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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 Price Equation: all different factors in a price ◦ Final Price = list price – (incentives + allowances) extra fees 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! 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 Four approaches to finding an approximate price level: ◦ ◦ ◦ ◦ Demand-Oriented Approach Cost-Oriented Approach Profit-Oriented Approach Competition-Oriented Approach 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 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 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 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 Odd-Even Pricing ◦ Common pricing strategy in North America: $499.99 $6.99 .99 ◦ Why not $500, $7, and $1? 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 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 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 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 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 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 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 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 Target Profit Pricing ◦ An annual target of a specific profit ◦ Back to the photo shop. If: 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? 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 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 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) 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 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 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) ◦ ◦ ◦ ◦ 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? 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 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 Market Share ◦ Ratio of sales compared to others in the industry ◦ Pepsi and Coca-Cola measure success this way 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 Survival ◦ In order to stay alive in a competitive market, firms must change pricing strategies Continental Airlines Social Responsibility ◦ Pricing may be adjusted to assist customers in need or society in general Constraints: Factors that limit the range of price a company may set Demand for the Product or Brand Newness of Product: Stage of Product Lifecycle Cost of Producing and Marketing the Product Competitor Prices 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 28 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 29 Step 3: Make Special Adjustments to the List or Quoted Price ◦ Discounts: 4 types ◦ - 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 30 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 31 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 32 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 33 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 34 Step 4: Monitor and Adjust Prices ◦ Monitor competitor prices ◦ Monitor laws ◦ Monitor economic conditions 35