the relationship between cost and price and to determine what sales volume must be reached at a given price at which company will completely cover its total costs • Sales – Variable Costs = Contribution • Losses < BE point < Profits • Angle of incidence, Margin of Safety • BE sales in units = Total Fixed Costs / Contribution per unit 11-13 Evaluating the Pricing Environment • The Economy – Pricing in a Recession: Consumers pull back on their spending – Pricing in inflation: Consumers desensitized to rising prices • The Competition: Perfect, Oligopoly, Monopolistic competition • Consumer Trends: Affluent people hunt for bargains 11-14 Cost-Plus Pricing • Most common cost-based approach • Marketer figures all costs for the product and then adds desired profit per unit • Straight markup pricing is the most frequently used type of cost-plus pricing – price is calculated by adding a predetermined percentage to the cost 11-15 Pricing Strategies Based on Cost • Advantages – Simple to calculate – Relatively risk free • Disadvantages – Fail to consider several factors • target market • demand • competition • product life cycle • product’s image – Difficult to accurately estimate costs 11-16 Steps in Cost-Plus Pricing • Estimate unit cost • Calculate markup – Markup on cost – Markup on selling price 11-17 Pricing Strategies Based on Demand_1 • Demand-based pricing means that the selling price is based on an estimate of volume or quantity that a firm can sell in different markets at different prices – Target costing: find out what customers will be willing to pay and work backwards to design a product within that cost – Yield management pricing: services use this method to fill capacity 11-18 Pricing strategies • Price leadership: the biggest firm in the industry announces a new price and all other firms fall in line - oligopoly • ELDP – Every Day Low Pricing: prices based on customer perceptions of value. No further discounts given e.g. Walmart, P&G, etc. 11-19 New Product Pricing • Skimming price – firm charges a high, premium price for its new product with the intention of reducing it in future response to market pressures • Penetration pricing – new product is introduced at a very low price • Trial pricing – product carries a low price for a limited time period 11-20 Pricing Tactics • Pricing for Individual Products – two-part pricing (e.g., country clubs, cell phone services) – payment pricing (e.g., easy payments for new cars) • Pricing for Multiple Products – Price bundling (e.g., monitor, keyboard, CPU in a computer package) – Captive pricing (e.g., razors and razor blades) 11-21 More Pricing Tactics • Distribution-based pricing – FOB pricing – CIF pricing • Basing-point pricing • Uniform delivered pricing • Freight absorption pricing 11-22 Discounting for Channel Members • • • • Trade or functional discounts Quantity discounts Cash discounts Seasonal discounts 11-23 Trade Discounts • Pricing structure built around list price – List price, also called suggested retail price, is the price that the manufacturer sets as the appropriate price for the end consumer – Manufacturers offer discounts because channel members perform selling, credit, storage, and transportation services 11-24 Pricing with Electronic Commerce • Dynamic pricing strategies – price can be adjusted to meet changes in the marketplace – online price changes can occur quickly, easily, and at virtually no cost • Auctions – sites offer chance to bid on items – sites offer reverse-price auctions 11-25 Price Discrimination • Means that marketers classify customers based on some characteristic that indicates what they are willing or able to pay • Acceptable when price differences are in response to: – changes in cost of product – changes in competitive activity – changes in marketplace 11-26 Psychological Issues in Pricing • Internal Reference Prices – consumers have a set price or price range in mind – If the actual price is higher, consumers will feel the product is overpriced – If it is too low below the internal reference price, consumers may assume its quality is inferior • Competition as Reference Price – If the price is close, the assimilation effect will encourage the customer to think the products are similar enough and choose the lower-priced product 11-27 Price-Quality Inferences • If consumers are unable to judge the quality of a product through examination or prior experience, they usually will assume that the higher-priced product is the higher-quality product 11-28 Psychological Pricing Strategies • Odd-even pricing • Price lining 11-29 Legal and Ethical Considerations • Deceptive pricing practices • Unfair sales act • Price discrimination 11-30 Deceptive Pricing Practices • Retailers must not claim prices are lower than competitors unless it is true • A going out-of-business sale should be the last sale before going out of business • Bait-and-switch – consumers are lured into store for a very low price, but then the item is not available. A more expensive product is offered instead – Trading up is acceptable 11-31 Unfair Sales Acts • Laws or regulations prohibiting selling products below cost – loss leader pricing – many regulations even set a percentage markup below which the distributor may not sell the products 11-32 Price Discrimination • Means selling the same product to different wholesalers and retailers at different prices if practices lessen competition • Regulated by Robinson-Patman Act – only applies to resellers – discounts are legal if based on established policy and offered to any customer who chooses to buy under those conditions 11-33 Price Fixing • Occurs when two or more companies conspire to keep prices at a certain level – Horizontal price fixing occurs when competitors making the same product jointly determine what price they each will charge – Vertical price fixing occurs when manufacturers attempt to force the retailer to charge the suggested retail price 11-34 Predatory Pricing • Means that a company sets a very low price for the purpose of driving competitors out of business 11-35