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PRODUCTS – PRICING

PRODUCTS – PRICING. MARKETING 360 Brian Gillespie. Price. The assignment of value, or the amount the consumer must exchange to receive the offering Money Goods Services Favors Votes Anything that has value to the other party

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PRODUCTS – PRICING

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  1. PRODUCTS – PRICING MARKETING 360 Brian Gillespie

  2. Price • The assignment of value, or the amount the consumer must exchange to receive the offering • Money • Goods • Services • Favors • Votes • Anything that has value to the other party • Price is a marketing tool and a key element in marketing promotions (the easiest P to change). Most retailers highlight product pricing in their advertising campaigns.

  3. Pricing Views • Customers view • what must be given up to obtain the benefits. Customers buy based on value and valued benefits, not price • Sellers view • Price reflects the revenue generated for each product sold and, thus, is an important factor in determining profit

  4. Steps in Pricing

  5. Develop Pricing Objectives • Sales/market objective • Reach a certain level of sales or market share • Profit objective • Make as much money as possible • Best strategy for fads • Competitive effect objective • Have an impact on competition • Cut into their market share • Release a competing product before they do • Customer satisfaction objective • Price transparency • Image enhancement objective • Prestige products priced higher

  6. Estimate Demand • Demand • Customer’s desire for a product • Demand curves • Graphs that show impact of price on demand • Normal products • As price increases, demand decreases • Prestige products • Curvalinear in design • As price increases, demand increases to a maximum point • Eventually demand decreases as price increases

  7. Demand Curves

  8. Shifts in Demand Curves • Price remains constant while demand shifts (up or down) • May be due to • Advertising • Product introduction • Global event • Etc…

  9. Estimating Pullman Thai Food Demand

  10. Crystal Pepsi • Imagine it is 1993. You are interested in calculating demand for cans of Crystal Pepsi in Spokane. • Spokane has 250,000 residents. • You expect the average person drinks 1 can of soda a day. • Crystal Pepsi has a 5% share of the market. • What is the total annual demand for soda in Spokane, and what are the annual, monthly and daily demands for cans of Crystal Pepsi?

  11. % Change in Quantity Demand Price Elasticity = % Change in Price Demand up by 30% Demand up by 10% = 3.0 = 0.25 Elastic Demand = Inelastic Demand = Price down by 10% Price down by 40% Price Elasticity • The percentage change in unit sales that results from a percentage change in price

  12. Price Elasticity

  13. Cross-Elasticity of Demand • When changes in price for one product affects changes in demand for a different product • Substitute products • Complementary products

  14. Determining Costs • Fixed costs • Costs that remain constant independent of number of units produced • Rent, executive salaries, heating, etc… • Average fixed costs = fixed costs / number of units • Variable costs • Costs that vary with the number of units produced • Materials, labor, etc… • Total costs • Sum of fixed and variable costs

  15. Variable Costs Example

  16. Break Even Analysis • How many units must be produced and sold in order to cover costs? • Break-even point • When total costs equals total revenues • Positive break-even point is profit • Negative break-even point is loss

  17. Total Fixed Costs BEP (units) = Contribution Per Unit to Fixed Costs Selling Price Per Unit – Variable Cost Per Unit Computing the Break-Even Point in Units

  18. $200,000 BEP (units) = = 4000 $50 So, you need to produce 4,000 units to break even Sell Bookshelf for $100 Costs you $50 to produce (variable cost per unit) So, Contribution to Fixed Costs Per Unit $100 - $50 = $50 Computing the Break-Even Point in Units

  19. Total Fixed Costs BEP (in $) = Variable Cost Per Unit 1 - Price Per Unit Computing the Break-Even Point in Revenue

  20. $200,000 BEP (in $) = $50 1 - $100 $200,000 BEP (in $) = = $400,000 1 - .50 Computing the Break-Even Point in Revenue So, you need to Reach $400,000 In revenue to reach Break-even point

  21. Break-Even Point

  22. Crystal Pepsi Break-Even Example • Fixed cost = $10,000,000 • Variable cost = $0.25 per can • Priced at $0.50 per can • What is the break-even point in • Sales • units

  23. Evaluate the Pricing Environment • In addition to internal factors such as manufacturing costs and capacity • Marketers must assess external environmental factors (including competitors) when setting pricing • Broad economic trends, consumer trends, social trends, and intensity of competition • When the economy is growing • Inflation occurs and prices rise • When the economy is slow • Prices stagnate or contract to keep sales stable • Consumers may be less likely to buy luxury items

  24. Choose Pricing Strategy • Cost-plus pricing • Add a fixed amount to the total costs of producing the product • Demand-based pricing • Set price based on predicted demand • Target costing • Figure out price and quality of product customers want • Figure out the cost to make the product • Determine if production is profitable • Yield management pricing • Charge different customers different prices to manage demand and maximize profits

  25. Choose Pricing Strategy • Value pricing • Pricing to provide ultimate value to the customer • New product pricing • Skimming • High price for highly desired product • Penetration • Very low price to encourage quick sales • Trial • Initial low price so consumers can try out product

  26. Develop Pricing Tactics • Pricing for individual products • Two part pricing • Need to pay twice • Payment pricing • Break overall price into smaller payments

  27. Develop Pricing Tactics • Pricing for multiple products • Price bundling • Put multiple products together in a bundle • Captive pricing • Price basic product low • Complementary and necessary products at a high profit margin

  28. Psychological Issues in Pricing • Internal reference price • Set price or range of prices consumers think are reasonable • Price-quality inferences • Greater price equals greater quality • Odd-even prices • Odd prices sell more • For some products, this conveys low quality • Price lining • Develop a variety of products at different price points

  29. Pricing and Placebo • MIT study on “Veladone” • FDA approved drug used in dental surgery • Price conditions • 10 cents per pill • $2.50 per pill • Effectiveness • In low price point • 61% reported decrease in pain • In high price point • 85% reported decrease in pain

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