W8 Case Discussion
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Unit8_Chapter15PowerPoint.pptxPrinciples of Marketing 4.0
Jeff Tanner and Mary Anne Raymond
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CHAPTER 15
Price, the Only Revenue Generator
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LEARNING OBJECTIVES
Understand the factors in the pricing framework.
Explain the different pricing objectives organizations have to choose from.
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THE PRICING FRAMEWORK
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THE PRICING FRAMEWORK
Various pricing objectives:
Targeted Return on Investment (ROI): The profit an organization hopes to make given the amount of assets, or money, it has tied up in a product.
Maximizing Profits: Set prices to increase revenues as much as possible, relative to costs.
Maximizing Sales: Pricing products to generate as much revenue as possible, regardless of what it does to a firm’s profits.
Maximizing Market Share: Set prices allows capturing a larger share of the sales.
Maintaining the Status Quo: Meet, or equal, competitors’ prices.
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KEY TAKEAWAYS
Price is the only marketing variable that generates money for a company.
All the other variables (product, communication, distribution) cost organizations money.
A product’s price is the easiest marketing variable to change and also the easiest to copy.
Before pricing a product, an organization must determine its pricing objective(s).
A company can choose from pricing objectives such as maximizing profits, maximizing sales, capturing market share, achieving a target return on investment (ROI) from a product, and maintaining the status quo in terms of the price of a product relative to competing products.
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LEARNING OBJECTIVES
Understand the factors that affect a firm’s pricing decisions.
Understand why companies must conduct research before setting prices in international markets.
Learn how to calculate the breakeven point.
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PRICING FACTORS
Customers: How will buyers respond?
Three important factors:
Will buyers perceive that the product offers value?
How many buyers are there?
How sensitive are customers to changes in price?
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PRICE ELASTICITY
Equal to percentage change in quantity demanded divided by percentage change in price.
Price elastic: Consumers are very sensitive to price changes and buy more at low prices and less at high prices.
Price inelastic: Buyers are not sensitive to price changes and demand is relatively unchanged.
REFERS TO PEOPLE’S SENSITIVITY TO PRICE CHANGES, WHICH AFFECTS THE DEMAND FOR A PRODUCT
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COMPTETITORS
A firm’s pricing decisions are affected by:
How competitors price and sell their products.
The availability of substitute products.
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THE ECONOMY AND REGULATIONS
Weak economies and high unemployment call for lower prices.
In international markets, currency exchange rates affect pricing decisions.
Pricing decisions are affected by federal and state regulations.
Robinson-Patman Act limits price discrimination.
Price fixing, or firms agreeing to charge the same (usually high) price, is illegal.
Unfair trade laws protect smaller businesses by preventing:
Larger businesses from selling products below cost
Predatory pricing, which is setting low prices to drive competitors out of business.
Bait and switch pricing, in which a seller ‘baits’ customers with low prices and then tries to switch them to higher-priced products, is illegal in many states.
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PRODUCT COSTS
The costs of the product that are taken into account when a pricing decision is made include the amount spent on:
Product development
Testing
Packaging
So do costs related to promotion and distribution.
The offering’s stage in the product life cycle can affect its price.
If a company has to open brick-and-mortar storefronts to distribute and sell the offering, this too will have to be built into the price the firm must charge for it.
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BREAKEVEN POINT
Total costs include both fixed and variable costs.
Fixed costs are costs that must be paid regardless of production or sales level.
Variable costs are costs that change with a company’s level of production and sales.
BEP = Total Fixed Costs divided by Contribution per Unit, or Total Fixed Costs divided by the difference between Unit Price and Unit Cost.
THE POINT WHERE TOTAL COSTS EQUAL TOTAL REVENUE
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KEY TAKEAWAYS
In addition to setting a pricing objective, a firm has to look at a number of factors before setting its prices. These factors include:
The customers whose needs it is designed to meet
Demand
The external environment
The competition
The economy
Government regulations
The offering’s cost
Other aspects of the marketing mix:
The nature of the offering
The stage of its product life cycle
Promotion
Distribution
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KEY TAKEAWAYS
In international markets, firms must look at environmental factors and customers’ buying behavior in each market.
For a company to be profitable, revenues must exceed total costs.
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LEARNING OBJECTIVES
Understand introductory pricing strategies.
Understand the different pricing approaches that businesses use.
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INTRODUCTORY PRICING STRATEGY
Skimming price strategy: A high initial price for a product aimed at consumers who are willing to pay a high price and buy products early.
Over time, the price of the product goes down as competitors enter the market and more consumers are willing to purchase the offering.
Penetration pricing strategy: Low initial price is set to get as much of the market as possible.
Often, many competitive products are already in the market.
Everyday low prices: The price the seller expects to charge throughout the product life cycle.
Walmart uses this theme in their advertising.
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PRICING APPROACHES
Cost-plus pricing (markup pricing): Uses the cost of the product and then adds a profit to determine a price.
The most common pricing approach
Ensures a company’s costs and profit are covered
Markup: Money added to the cost of a product to set the final price.
Markdown: The amount taken off of the price in a price reduction.
Odd-even pricing: Pricing a product a few cents below the next dollar amount or a few dollars below the next hundred- or thousand-dollar value
Prestige pricing: Utilizing a higher price to give an offering a high-quality image.
Price lining: Pricing a group of similar products at different price levels.
Demand-backward pricing: Starts with the price demanded by consumers and create offerings at that price.
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PRICING APPROACHES
Leader pricing: Pricing one or more items unusually low to get people into a store.
Loss leaders: Items priced below cost to bring people into stores – this is illegal in many states.
Sealed bid pricing: Process of offering to buy or sell products at prices designated in sealed bids.
Online auctions: Such as eBay, give customers the chance to bid and negotiate prices with sellers until an acceptable price is agreed upon.
Forward auction: Buyer lists an item to buy, sellers submit bids.
Reverse auction: States how much one is willing to pay for it.
Going rate: Pricing occurs when buyers pay the same price regardless of where or for whom they buy the product.
Price bundling: Selling different products or services together, typically at a lower price than if each product or service is sold separately
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PRICING APPROACHES
Captive pricing: Pricing products when firms know customers must buy specific replacement parts because there are no alternatives.
Product mix pricing: Deciding on how to price a firm’s products and services that go together.
Two-part pricing: A strategy in which providers have two different charges for a product.
Payment pricing: A strategy in which customers are allowed to break down product payments into smaller amounts they pay incrementally.
Promotional pricing: A short-term tactic to get people to purchase a product or more of it.
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PRICE DISCRIMINATION
In some situations (mostly retail), price discrimination is legal.
Price discrimination is used to get more people to use a product.
A company might lower its prices in order to get more customers to buy an offering when business is slow.
CHARGING DIFFERENT CUSTOMERS DIFFERENT PRICES FOR THE SAME PRODUCT
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PRICE ADJUSTMENTS
Quantity discounts: Involves giving customers discounts for larger purchases.
Pricing adjustments businesses:
FOB (free on board) origin.
FOB (free on board) destination.
CHANGING THE LISTED PRICES OF PRODUCTS
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PRICE ADJUSTMENTS
Uniform-delivered pricing: Buyers pay the same shipping charges regardless of where they are located.
Trade allowances: discounts given to channel partners.
Reciprocal agreements: Agreements in which merchants agree to promote each other to customers.
Bounce back: A promotion in which a seller gives customers discount cards or coupons.
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KEY TAKEAWAYS
Both external and internal factors affect pricing decisions. Companies use many different pricing strategies and price adjustments. However, the price must generate enough revenues to cover costs in order for the product to be profitable.
Cost-plus pricing, odd-even pricing, prestige pricing, price bundling, sealed bid pricing, going-rate pricing, and captive pricing are just a few of the strategies used.
Organizations must also decide what their policies are when it comes to making price adjustments, or changing the listed prices of their products. Some companies use price adjustments as a short-term tactic to increase sales.
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