Assignment and Reflection about Principles of Marketing
mark39
ClassChapter19.pptxPricing Concepts
Unrestricted
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Amount that is given up in exchange for a good or service
Involves making a sacrifice (usually money)
Provides info about product (usually quality)
Value is based upon perceived satisfaction
Reasonable price means perceived reasonable value at the time of transaction
Price
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Managers need to earn a fair profit
Revenue = Price X Units Sold
Profit = Revenue - Expenses
Price
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Like other objectives, should be specific, attainable, and measureable
Profit oriented
Sales oriented
Status quo
Pricing Objectives
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Profit maximization:
Setting prices so that total revenue is as large as possible relative to total costs
Has to be feasible and consider value and competitive environment
Satisfactory profits:
A reasonable level of profit, given the level of risk an organization faces
Lower with high-risk industries; higher with those that are more stable
Target Return on Investment (ROI)
ROI = Net profit after taxes/Total assets
Higher is better; represents firm effectiveness in using available assets
Price – Profit objectives
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Maintaining or increasing market share:
Market share: a company’s product sales as a percentage of total sales for that industry
Increases in market share can indicate effectiveness of a marketing mix
Maximizing sales:
Ignores profits, competition, and marketing environment
Not good in the long run because it doesn’t tell you anything about profits
Price – Sales objectives
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Status quo pricing:
Maintains existing prices or meets the competition
Ignores customer perceived value, as well as how your product offering may be different from the competition
Also ignores costs – may be a very ineffective strategy in the long run
Price – Sales objectives
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Demand: the quantity of a product that will be sold in the market at various prices for a specified period
Supply: the quantity of a product that will be offered to the market by suppliers at various prices for a specified period
Setting prices – Considering demand
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Elasticity of demand: how sensitive are customers to changes in price?
Elastic demand: customers are pretty sensitive to changes in price
Inelastic demand: customers are not that sensitive to price changes; will continue to buy the same amount
Setting prices – Considering demand
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Availability of substitutes
Price relative to purchasing power
Product durability
Product’s other uses
What influences elasticity of demand?
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Dynamic pricing: Ability to change prices very quickly in real time
Can help brick-and-mortar retailers compete with online retailers
Yield management system (YMS): Uses software to profitably fill unused capacity by
Discounting early purchases
Limiting early sales at discounted prices and overbooking capacity
Setting prices – Considering demand
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Setting prices – Considering cost
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Variable cost
Cost that varies with changes in the level of output
Fixed cost
Cost that does not change as output is increased or decreased
Markup Pricing: Starts with the cost of buying the product and makes adjustments for desired gross margin
Margin should be large enough to cover selling expenses and desired profit
Setting prices – Considering cost
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Experience (e.g. keystoning)
Merchandise’s appeal to consumers
Past response to the markup
Item’s promotional value
Seasonality of the good
Fashion appeal of the product
Product’s traditional selling price
Competition
What influences markups?
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Calculating prices with markups
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Determines what sales volume is required for total revenue to equal total costs
Answers the question:
How many units do I need to sell to cover costs?
To start making a profit?
Breakeven Analysis
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Breakeven Analysis
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Other determinants of price
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Stages in the product life cycle
Competition, price matching, and customer loyalty
Distribution strategy
Impact of the Internet and extranets
Promotion strategy
Demands of large customers
Relationship of price to quality
Stages in the product life cycle
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Consumers rely on high price as a predictor of good quality when a purchase decision involves uncertainty
Higher prices increase expectation and set a reference point against which people can evaluate their consumption experiences
Relationship of price to quality
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How to set a price
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Pricing strategies
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Price skimming
Penetration pricing
Status quo pricing
Price skimming:
Charge a high introductory price, coupled with heavy promotion
Good idea when:
There is strong demand
Product has unique advantages
Barriers to entry by competition
Pricing strategies
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Penetration pricing:
Charge a low price upon roll out
Requires a higher volume of sales to reach break-even
Can attract a high number of buyers
Good idea when:
You want to capture a large share of the market
You can produce the amount of product necessary to meet demand
Pricing strategies
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Status quo pricing:
Charge a price like the competition
Is simple and easy, but ignores demand and cost
Unlikely to be effective in long-run
Pricing strategies
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Illegal pricing strategies
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Unfair trade practices
Price fixing
Price discrimination
Predatory pricing
Unfair trade practices: Wholesalers and retailers selling below cost
Price fixing: Agreement between two or more firms on a price they will charge for a product
Price discrimination: Charging different buyers different prices for the same product (all else equal)
Predatory pricing: Practice of charging a very low price for a product with the intent to drive out competitors
Illegal pricing strategies
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Prohibits:
Firms from selling similar commodities at different prices to two or more different buyers within a short time
Sellers from offering two buyers different supplementary services
Buyers from using their purchasing power to force sellers into granting discriminatory prices or services
Robinson-Patman Act of 1936
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Tactics for fine-tuning the base price
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Discounts, allowances, and rebates
Geographic pricing
Other pricing strategies
Value-based pricing
Quantity discounts
Cumulative quantity discount
Noncumulative quantity discount
Cash discounts
Functional discounts (trade discounts)
Seasonal discounts
Gambled price discounts
Promotional allowances
Discounts, allowances, rebates, value-based pricing
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Rebates
Coupons
Zero percent financing
Free shipping
Value-based pricing
Discounts, allowances, rebates, value-based pricing
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Geographic pricing
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FOB origin pricing
Uniform delivered pricing
Zone pricing
Freight absorption pricing
Basing-point pricing
Other pricing tactics
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Single-price tactic
Flexible pricing (variable pricing)
Professional services pricing
Price lining
Leader pricing (loss-leader pricing)
Bait pricing
Odd–even pricing (psychological pricing)
Price bundling
Two-part pricing
Pay what you want
Package content reduction
Extra fee paid by the consumer for violating the terms of the purchase agreement
Businesses impose penalties when:
They suffer an irrevocable revenue loss
They incur significant additional transaction costs if customers are unable or unwilling to complete their purchase obligations
Consumer penalty
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