Marketing Chapter 13 and 14 Notes

Marketing Chapter 13: Building the Price Foundation and Chapter 14: Arriving at the Final Price     What is price? o Price is the money or other considerations exchanged for the ownership or use of a product or service o Barter- The practice of exchanging products and services for other products and services instead of money o New 21st Century pricing tactic is to use special fees and surcharges because buyers are more willing to pay extra fees than a higher list price, so sellers use add on charges as a way of having the consumer pay more without raising the list price o Final Price= List Price-incentive and allowances and Extra Fees Price as an indicator of Value o Value is the ratio of perceived benefits to price (perceived benefits/price=value)—as benefits increase so does value. o Value Pricing—the practice of simultaneously increasing product and service benefits while maintaining or decrease in price o For some products, price influences consumers’ perception of overall quality and ultimately its value to consumers—the higher the price, the higher the quality o 77&7 deal---you pay 77% of the list price and 7% of that price—may seem like you get 70% off, but its actually 71.6 percent of the price Prices in the marketing mix: o Profit= TR-TC=(unit price*q)- (fixed cost +variable cost) Step 1: Identify Pricing Objectives and Constraints o Pricing objectives involve specifying the role of price in an organization’s marketing and strategic plans o Objective 1: Profit  Return on Investment, Return on Assets  Managing for long run profits—give up immediate profit by developing quality products to penetrate competitive markets over the LT  Maximizing current proft—Occurs when a firm sets a profit goal like 20% of ROI o Sales—An increase in sales will lead to an increase in profit and market share o Market share: Pursue this when industry sales are relatively flat or declining—some see increase in market share as a means to other ends o Unit Volume: These firms often sell multiple products at very different prices and need to match the unit volume demanded by customers with price and production capacity. o Survival: Do whatever it takes to survive   o Social Responsibility: Forgo higher profit on sales and follow a pricing objective that recognizes its obligations to customers and society in general Step 1 Continued: Identifying Pricing Constraints o Demand for the Product Class, Product, Brand  The demand for the product class, product, or brand clearly affect the price a seller can charge o Cost of Producing and Marketing the Product  IN the LR, a firm’s price must cover all the costs of producing and marketing a product—if not the firm will fail  T/f, need to control costs o Newness of the Product: Stage in the Product Life Cycle  The newer the product and the earlier it is in its life cycle, the higher is the price that can usually be charged  When nostalgia or price comes into play—prices may rise later in the product’s life cycle o Single product versus a Product Line  The price of individual models has to be consistent with the others and must communicate value to consumes o Type of Competitive market  Pure Competition: Many firms producing the same good- market sets the price-advertising does little  Monopolistic: A few firms producing a slightly differentiated product—compete over range of price—use a lot of advertising  Oligopoly- A few firms producing the same good—Price leader or follower of competitors  Pure Monopoly-Sole producer of a good—can set price o Competitors Prices Step 2: Estimate Demand and Revenue o Demand curve is a graph relating the quantity sold and price, which shows the maximum number of units that will be sold at a given price--as price fals, more people decide to buy and unit sales increase o Also use consumer tastes, price and availability of similar products and consumer income—first to influence what a consumer wants, while the last one influences what a consumer can buy---demand factors o Demand curve may shift: increase in demand for the product, increase in income o Total Revenue: Price*Quantity o Average Revenue: The average amount of money received for selling one unit of a product, or simply the price of that unit==total revenue divided by the amount sold o Marginal Revenue: The change in total revenue that results from producing and marketing one additional unit of a product= change in total revenue/change in Q o Operate at the point where p=AR and MR=0 o Price elasticity of demand: the percentage change in quantity demanded relative to a percentage change in price  Elastic Demand: When a 1 percent decrease in price produce more than a one percent increase in quantity demand—exists when E is greater than 1  Inelastic demand: When a 1 percent decrease in price produces less than a one percent increase in quantity demand—exists when E is less than 1—necessities (like heart surgery)—so in a recession, prices tend to rise  Unitary Demand: When the percentage change in price is identical to the percentage change in quantity demanded  Items that require a large cash outlay compared with a person’s disposable income are price elastic—cars and yachts are price elastic, while soft drinks are inelastic  Step 3: Determine Cost, Volume, and Profit Relationships o Total Cost: Total expense incurred by a firm in producing and marketing a product==sum of FC and VC o Fixed Cost: The sum of the expenses of the firm that are stable and do not change with the quantity of the product being sold or produced (example: rent) o Variable Cost: The sum of the expenses of the firm that vary directly with the quantity of the product that is produced and sold o Unit Variable Cost: Variable cost on a per unit basis o Marginal Cost- The change in total cost that results from producing and marketing one additional unit of a product o Marginal Analysis- As long as revenue received form the sale of an additional product (MR) is greater than the additional cost of producing and selling it (MC), a firm will expand its output of that product o Break Even Point: : Quantity at which total revenue=total cost= (FC)/(PUVC) o Always produce when MC=MR Step 4: Select an Approximate Price Level  Demand Oriented Pricing Approaches o Skimming Pricing: Setting the highest initial price that customers really desiring the product are willing to pay—attractive when enough prospective customers are willing to buy the product immediately at the high initial price to make sales profitable, the high price will not attract competition, lowering the price only slightly affects sales, customers believe high price means high quality o Penetration Pricing: Setting a low initial price on a new product to appeal immediately to the mass market—good when many segments of the market are price sensitive, discourages competitors from entering, unit production and marketing costs fall dramtically    o Prestige Pricing: Setting a high price so that quality or status conscious consumers will be attracted to the product and buy it—Rolls Royce Car, Chanel perfume, Rolex watches o Price Lining: Often a firm that is selling not just a single product but a line of products may price them at a number of different specific pricing points---a department store manager may price a line of women’s casual slacks at 59, 79, 99 o Odd-Even Pricing: Involves setting prices a few dollars or cents under an even number under the assumption that consumers see the item at something under 400 o Target Pricing: Manufacturers will sometimes estimate the price that the ultimate consumer would be willing to pay for a product. They then work backward through markups taken by retailers and wholesalers to determine what price they can charge wholesalers o Bundle Pricing: The marketing of two or more products in a single package pricing…For instance Delta offers a vacation packages that include airfare, care rental, and lodging o Yield Management Pricing—the charging of different prices to maximize revenue for a set amount of capacity at any given time—As done by airlines, hotels Cost Oriented Pricing Approaches o Standard Markup Pricing—Adding a fixed percentage to the cost of all items in a specific product class—the 5 varies depending on the type of retail store and on the product involved--o Cost-Plus Pricing—Involves summing the total unit cot of providing a product or service and adding a specific amount to the cost to arrive at a price o Experience Curve Pricing: Based on the learning effect, which holds that the unit cost of many products and services by 10 to 30 percent each time a firm’s experience at producing and selling them double Profit Oriented Pricing Approaches o Target Profit Pricing—A firm may set an annual target of a specific dollar volume of profit  Price can be calculated if you have quantity, FC, UVC<, and Q to get profit o Target ROI Pricing—A method of setting prices to achieve the target Consumption-Oriented Pricing o Customary Pricing: Where tradition, a standardized channel of distribution or other competitive factors dictate the price—it has been the price forever o Above, At, or Below the Market Price  Above—Very high quality product  At- department store prices  Below—Set prices below nationally branded competitive products Loss-Leader Pricing: Retail stores deliberately sell a product below its customary price to attract attention to it—purpose is not to increase sales, but rather to attract customers in hopes they will buy other products as well, particularly those with high markups Step 5: Set the List or Quoted Price  Choosing a Price Policy o One Price Policy or Fixed Pricing  Setting one price for all buyers of a product or service o Flexible Price Policy: Involves setting different prices for products or services depending on individual buyers and purchase situations  Prices vary by an individual buyer’s purchase situation, company cost considerations, and competitive conditions—adjusts prices in response to change in its own costs, competitive pressures and demand from customers  Company, Customer, and Competitive Effects on Pricing o Company Effects: Need to consider the price of other items in its product line or related product lines in its product mix  Product line pricing—the setting of prices for all items in a product line—when setting prices, the manager seeks to cover the total cost and produce a profit for the complete line, not just for one product----This pricing involves determining the lowest priced product and price, the highest priced product and price, and price differentials for the other products o Customer Effects: Marketers weigh factors heavily that satisfy the perceptions or expectations of ultimate consumers, such as the customary prices for a variet of consumer products—also must choose prices that result in profit for resellers in the channel to gain the cooperation and support. o Competitive Effects  A price war involves successive price cutting by competitors to increase or maintain their unit sales or market share Step 6: Make Special Adjustments to the list or quoted price  Discounts-reductions form the list price that a seller gives a buyer as a reward for some activity of the buyer that is favorable to the seller o Quantity: Reductions in unit costs for a larger order o Seasonal: To encourage buyers to stock inventory earlier than their normal demand would require o Trade: To reward wholesalers and retailers for marketing functions for function they will perform in the future---redutions off the list or base price are offered to resellers in the marketing channel on the basis of where they are in the channel and the marketing activities they are expected to perform o Cash: TO encourage retailers to pay their bills quickly, manufacturers offer them cash discounts     Allowances: Reductions from list or quoted prices to buyers for performing some activity o Trade in Allowances: Price reduction given when a used product is part of the payment on the new product o Promotional Allowances: Sellers in the marketing channel can qualify for promotional allowances for undertaking certain advertising or selling activities to promote a product—may be cash payment or “free goods”  Every Day Low Pricing—practice of replacing promotional allowances with lower manufacturer list prices Geographical Adjustments o FOB Origin Pricing: Seller pays the cost of loading the product onto the vehicle that is used o Uniform Delivered Pricing—the price the seller quotes includes all transportation costs  Single Zone: all buyers pay the same delivered price for the product regardless of their distance from the seller  Multiple Zone: divides selling territory into geographical areas— different prices for different zones  Basing point: selecting one or more locations from which the list price for products plus freight expenses are charged to the buyer Legal and Regulatory Aspects of Pricing o Price Fixing: A conspiracy to set prices for a product is termed price fixing—illegal under the Sherman Act  Horizontal: When two or more competitors explicitly or implicitly set prices  Vertical: Involves controlling agreements between independent buyers and sellers whereby sellers are required to not sell products below a minimum price---illegal o Price Discrimination: The practice of charging different prices to different buyers for goods of like grade and quality—only illegal if it lessens competition or creates a monopoly o Deceptive Pricing: Price deals that mislead consumers o Geographical pricing: FOR origin pricing is legal—but it is not allowed for clear-cut conspiracy to set prices o Predatory Pricing: The practice of charging a very low price for a product with the intent of driving competitors out of business