Download Marketing 2 Class 18 Pricing

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Price
◦ The money or other goods and services exchanged for
the ownership or use of a good or service
Final Price = List Price – (Incentives + Allowances) + Extra
Fees
List Price: Amount you charge for the product or service
Discounts, allowance and rebates lower prices
Incentive: A sales promotion that encourages customer to
buy
Allowance: Amount given to the customer
extra/ or Special fees/surcharges: raise real price to the
customer eg cell system licensing charge
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Price Equation: all different factors in a price
◦ Final Price = list price – (incentives + allowances) extra fees
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Value: Ratio of Perceived benefit / Price
◦ If a large pizza is the same price as a small pizza,
the large pizza would be more valuable!
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But, for some customers, low price might
mean low quality and low value
This is especially true for services
Price has a direct impact on profit!
Profit equation
Profit = Total Revenue – Total Cost
Revenue = Unit Price x Quantity Sold
Profit= (Unit Price x Quantity Sold) – Total Cost
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Four approaches to finding an approximate
price level:
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Demand-Oriented Approach
Cost-Oriented Approach
Profit-Oriented Approach
Competition-Oriented Approach
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Skimming Pricing (price skimming)
▪ First, set a high price for customers who really want the
product and are willing to pay
▪ Then, lower the price to attract price-sensitive customers
 Use this approach when:
▪ There are many who will buy the product at a high price
▪ The high price won’t attract competitors
▪ Lowering the price has only a small impact on increasing
sales volume and reducing unit costs
▪ Customers think high price = high quality
 Examples: When patents are used that keep competitors
out
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Penetration Pricing
 Setting a low initial price on a new product to
appeal immediately to the mass market
 Conditions for this approach:
▪ Many segments are price sensitive
▪ A low initial price discourages competitors
▪ Unit production costs and marketing costs fall
dramatically as production volume increases
(Economies of scale)
 Could be used with Skimming strategy: first pay off
expenses with skimming and then appeal to a
larger segment of the population
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Prestige Pricing
◦ Setting a high price so that customers concerned
about quality or status will like the product
◦ Examples: Rolls-Royce Cars, Diamonds, Perfume,
Swiss Watches
◦ When TAG Huer (a Swiss watchmaker) increased the
price of its watches from $250 - $1,000, its sales
volume increased sevenfold
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Price Lining
◦ A firm that is selling a line of products will often
price products at specific levels
◦ Example: selling dresses at $59, $79, and $99 even
if they all cost the same amount.
◦ This is based on colour, style and expected demand
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Odd-Even Pricing
◦ Common pricing strategy in North America:
 $499.99
 $6.99
 .99
◦ Why not $500, $7, and $1?
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Odd-Even Pricing
◦ Setting prices a few dollars or cents under a whole
number
◦ Consumers see items priced at over $400 instead of
around $500.
◦ An overuse of this technique has decreased its effect
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Target Pricing
◦ Start by estimating the price customers would pay
◦ Work backwards, taking off mark-ups, to come to a price
that the company should charge wholesalers
◦ Canon uses this technique in pricing its cameras
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Bundle Pricing
◦ The marketing of two or more at a price for the package
◦ Based on the idea that customers value a package more than
the individual items
◦ Benefits from not having to make several purchases and
increased pleasure of enjoying many products at the same
time
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Yield Management Pricing
 Seats within the economy section of an airplane are
sometimes priced differently. Why?
 Yield Management:
▪ The charging of different prices to maximize revenue
for a set amount of capacity at any given time
 Many companies vary the price by time, day, week
or season, increasing revenue by millions of
dollars
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The person setting prices focuses on how
much the product costs
There are three cost-oriented approaches
◦ Standard Markup Pricing
◦ Cost-Plus Pricing
◦ Experience Curve Pricing
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Standard Markup Pricing
 Some stores sell so many products that they can’t
estimate the demand for each one
 They add a standard percentage to the cost of all items
in a specific product category
 High-volume products have a higher markup than lowvolume products
 At the supermarket
▪ Sugar, Flour, Dairy: 10-23 percent markup
▪ Snack foods, candy: 27-47 percent markup
 At the movie theatre
▪ Soft drinks: 87 percent markup, Popcorn: 90 percent
markup
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Cost-Plus Pricing
◦ Add up the total costs of providing a product or
service
◦ Then add a specific amount to the cost to arrive at
the price
◦ Becoming the most commonly used method
◦ Example: lawyers charge a basic fee above all costs
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Experience Curve Pricing
◦ As a firm produces and sells products over time,
the cost of the product will decline
◦ A rapid decrease in price is possible as firm’s
experience with the product increases
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Target Profit Pricing
◦ An annual target of a specific profit
◦ Back to the photo shop. If:
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Variable cost is $22
Fixed costs are $26,000
Demand is the same up to $60 per unit
The shop wants a target profit of $7000 at an annual volume
of 1000 units
Target Profit Pricing
Profit = Total Revenue – Total Cost
Profit = (PxQ) – [FC+ (UVCxQ)]
What should the price be?
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Customary Pricing
◦ The accepted price for a product which has not
changed over time
◦ Companies change the quantity of product in a
package in order to achieve the price
◦ Hershey Chocolate Bars
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Loss-Leader Pricing
◦ Retail stores sell products at a lower price than
normal in order to draw attention to them
◦ Stores do not want to sell that particular product,
but other similar products or impulse items
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Above-, At-, or Below-Market Pricing
◦ Choose a strategy that is above, the same as, or
below a competitor
◦ Above-market: Holt Renfrew, Christian Dior
◦ At-market: Nike, Adidas (about the same as
competitors)
◦ Below-market: Discount retailers (8-10 percent
below competitors)
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Demand is based on three key factors:
 Consumer tastes
▪ What customers want to buy
 Price and availability of other products
 Competitor products or substitutes
 Consumer income
▪ What customers can buy
Demand is the quantity sold at a given price:
Total Revenue = Price x Quantity
Total Profit = Total Revenue – Total Cost
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Elasticity of Demand:
 Change in quantity demanded as a result of a
change in price
 Elastic – Change in demand > change in price
 Gum
 Inelastic – Change in Demand < change in price
 Medication
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Break-Even Analysis
◦ Break-Even Point (BEP)
 The point where T. revenue and T. costs are equal
 BEP = Fixed Costs / (Unit price – Unit Variable cost)
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A picture frame shop charges $100 per picture
Fixed costs for the business are $28,000
The variable cost of each frame is $30
What is the BEP?
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Profit
◦ Managing for long-run profits
 Japanese firms that wait for
profitability and focus on
quality
◦ Maximizing current profit
 Short term objectives
◦ Target Return
 ROI goal
◦ Making channels happy
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Sales
◦ Companies hope that increased sales lead to
increased market share
◦ Cutting prices might increase sales revenue if a
higher quantity is sold
◦ Sales targets are easy to understand and
communicate
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Market Share
◦ Ratio of sales compared to others in the industry
◦ Pepsi and Coca-Cola measure success this way
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Unit Volume
◦ Many firms use the amount produced or sold as an
objective
◦ If volume is achieved by drastic price cutting,
company profitability is driven down
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Survival
◦ In order to stay alive in a competitive market, firms
must change pricing strategies
 Continental Airlines
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Social Responsibility
◦ Pricing may be adjusted to assist customers in need
or society in general
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Constraints: Factors that limit the range of
price a company may set
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Demand for the Product or Brand
Newness of Product: Stage of Product Lifecycle
Cost of Producing and Marketing the Product
Competitor Prices
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Step 1: Set an Approximate Price Level
◦ Consider pricing objectives
◦ Consider constraints
◦ Then choose among pricing approaches:
 Demand, cost, profit, or competition
◦ This price is analyzed in terms of cost, volume, and
profit
 B/E analysis is run at this point
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Step 2: Set the List or Quoted Price
◦ One-Price Policy: set one price for all buyers
◦ Flexible-Price Policy: different prices for ppl
depending on individual buyers and purchase
situations
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Step 3: Make Special Adjustments to the
List or Quoted Price
◦ Discounts: 4 types
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- reductions from list price as
rewards
 Qty. discounts – to encourage customers to buy larger
qty of a product
 Happens at all levels of the channel
 Eg buy in bulk
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Step 3: Make Special Adjustments to the
List or Quoted Price
 Seasonal discounts – to encourage customers to buy
inventory earlier than their normal demand
 Trade (functional) Discounts – to reward wholesalers and
retailers for marketing functions they perform
 Eg list price - $100, less 30/10/5
 30 – is for retailers end of channel = sub $30
 10 – for wholesalers 1 = sub $70x 10% = $7
 5 – is for the wholesalers 2 or jobber in the channel = sub
$63x5% = $3.15
 SELLING PRICE = $59.85
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Step 3: Make Special Adjustments to the
List or Quoted Price
 Cash discounts – to encourage retailers to pay their
bills early manufacturers offer cash discounts
 Eg. $1000, 2/10 net 30
 Bill for product is $1000 but retailer takes 2% discount =
$20 if PMT is made within 10 days and send a cheque for
$980
 If can’t make in 10 days then $1000 is due in 30 days
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Step 3: Make Special Adjustments to the
List or Quoted Price
◦ Allowances:- reductions from list price to
buyers as rewards
 Trade in Allowance – trade in old car for discount on
new car
 Promotional Allowance – sellers in channel is distribution
can qualify for promotional allowances for taking on
marketing or advertising activities eg cash or free goods
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Step 3: Make Special Adjustments to the
List or Quoted Price
◦ Geographical Adjustments:- changes made to
reflect the cost of transportation
 2 methods
 FOB origin pricing – “free on board” where seller pay
cost of loading product onto vehicle
 Seller usually names place of loading eg. FOB Montreal
 Uniform Delivered Pricing – the price the seller quotes
includes all transportation costs
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Step 4: Monitor and Adjust Prices
◦ Monitor competitor prices
◦ Monitor laws
◦ Monitor economic conditions
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