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Global Environment

Slide 1. International Marketing 70-480, Session 9 Lloyd Corder, Ph.D. Global Environment. Pricing. Slide 2. Corder’s Questions. Why is pricing such a difficult subject few marketers want to focus on?

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Global Environment

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  1. Slide 1 International Marketing 70-480, Session 9 Lloyd Corder, Ph.D. Global Environment Pricing

  2. Slide 2 Corder’s Questions • Why is pricing such a difficult subject few marketers want to focus on? • What tools can be used to determine the potential impact of pricing changes on sales volume, price and other factors? • How can we use the psychology of pricing to our advantage? • Why does it really matter how you think—and talk—about customers? Believe in the power of feedback. 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  3. Slide 3 Price Defined “The sum of money or goods asked or given for something.” - American Heritage Dictionary Seller Buyer Amount of money received for product, service, brand, etc. Amount of goods or services received for money given. 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  4. Slide 4 Customer’s View of Price Seller Buyer • Price • List price • Less discounts • Quantity • Seasonal • Cash • Less allowances • Trade-ins • Damaged goods • Product • Physical product • Service • Assurance of quality • Repair facility • Packaging • Credit • Buyer incentive program • Place of delivery or availability 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  5. Slide 5 Channel Partner’s View of Price Seller Buyer • Price • List price • Less discounts • Quantity • Seasonal • Cash • Trade • Less allowances • Damaged goods • Advertising • Special incentives • Product • Branded (well-known) • Guaranteed • Warranty • Service-repair facility • Convenient package • Place • Available when & where needed • Price • Price-level guaranteed • Sufficient margin for profit • Promotion • Promotion aimed at customers 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  6. Rent/mortgage Fee Tariff Bid Premium Dues Retainer Salary/wages Bill Check/ticket Bribe Slide 6 Other Words for Price • Tuition • Interest • Fare • Commission • Honorarium • Assessment • Toll • Donation • Wager • Tax • Invoice Price is the moment of truth. It’s when you get paid for all of your product, service and marketing efforts. It’s the value we get for everything we put into the product, service or idea. 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  7. Slide 7 Brief History of Pricing 1950 Most firms set prices based on costs or imitate competitors mechanically. 1964 Only half the practitioners say pricing is important. Many firms don’t understand and capture the value they have created for their customers. 1984 Top managers say pricing is the most important issue. 1994 Only 12% of firms do serious pricing research; only 2/3 of those companies use the research results. Survey Date 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D. Source: Business Week

  8. Slide 8 Pricing Factors Government Profit Price Profit Price Buyer Seller Competitors Cost Cost 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  9. Slide 9 How to Make More Profit Profit Revenue Cost Sell More Spend Less Better marketing Better selling skills Make more sales calls Brand products / services Raise Prices Better accounting Less waste (TQM) Cut staff Negotiate better costs Decrease production time 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  10. Slide 10 How To Calculate Profit Profit Revenue Cost ( ) ( ) Price Volume Fixed Variable • Labor • Materials • Energy • Equipment • Software • Land • Buildings • Customer classification • Size (A, B, C) • New/existing • Loyalty • Production/ service capacity • Customer demand • Pricing policy • Product life cycle • Value of brand image • Discounts/ coupons • Marketing effectiveness • Competitors’ pricing Variable Unit Cost Volume 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  11. Slide 11 PowerStar Price • Company background • Electric power tool manufacturer • Direct to professional customers for $100 • Annual sales volume: 1,000,000 units • Variable unit costs: $60 • Total fixed cost: $30,000,000 • Assume a linear relationship between price and sales • You are hired as a consultant by PowerStar 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  12. Slide 12 PowerStar, continued • Questions: • What is the current profit at $100? • What would be the profit if the cost was reduced by 20%? • What would be the profit if the cost was increased by 20%? • How can we achieve optimal profit? What is the optimal price, volume and profit? • Besides the information they’ve already provided, what questions would you ask management to help them make future pricing decisions? • Takeaways from this example? 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  13. Slide 13 Identifying True Cost What gets classified as a “cost” can dramatically influence your price—and your opportunities. What is considered a “cost?” Relevant costs for producing product, service or idea? Everything a business spends on everything? 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  14. Slide 14 Classifying Costs Asset? Liability? • Salaries and wages • Rent • Utilities • Repairs and maintenance • Insurance • Travel • Telephone • Postage • Printing • Advertising • Marketing/promotion • Professional fees • Training and development • Bank charges • Depreciation • Miscellaneous • Interest income (expense) • Etc. Fixed? Variable? Relevant? Costs incurred because a product is sold—or not sold 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  15. Slide 15 Orchestra Example • Performs two Saturday evenings a month during the season with a new program for each date • Current costs • Fixed overhead costs $1,500 • Rehearsal costs $4,500 • Performance costs $2,000 • Variable costs (programs, printing tickets, etc.) $1 per patron • Tickets: $10; Hall capacity: 1,100 seats • Problems: • Usual attendance: 900 • Current revenues: $9,000 • Current expenses: $8,900 • Current profit: $100 Manager doesn’t believe a simple price increase will work. 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  16. Slide 16 Orchestra, continued • Alternative Proposals • Student rush: Sell the 200 extra tickets for $4 each to students (first come, first served) • Expects students to be a new audience • Sunday matinee: Repeat Saturday performance next day for $6 • Expects to sell 700 seats, but 150 would come from the Saturday performance (net 550) • New Series: Performed on alternate Saturdays • Tickets Priced at $10, expects to sell 800 tickets, but 100 would be from original Saturdays… patronage would increase by 700 • Which approach, if any, should be selected? 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  17. Slide 17 Tools for Understanding Pricing • Break Even • Point at which money coming in equals the money going out • Contribution margin • How much money you make off of each item (product, service, etc.) • Elasticity (Price Sensitivity) • How much business you win/lose when you change your price • Psychological Pricing • Internet Pricing 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  18. Slide 18 1. Breakeven Formula • Simple Example (Store with 1 product) • Rent: $10,000 per month (fixed cost) • Revenue = Expenses • Product cost: $3 per unit (variable cost) • Suggested Product Retail Price: $5 • Accounting Formula for Breakeven Sales Fixed Cost $10,000 Breakeven Sales 5,000 ( ( ) ) Price Variable $5 $3 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  19. Slide 19 Breakeven Graphs 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D. Source: Basic Marketing, E. Jerome McCarthy

  20. Slide 20 Making a Profit • Take breakeven and add profit • To make a profit of $4,000 at $5 per item, we need to sell 7,000 units • What happens if we think we can only sell 6,500 units? What price do we need to set our products? Fixed Cost Profit $10,000 $4,000 Breakeven Sales 7,000 ( ( ) ) Price Variable $5 $3 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  21. Slide 21 Working Backward Fixed Cost Profit $10,000 $4,000 Breakeven 6,500 ( ( ) ) Price Variable $? $3 $10,000 $4,000 $? $3 ( ) 6,500 $10,000 $4,000 $? ( ) $2.15 $3 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  22. Slide 22 2. Contribution Margin • Few businesses sell only 1 product • Need a “contribution margin”—deduct the money paid to suppliers from the money received from customers ( ( ) ) $5 $3 Sales Variable Contribution Margin Ratio 40% $5 Sales Fixed Cost Profit $10,000 $4,000 Breakeven $35,000 ( ( ) ) Contribution Margin Ratio 40% 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  23. Slide 23 3. Elasticity (Price Sensitivity) Price Sensitivity How much product to buy? Which brand to buy? Primary demand elasticity Brand choice elasticity • What happens if Coke raises its price? • Some consumers buy it, anyway. • Some brand loyal consumers buy less of it. • Some consumers start buying Pepsi, RC Cola or store brand s 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  24. Before After Slide 24 Hotels Raise Rates by 10% Hotel AHotel B 200 200 190 160 Occupancy (Rooms Sold) Occupancy (Rooms Sold) Occupancy drops 20% Occupancy drops 5% Before After Need to know which hotels are A’s and which are B’s 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  25. Slide 25 Profit Impact on Hotels It is extremely valuable to segment hotels in this way. Hotel A Hotel B BeforeAfter BeforeAfter Price/roomnight Roomnights sold Revenue Revenue drops 12% Fixed cost Variable cost $15/room Profit $60 200 $12,000 $8,000 $3,000 $1,000 $66 160 $10,560 $8,000 $2,400 $160 Price/roomnight Roomnights sold Revenue Revenue increases 4.5% Fixed cost Variable cost $15/room Profit $60 200 $12,000 $8,000 $3,000 $1,000 $66 190 $12,540 $8,000 $2,850 $1,690 Profit Drops 84% Profit Increases 69% 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  26. Occupancy Drop Rate Increase 20% +10% Occupancy Drop Rate Increase 5% +10% Elasticity: = = 2.0 Elasticity: = = 0.5 “High Elasticity” “Low Elasticity” Slide 26 Need to Know Price Elasticity How does knowledge of elasticity affect our pricing strategy? Hotel AHotel B 200 200 190 160 Occupancy (Rooms Sold) Occupancy (Rooms Sold) Before After Before After 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  27. Slide 27 Elasticity Summarized % Change in Unit Sales Elasticity • Usually negative reaction (price increase = less sales; price decrease = more sales) % Change in Price 2 1 0 -1 -2 • General Rules: • If <1, raise prices • If <1, don’t lower prices • Miller Beer cut prices by 20%, sales jumped 9%… sales revenue fell 12.8% after cut .80 (price) X 109 (volume) = 87.2, which is 12.8% less than 100 Elastic General Rules Inelastic Elastic 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  28. Slide 28 4. Psychological Pricing Influence Should you stick with your initial purchase price or switch to the second? 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  29. Slide 29 a. Weber-Fechner Law • People evaluate price difference based on the percentage difference—not absolute terms • Price differences seem less important as base price increases 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  30. Slide 30 b. Odd Price • “Odd” is a price just below a full dollar amount ($19.99 vs. $20.00) • For retail, odd prices are perceived as being significantly lower than the next highest round number • Recent trend is to shift from .99 to .95 • Odd price in consulting practices often viewed as “low budget” and “low class” • Better to price a survey at $10,000 than $9,999.95 Find out how competitors in your marketplace are using odd pricing strategies. 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  31. Slide 31 c. Reference Price • Buyers have a general perception of a fair price • Perceptions based on current prices, past prices, competitors’ prices and purchase context • Buyers form higher reference prices when they are exposed to prices in descending order (top-down selling) Be careful what you ask for on the first “purchase” or product entry—past prices will dramatically shape perception of price increases. 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  32. Slide 32 Reference Price, continued • Sandwich technique: Present three prices, sell “high price”, expect “low price” to be scoffed at and win “medium price” • Consulting proposal • $10,000 (1 day training, individual follow-up, team building facilitation, 10 books, year-long newsletter subscription) • $7,500 (1 day training, individual follow-up) • $3,500 (1 day training) Rule: Never “lower” the price for the same group of items…instead, “take things away” from the offering. Sell this Win this 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  33. Slide 33 d. Prospect Theory • Buyers evaluate purchases as gains and losses • Buyers judge the loss of any given amount as more painful than they judge the gain of an equal amount as pleasurable—no one likes to lose! • Gains and losses have a diminishing effect as they grow larger Prospects have a price they think is fair. If the actual price is greater, they feel a loss. If it’s lower, they feel a gain. 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  34. Slide 34 Prospect Theory, continued Value Function Loss function is steeper than gain 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D. Source: Negle & Holden, Strategy and Tactics of Pricing

  35. Slide 35 5. Internet Pricing • Pricing traditions are transforming pricing practices in profound ways and the buyer • Set price: Seller simply fixes the price • Examples: Palm Pilot, Amazon.com, eToys • Strategies/implications: • Build your brand and your customers’ trust • Add more web features to enhance the shopping experience • Use frequent buyer, personalization and other features increase repeat business Internet explodes traditional “geographic” segments, but also puts more price pressure on manufacturers (because it’s easier to shop around for a better price) 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  36. Slide 36 Internet Pricing Options, continued • Dynamic pricing: Update your prices frequently • Examples: eCOST.com • Strategies/implications • Track your clicks and instantaneously offer special products or discounts • Develop an extensive customer database and segment the market based on past purchase habits • Establish different storefronts • Develop a price-matching system for customers who enter your store through a price comparison tool/program 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  37. Slide 37 Internet Pricing Options, continued • Auctions: A vendor puts items up for sale and would-be buyers are invited to bid • Examples: eBay • Strategies/implications: • For sellers: Lowers searching costs • For suppliers: Lowers sales costs (can eliminate a channel) and inventory costs (can sell it faster) • For buyers: Lower the cost of getting “hard to find” items 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  38. Insert Here Slide 38 Corder’s Conclusions 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

  39. Slide 39 9. Pricing International Marketing 70-480 Lloyd Corder, Ph.D.

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