Marketing Management 3 assigment 750-900 words each assigment

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Pricing

9. 1

Marketing Framework

Price

• Price obtains value back from customers • Marketers set optimal pricing

• Pricing… • Is influenced by company cost, competitive

pricing and customers’ willingness to pay

• Usually can be easily tweaked

• May vary across segments & lifecycle

• Sends signals to the market

• Influences your profitability

Pricing: Supply and Demand

• Demand tends to decrease as price increases

Simple Pricing Strategies

Pricing and Profitability

• Profit (π) = (price x demand) – (fixed costs) – (variable costs x demand) = [(price – variable costs)] x demand – (fixed costs)

• Profit (per unit sold) increases as price increases; • However demand decreases when price

increases • Need to find a happy medium

Pricing and Elasticity

• Elasticity • How much does demand (units sold)

increase (or decrease) with a price change? • e.g., If decrease price, does volume increase

cover lost revenue?

• Inelastic: demand barely changes

• Elastic: demand changes

Factors That Drive Demand

• Demand increases if • Customer’s desire for the brand increases

• Perceptions of product’s benefits and brand images increase

• Competitive products are poor or priced higher

• There are few good substitutes

Price Sensitivity

• Price-sensitivity is greater when • Customers

– Don’t care much about the purchase

– Don’t have strong preferences

– Don’t have strong brand loyalty

– Have limited income

• The item is a luxury rather than a necessity

• There are many substitutes

• The purchase is large relative to income

• It is easy to compare prices

Low Prices

• Two considerations: • You need to cover your costs

• Compute a variety of breakevens – Number of units needed make money

• You need to determine if you want to have a constant low price strategy (Walmart) or a fluctuating one (Kohl’s)

Covering Costs

• Firms need to cover costs • Costs set the minimum floor on pricing

• Cost-plus pricing: (unit cost) / (1-X%) • Where X% is the intended return

• If fixed costs are high relative to variable, maximize volume

• If variable costs are high relative to variable, maximize per unit margins

Breakeven Analysis

• Breakeven • Number of units to sell to cover costs

BE = (fixed costs) / [(price – variable costs)]

Concept in Action: Breakeven for Good

Concept in Action: Breakeven for Service

High Prices & Price Sensitivity

• How much would sales drop off in the face of a price increase?

• Good brands have low price sensitivity

• Consider price sensitivity

% change in sales

• Use existing PS estimate OR

• Develop PS estimates using scanner data, survey data and/or conjoint analysis

  1

PPPS  

Price Sensitivity and Survey Methods

• Conduct a survey to assess willingness to pay (WTP) • $25.00 definitely would not buy 1 2 3 4 5 6 7 definitely would buy

• $35.00 definitely would not buy 1 2 3 4 5 6 7 definitely would buy

• Conduct price studies • Surveys are identical except pricing

• A may have higher price than B, B than C, etc.

• Each customer fills out his assigned survey

Price Sensitivity and Conjoint Analysis

• Show product combinations with price; ask “Which do you most prefer?” “Next?” • Two segments are represented below

• Left segment want the brand and will pay more

• Right segment gives up brand for lower price

Pricing Question

• Given the figures, explain the difference between Google and RIM.

Units or Revenue; Volume or Profits

• Profit = revenue – expense • Revenue = price x quantity sold

• To maximize profits, find a price where any further increase in price would lead to a large falloff in quantity sold • Profit Maximization: marginal revenue

equals marginal cost

Marginal Revenue and Marginal Cost

• Marginal revenue = marginal cost at $1.00

Systematic Biases in Pricing

• No pricing model is perfect • Every model has error

• There are systematic biases in pricing

• Price serves as a quality cue; higher price may be more appealing • However, studies demonstrate that there is

no correlation between price and quality for most product categories

Systematic Biases in Pricing

• Absolute vs. relative numbers • Absolute: $15 off of a $199 item and $15 off

of a $49 item is the same in absolute terms • Relative: $15 of $199 is 8% while $15 of $49

is 31%

• Framing • A $499 trip is the same as a $599 trip with a

$100 discount at booking • However, the $599 trip seems like a better

deal because of the higher starting price

Systematic Biases in Pricing

• Price discount and mood • Temporary price discounts make customers

think they are smart shoppers • They experience feelings of happiness, pride,

optimism, confidence, etc.

• Prices ending in 99 • Prices like $4.99 or $49.99 tend to be more

attractive than $5 or $50 • People read left to righ; thus, the 4 is

processed first and leaves an impression

Systematic Biases in Pricing

• Mental accounting • People categorize & budget purchases

• People pay less attention to future – e.g., Vacation money is “different than” food

money

• Compromise effect • The inner/middle choice between two

extremes is attractive • People assume that if a company charges

more, it must be providing more

Systematic Biases in Pricing

• Referent pricing • People compare price to some referent,

either an externally available price or an internally stored price

• External – “MSRP is $49.99, now available for $35.99!” – “Our price $34.99, compare at $45.00!”

• Internal – Relevant memory – Inferences about store, etc.

Discussion Questions

• Discuss the pricing biases at work in the following examples: 1. A house builder has three price points on

kitchen cabinets,

2. A price tag that reads “was $299 now only $199,” and

3. A toy package that reads, “This toy is not only fun but also educational.”

Price Discrimination

• Segment discrimination is not illegal • Different segments value different things

• Customers might be annoyed to learn that others paid a lower price

Quantity Discounts/Yield Management

• Quantity Discounts: the more purchased, the more saved

• Yield Management: Using price and scheduling to manage demand

• e.g., Movies during the day for less money

•Need to manage perceptions of fairness

Two Part Pricing

• Charge a fixed and variable usage fee

• Price two parts separately

Product Lifecycle Pricing

• Introduction stage • Penetration pricing: seek market share

• Price low to stimulate sales, encourage trial, and trigger word of mouth

• Skimming pricing: seek profit • Price high initially, then lower to make

product more accessible

• Adjust price in various stages; usually end with lower prices in decline stage

Price Fluctuations

• Temporary cuts may be negative • Competitors can imitate; thus, impact may

be negated while also squeezing margins

• Price drops attract disloyal customers

• Customers may “stock up”

• May negatively affect brand image

• Coupons are only relevant to clippers – Redemption rate is only about 1%

• Effective at encouraging new/old customers to try old/new products

Game Theory

• Game theory is used to estimate likely results of price cuts and competitive response • Marketers need to think about the broader

market and competitive responses not just their own decisions

• Mutual cooperation can yield even better outcomes than both parties acting selfishly

Auctions

• Price is negotiated by buyer and seller • Bidders compete to buy item

• Sealed or open bid

• Reservation price: estimate of customers willingness to pay

• If the price is higher than reservation, don’t buy; if it is lower, then buy

• English auctions: Bids start low & increase

• Dutch auctions: Bids start high & decrease

Value

• Value • An assessment of what the customer gets

compared with what the customer gives up • Benefits/Cost

• It is usually not a good idea to compete on price

• Find benefits your customers want and charge for them

Managerial Recap

• Pricing strategies are basically: low, medium, or high • Company and its costs can dictate the

lower-bound price

• Customers’ willingness to pay marks the upper-bound, and

• In the middle, price is tweaked up or down relative to competitors’ prices

Managerial Recap

• Pricing can be used to • Shape a brand’s positioning and

• Attract/repel different targets

• There are economic and psychological elements to pricing