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Transcript
Principles of Marketing Chapter 9: Pricing Understanding & Capturing Value What’s a Price? • Price: Narrow • sense: The amount of money charged for a “product” Broader • sense: Sum of all values given up to gain benefits of having or using a product Includes: • • • Opportunity costs Travel costs Search costs, etc. Dr. James Carver – Auburn University Organization Slide • Part I: The • “process” of calculating Focused on “Cost-Plus” method Adding a standard markup to the cost of a product • Part II: Conceptual topics, etc. Dr. James Carver – Auburn University Part 1 Dr. James Carver – Auburn University Using Markups • Markup Selling • Equivalent to the good’s gross margin. The • price of the merchandise less its cost basic markup equation: MU$ = SP - C Where: C = Dollar cost of merchandise (per unit) MU = Dollar markup (per unit) SP = Selling price (per unit) Dr. James Carver – Auburn University Markup Percentages • Markup on Selling Price: MUSP • = MU$ / SP Which is also equal to MUSP = (SP – C) / SP This is always “markup” unless I explicitly ask for markup on cost • Markup on Cost: MUC • = MU$ / C Which is also equal to MUC = (SP – C) / C Dr. James Carver – Auburn University Break-Even Analysis • Breakeven point: The point where the total revenue from the quantity sold just equals the firm’s total costs Formula: • GM = FC + VC + Π Where: • • • • GM = gross margin FC = fixed cost VC = variable cost Π = profit (which is equal to zero in break-even problems) Dr. James Carver – Auburn University Part 2 Dr. James Carver – Auburn University Increasing Focus on Non-Price Variables • Price sensitivity has decreased Due • to increased desire for values like: Convenience, personalization, etc. • Yet remains one of most important elements Because: • • It’s extremely flexible (i.e., easily changed) It’s the only “mix” variable that produces revenue Dr. James Carver – Auburn University Controllable Factors in Pricing • Many firms focus too much on price. Conditions customers to only purchase on sale. Overlooks the relationship price has with the other variables of the marketing mix. Two 1. 2. controllable factors in pricing are: Cost paid for (or to produce) goods Desired gross margin Dr. James Carver – Auburn University “Law of Demand” and Price Sensitivity $ Q Dr. James Carver – Auburn University “Law of Demand” and Price Sensitivity $ Perfectly Elastic Q Dr. James Carver – Auburn University “Law of Demand” and Price Sensitivity $ Perfectly Inelastic Q Dr. James Carver – Auburn University Pricing Freedom as a Function of Market Type • Competition generally falls into one of four categories: 1. Pure Competition 2. Pure Monopoly 3. Monopolistic Competition 4. Oligopolistic Competition Dr. James Carver – Auburn University Pure Competition • Occurs when a market has: • • • • In • • • Homogenous products, Many buyers and sellers, Buyers and sellers have perfect knowledge, and There’s ease of entry for both buyers and sellers. such a situation: Firms face horizontal demand curve Must sell product at ‘‘market’’ or equilibrium price Extremely rare Dr. James Carver – Auburn University Pure Monopoly • Occurs when there is only one seller for a product or service. Yet this does not mean one can simply sell at whatever price s/he wants… • Not perfectly inelastic for two reasons: 1. Law of diminishing returns (i.e., declining marginal utility) • 2. Hot fudge sundae example To sell more units, one must lower the selling price. • Not all consumers have same utility for any one good Dr. James Carver – Auburn University Monopolistic Competition • Occurs when a market has: • • • Heterogeneous products, Products are viewed as substitutes for each other, and Sellers recognize that they compete with sellers of these substitute products. Here, firms attempt to differentiate themselves with the products or services they offer • Most common form of competition in America Particularly at the national-level Dr. James Carver – Auburn University Oligopolistic Competition • Occurs when a market has: • • Essentially homogeneous products (e.g., gas), Relatively few sellers (top 4 firms account for 60-80%), • Or, many small firms who follow the lead of a few larger firms, Any action taken by is expected to be noticed and reacted to by the other sellers. Likely • to lead to: Similar prices as everybody knows what others are doing. Dr. James Carver – Auburn University Pricing Objectives and Policies • Should be made after careful consideration of the firm’s… 1. 2. 3. 4. Mission statement, Goals/objectives, Strategy, and Marketing Mix Dr. James Carver – Auburn University Specific Pricing Strategies •Customary pricing •Multiple-unit pricing •Variable pricing •Bundle pricing •Flexible pricing •Bait-and-switch pricing •One-price policy pricing •Private label pricing •Odd pricing •Hi-low pricing •Price lining •Leader pricing Dr. James Carver – Auburn University Specific Pricing Strategies Customary pricing The retailer sets prices for goods and services and seeks to maintain those prices over an extended period of time. Variable pricing Recognizes that differences in demand and cost necessitate that the retailer change prices in a fairly predictable manner. Flexible pricing Encourages offering the same products and quantities to different customers at different prices (common for products sold using personal selling). One-price policy Establishes that the retailer will charge all customers the same price for an item. Not only does it speed up transactions, but also it reduces the need for highly skilled salespeople. Odd pricing Practice of setting retail prices that end in the digits 5, 8, 9— such as $29.95, $49.98, or $9.99. Dr. James Carver – Auburn University Specific Pricing Strategies • Price Lining • Established to help customers make merchandise comparisons and involves establishing a specified number of price points for each merchandise classification. Trading up - Occurs when a firm uses price lining, and a salesperson moves a customer from a lower priced line to a higher one. Trading down - Occurs when a firm uses price lining, and a customer initially exposed to higher-priced lines expresses the desire to purchase a lower-priced line. Dr. James Carver – Auburn University Specific Pricing Strategies Multiple-unit pricing Price of each unit in a multiple-unit package is less than the price of each unit if it were sold individually. Bundle Pricing Selling distinct multiple items offered together at a special price. Bait-and-switch pricing Advertising or promoting a product at an unrealistically low price to serve as ‘‘bait’’ and then trying to ‘‘switch’’ the customer to a higher-priced product. Private-label brand pricing A private-label brand can be purchased by a retailer at a cheaper price, have a higher markup percentage, and still be priced lower than a comparable national brand. High-low pricing Use of high every day prices and low leader ‘‘specials’’ on items typically featured in weekly ads. Dr. James Carver – Auburn University Specific Pricing Strategies • Leader pricing Used when a high-demand item is priced low and heavily advertised in order to attract customers into the store. Loss leader - Extreme form of leader pricing where an item is sold below a firm’s cost. • Example: Turkeys at Thanksgiving time Dr. James Carver – Auburn University