Marketing Chapter 10 Price

Marketing: Real People, Real Choices Chapter 10 Price Learning Objectives 10.1 Explain the importance of pricing and how marketers set objectives for their pricing strategies. 10.2 Describe how marketers use costs, demand, revenue, and the pricing environment to make pricing decisions. 10.3 Understand key pricing strategies and tactics. 10.4 Understand the opportunities for Internet pricing strategies. 10.5 Describe the psychological, legal, and ethical aspects of pricing. Real People, Real Choices: Converse College • Which option should Betsy pursue?  Option 1: Reset tuition to a significantly lower price for traditional undergraduate students.  Option 2: Freeze tuition for each incoming student from the time she matriculated until she graduated.  Option 3: Provide students with a Loan Repayment Program (LRP), which guarantees that any student without employment after college would have her loans covered by an insurance policy. “Yes, but What Does It Cost?” • Price is the assignment of value, or the amount the consumer must exchange to receive the offering.  Includes money, goods, services, favors, votes, or anything else that has value to the other party  Opportunity costs must also be considered. Figure 10.1 Elements of Price Planning Step 1: Set Pricing Objectives • Must support the broader objectives of the firm as well as overall marketing objectives. Pricing Objectives (1 of 2) • Profit Objectives • Sales or Market Share Objectives • Competitive Effect Objectives Pricing Objectives (2 of 2) • Customer Satisfaction Objectives • Image Enhancement Objectives Figure 10.2 Pricing Objectives Getting to the Right Price • It is very rare for someone to agree to buy something without knowing the price.  Non-monetary costs are also of great significance for marketers. • Price planning follows a sequence of steps that begins with setting pricing objectives. Consider tuition at your college or university. What type of pricing objective do you believe is being used by the administration? Costs, Demand, Revenue, and the Pricing Environment • In order to set the right price, marketers must understand quantitative and qualitative factors that can influence pricing strategy success. Step 2: Estimate Demand • Demand refers to customers’ desire for a product.  How much are customers willing to pay as the price of the product goes up or down? • Economists use demand curves to illustrate the effect of price on quantity of a product demanded. • The law of demand: As price goes up, quantity demanded goes down. Figure 10.4 Demand Curves for Normal and Prestige Products Shifts in Demand • A shift is a change in direction or position. • Marketers can stimulate shifts through effective marketing. • An upward shift is when a greater demand for a product occurs. • A downward shift is when demand suddenly drops. Figure 10.5 Shift in Demand Curve Table 10.1 Estimating Demand for Pizza Number of families in market 180,000 Average number of pizzas per family per year 6 Total annual market demand 1,080,000 Company’s predicted share of the total market 3 percent Estimated annual company demand 32,400 pizzas Estimated monthly company demand 2,700 pizzas Estimated weekly company demand 675 pizzas Price Elasticity of Demand • Price elasticity is the percentage change in unit sales that results from a percentage change in price. • Elastic demand is when changes in price have large effects on the amount demanded. • Inelastic demand is when changes in price have little or no effect on the amount demanded. Figure 10.7 Price-Elastic and Price-Inelastic Demand Price Elasticity of Demand: Elastic Demand Price Elasticity of Demand: Inelastic Demand Cross-Elasticity of Demand • Changes in the prices of other products may affect a product’s demand.  If products are substitutes, an increase in the price of one will increase demand for the other.  If one product is essential for use of second, an increase in the price of one decreases demand for another. Determine Costs • In order to ensure that product price will cover costs, marketers must determine  Variable Costs: Per-unit costs of production that will fluctuate depending on how many units a firm produces (such as the costs to make a pizza, labor costs of cooks, and boxes for the pizza)  Fixed Costs: Costs that do not vary with the number of units produced (such as rent on the building, electricity, water, and insurance) Figure 10.8 Variable Costs at Different Levels of Production Break-Even Analysis • Break-even analysis tells marketers how many units must be sold in order to cover all costs. • Break-even analysis is important because it helps marketers understand the relationship between costs and price. • Knowing the break-even point will tell you at what point the firm will start making a profit. Figure 10.9 Break-Even Analysis Assuming a Price of $100 Break-Even Calculation Break -even point (in units) = Total fixed costs Contribution per unit to fixed costs Markups and Margins: Pricing through the Channel • Markup is an amount added to the cost of the product to create a price at which the channel member will sell the product.     Gross margin Retailer margin Wholesaler margin List price or manufacturer’s suggested retail price (MSRP) Figure 10.10 Markups Through the Channel Examine the Pricing Environment • Firm must also consider external influences upon pricing decisions.      Economy Competition Government regulation Consumer trends International environment The Economy • Consumers become very price sensitive when economic conditions appear bleak. • Marketers must factor broad macroeconomic trends into pricing decisions.     Economic growth Consumer confidence Recession Inflation The Pricing Environment: Non-Economic Influences (1 of 2) • Competition  The type of industry structure (oligopoly, monopolistic competition, or pure competition) can influence pricing. • Government regulation  Laws and government agencies impact pricing decisions. The Pricing Environment: Non-Economic Influences (2 of 2) • Consumer trends  Culture and demographics influence pricing. • International environment  Companies may vary their pricing depending upon the country in which their product is sold. Understanding Demand • In order to set price, marketers must have an understanding of product demand. • This includes considerations, such as:  Price elasticity  Variable and fixed costs  Impact of external environment on pricing What are the implications for upscale retailers of “strategic shopping” by affluent U.S. shoppers? Identify Strategies and Tactics to Price the Product • Choose a pricing strategy. • When is it best for the firm to undercut the competition and when best to just meet the competition’s prices? • When is the best pricing strategy one that considers costs only? When is it best to use a strategy based on demand? Figure 10.11 Pricing Strategies and Tactics Pricing Strategies Based on Cost • Cost-based pricing is very common. • Most frequently used cost-based is cost-plus pricing.  Easy to calculate  Relatively risk free • But not without drawbacks …  Cost-based approaches do not factor in key considerations, such as nature of target market and competitors. Price Strategies Based on Demand • Demand-based pricing: firm bases selling price on an estimate of volume it can sell in different markets at different prices.  Target costing  Yield management Figure 10.12 Target Costing Using a Jeans Example Price Strategies Based on Competition and Customer Needs • Pricing based on competition  Price leadership strategy • Pricing based on customer needs  Value or every day low pricing (EDLP)  Hybrid EDLP approaches New Product Pricing • New products present unique pricing challenges! • In absence of reliable demand estimates and pricing norms, common pricing tactics include:  Skimming price  Penetration pricing  Trial pricing Develop Pricing Tactics: Pricing for Individual vs. Multiple Products • Pricing for individual products  Two-part pricing  Payment pricing  Decoy pricing • Pricing for multiple products  Price bundling  Captive pricing Price Segmentation • Practice of charging different prices to different market segments for the same product • Peak load pricing • Surge pricing Bottom of the Pyramid Pricing • Innovative pricing that will appeal to consumers with the lowest incomes by brands that wish to get a foothold in bottom of the pyramid countries Develop Pricing Tactics: DistributionBased Pricing • Distribution-based pricing for end-users     F.O.B. (free on board) origin pricing F.O.B delivered pricing Uniform delivered pricing Freight absorption pricing Develop Pricing Tactics: Discounting for Channel Members • When setting prices for channel members, marketers may also apply tactics such as:     Trade or functional discounts Quantity discounts Cash discounts Seasonal discounts Pricing Strategies and Tactics • How do you know whether you’ve charged too much or not enough?  Pricing moves and countermoves require ongoing planning. • Appropriateness of pricing strategy and tactics may vary based upon:  number of products, product newness, B2C/B2B. What types of pricing strategies and tactics are used by your college or university? Pricing and Electronic Commerce • Online environment provides even more pricing options. • Technology and market efficiency     Dynamic pricing Internet price discrimination Online auctions “Freemium” pricing models Pricing Advantages for Online Shoppers • The Internet provides consumers and business buyers more control over the purchase process.  Increased consumer price sensitivity and negotiating power What do you think are the implications of increased price transparency for marketers (and marketing)? Figure 10.13 Psychological, Legal, and Ethical Aspects of Pricing Psychological Issues in Setting Prices • Buyers form expectations of what is fair or customary prices for goods and services.  Price too high = Bad deal  Price too low = Suspect quality • Customary price perceptions are influenced by:  Internal reference prices: A set price or price range consumers have in mind when evaluating a product’s price.  Price–quality inferences : When consumers use price as a cue to infer product quality Psychological Pricing Strategies • Odd–even pricing • Price lining • Prestige or premium pricing Legal and Ethical Considerations in B2C Pricing • Bait-and-switch is illegal  Advertise very low-priced item to lure customers to store (bait)  Arriving customers find product is out of stock and are offered more expensive item (switch) • Loss-leader pricing  Use very low prices to get customers into the store  Making up the “loss” through sale of other products  Some states have “unfair sales acts” forbidding lossleader pricing. Legal Issues in B2B Pricing • Illegal B2B price discrimination: Firms sell products to channel members at different prices in a way that “lessens competition.” • Price-fixing: Two or more companies conspire to keep prices at a certain level.  Horizontal vs. vertical price fixing • Predatory pricing: Firm sets very low price for purpose of driving rival out of business. The Psychology of Price • Many pricing frameworks are based on the notion of a highly rational consumer.  In the real world, consumer perceptions and judgments of price aren’t nearly so logical! • Psychological aspects of price raise a number of ethical and legal considerations. Restaurants have found odd–even pricing influences spending. Have you seen local dining establishments who have employed such tactics? Ethical/Sustainable Decisions in the Real World • First sold in 2008, over 30 million Snuggies were sold by 2015 • Allstar (maker of Snuggies) paid $8 million in fines for “false advertising” in that all the costs associated with the second “free” Snuggie were not disclosed. Do you believe that the FTC should create additional regulations on advertising that would create greater requirements for full disclosure in advertising?