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2. 2 Pricing ˘ŁĄ$ As a consumer - How do you know what is a fair price for a product or service? Do you know that cost and price are often unrelated? How much effort do you put into researching price? BTW are the genders different in this regard? As an entrepreneur – How do you figure out what price to charge for your product or service? As a store manager – How do you choose pricing plans, discount schedules, bundling plans, etc? Do you know at what times of the month or year or day to discount, and for which target markets? As a brand manager or product category manager – what should the prices of the different products in your product line be?

3. FYI Product line managers set pricing strategies and this is typically both the easiest of the 4p’s to change, but also the easiest of the 4p’s to get wrong. Just realize that the other 3 P’s influence price Sure price is set to cover costs and provide profit objectives, but also price is set in comparison to competition, and based on psychological maps of product positions within the product category, and desired signals Pricing strategies are affected by factors that are studied within many fields: cultural anthropology, sociology, economics, psychology, IBUS, supply chain issues, etc. Do consumers feel better about themselves (Identity) if they are esteemed for paying a lot of money for a branded product? 3

4. Chapter Objectives Explain the importance of pricing and how prices can take both monetary and nonmonetary forms (pls review link for exam) Understand the pricing objectives marketers typically use (should vendor max profits, market share, or price to keep customers loyal? – Coach. Price of product depends on context when/where it is sold…ex: peanuts) Describe how marketers use costs, estimate demands, and revenue to make pricing decisions Understand some of the environmental factors that affect pricing strategies (ex: dumping, macroeconomic changes, competition) pls. read both links to grasp the importance of pricing 4

5. Chapter Objectives (cont’d) Understand how to implement the overall pricing objective using key pricing strategies (based on production cost, or estimated market demand, etc.) Explain detail day-to-day operational pricing tactics for single and multiple products, and for pricing on the Internet Understand the opportunities for Internet pricing strategies Describe the psychological (playit), legal, and ethical aspects of pricing and how consumers react to sales (temporary price discounts) 5

6. What does it cost the consumer? Price: the assignment of value, or the amount the consumer must exchange to receive the offering (money, goods, services, favors, votes, or anything else that has value to the other party) 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. Price is a marketing tool and is a key element in marketing promotions. (is used to signal…..?). Most retailers highlight product pricing in their advertising campaigns. 6

7. Importance of Pricing Pricing is the most Flexible Marketing Mix Variable –both in practice and for marketing research. Test different market prices (in promo campaigns and EDLP) and see what works best Set the price too low and you lose $$revenue, set the price too high and you lose customers! The sale price sign is often the first thing consumer’s see, and effect all subsequent thoughts and beliefs about the product Price is an important part of promotions, but you cannot constantly jigger prices …this confuses consumers Pricing must cover unforseen supply chain and manufacturing problems, and cover promotional expenditures… Pricing must signal market position Pricing must match expectations of the target market 7

8. Current events in pricing On Black Friday (Nov 29th?) shopping prices are low, but only “while supplies last”, or for “5 at this price”, or often use some strange model number, or funky vendor Are prices really any better on big shopping days? 8

9. Steps in Price Planning 9

10. Pricing Objectives 10

11. Great Pricing Video from Tom McKaskill (playit) Funny pricing video How to Price your Product 11

12. Step 1: Develop Pricing Objectives to align with Broader Org. Objectives Sales or market share objectives – ex: pricing products low to max unit sales – perhaps to maximize usage of manufacturing facilities – due to beliefs of competitive advantage of the manufacturing ops, or supply chain Profit objectives – price product to reach target profits for product or product line (cost plus 40%) Competitive effect objectives –reduce price to max sales for a short time (seasonal or to fight off a new competitor, MSFT) Customer satisfaction – set price points for different products in the product line so that its easy for customers to choose. Image enhancement – set pricing to reflect/signal prestige 12

13. Steps in Price Planning 13

14. Step 2: Estimate Demand (project sales levels) 14 Demand: in aggregate the quantity of a product that customers are going to buy. Pricing is usually based on covering costs of estimated demand, and providing a profit. Manufacturing and related dept’s depend on marketers getting pricing and demand estimates accurate. Demand estimates are one of the most important marketing tasks Why? Manufacturing/engineering/quality control/ material management…they know operational efficiency. They don’t know external factors and demand, so Marketers keep track of competition, etc, and make the demand estimate which becomes the manufacturing plan

15. Step 2: Estimating Demand Marketers predict total demand by estimating # of potential buyers for a product then multiplying this # by the average units amount of each buyer’s purchase (based in part on market research. Similarly marketers can just use statistics of total # of units sold industry-wide for a product category. Then they predict their company’s market share (1%, 3%, etc.). Now you can estimate demand. Ex: 3000 families in Colfax(4 people per), each are estimated to eat Mexican restaurant meals 12 times per year = 36k meals or ~ 100k entrées. If the restaurant expects 20% of this action then they will be serving 20,000 entries per year, ~1650 per month or ~420 max per week (now the mgr can schedule food deliveries!) 15

16. Step 2: Estimate Demand 16 Demand is elastic (variable) if it varies as other factors change (such as the product’s price goes up or down). Demand for commodities is more elastic than loved brands, Availability of close substitute products also makes demand more price elastic. As price is increases quantity sold decreases. Demand is inelastic (nonvariant) if moderate changes in price have little effect on demand. Demand for beloved brands, luxury products, necessities, or specialty products is price inelastic. Larger changes in price will however always effect demand (people and biz seek substitutes) When selling products – with modest price increases, sales may not change but big hikes in price reduce sales and revenue.

17. Demand Curves Help Marketers Estimate Consumer Demand Based on Fluctuating Prices Estimating demand is an art and science, here’s the science Marketers can use econometric graphing tools (run on sales data from the data warehouse) such as demand curves to perform their job of estimation. On graph the demand curve can be depicted as a straight line or a curve. Law of demand: as price goes up, quantity ‘demanded’ (purchased) goes down. 17

18. Price Elasticity of Demand: What effect do price changes have? What is the change in unit sales (demand) that results from price changes? Flatter lines indicate more elasticity, steeper lines indicate price inelasticity. (vertical I would be perfectly Inelastic 18

19. Demand Curves for Normal Products 19

20. Estimating Price Elasticity of Demand % change in sales divided by % change in price 20

21. Demand Curves for Prestige Products: What effect do price changes have? 21

22. Anyone work retail lately? Is it true that reduced prices seems to ‘trigger’ higher demand? Want to share retailing stories? Is it easy for retailers to return to the non-discounted price? Do sales return when discounts fade? 22

23. Other Factors Which Shift Demand Curves Its important to know how price changes would affect demand for YOUR product. Other factors also influence demand for YOUR product Changes in marketing strategy (improved product, bundling, expanding product line, new advertising) or non-marketing activities can also cause upward or downward shifts in demand. Which means that when price is stable, demand can change greatly – shift up or down. Sears added a new top of the line (expensive) microwave to their product line (which nobody purchased) but had the effect of greatly increasing sales of the previously most expensive model 23

24. Shift in Demand Curve 24

25. Substitute Products Changes in prices or availability of other products can affect demand for product. Ex: $5 marinara footlongs Availability of substitutes affects demand: increase in price of hamburger patties and potatoes may increase demand for substitute meals (pizza) Also new restaurants close by can reduce demand for your service (Cub). New competitors can wreak havoc on your sales. Brands implore you not to accept inferior substitutes. Brands sell value, lifestyle, identity and relationship…stay in love with us..we love each other right? 25

26. Cross-Elasticity of Demand 26

27. Wrap-up of Estimating Demand Estimate total market demand for targeted product category by year and month. (Recalculate est. demand every month) Next guestimate/SWAG your firm’s market share % of this action (be conservative!) Calculate the # of units (the estimated demand) this estimated market share translates to (your unit demand) Identify substitute products, competing product lines, and cross-market effectors of reduced/increased demand (then watch for changes in these!), & other forces that move the demand curve Factor in price elasticity, the discounting you plan to use. Arrive at demand estimate 27

28. Steps in Price Planning 28

29. Step 3: Determine Costs of Goods Sold Pretend you are the manufacturer of a new product line Now that manufacturer’s of products and services have an idea of what sales may look like, they still can’t scientifically determine the best price until we identify the cost of the products we will (make and) sell (cost of goods sold) – cost is based on fixed and variable costs Variable costs: costs of production that are tied to and vary depending on the number of units produced (due to price discounts and economies of scale) Average variable costs change as the number of units produced changes. 29

30. Variable Costs at Different Levels of Production 30

31. Step 3: Determine Costs Fixed costs: costs of production that don’t change with number of units produced EX: Rent, cost of owning/maintaining factory, equipment, fixed salaries of firm’s executives Average fixed cost: fixed cost per unit (total fixed costs divided by number of units produced). This decreases as the number of units produced increases (fixed costs get spread over a larger production run). Total costs: total of fixed costs + variable costs for a set number of units produced. Product Prices must cover these at each level of demand. 31

32. Break-Even Analysis The # of units a firm must produce and sell at a given price to cover all its costs. The point at which a firm doesn’t lose any money but doesn’t yet make any profit yet. If you can calculate demand - how many you will sell, and you can calculate the costs of production, then you better match them at a given price to break-even Break-even point: the point at which your sales cover costs and new sales contribute to profit. Each firm needs to identify their break-even point for weekly, monthly or quarterly sales Break-even is based on sales prices that marketing managers set. Providing discounts necessitates recalculation. 32

33. 33 Break-Even Analysis

34. Break-even point (in units) = for any time period, the number of units that must be sold to cover costs Break-even point (in dollars) = the $ amount of sales revenue that come into the ‘cash register’ to cover costs Contribution per unit: amount per unit that can be applied to profits and fixed expenses (= the difference between the price the firm charges for a product and the variable costs) The pricing of the product must cover the total costs at the estimated level of sales (the projected demand) 34 Break-Even Point

35. Based on costs, manufacture product to meet projected demand and set the price that covers costs and maximizes profits. Marginal cost: the increase in total costs from producing one additional unit of a product Marginal revenue: the increase in total revenue from selling one additional unit of a product (may decrease with each additional unit sold, due to volume discounting) Profit is maximized where marginal cost is exactly = to marginal revenue. producing more costs too much! Marginal revenue can decrease as sales increase (ex: discounts required to sell additional product, or costs of production become prohibitive) 35

36. Marginal Analysis 36

37. Steps in Price Planning 37

38. Evaluate the Pricing Environment In addition to internal factors such as manufacturing costs and capacity, marketers must assess external environmental factors (incl. competitors) when setting pricing. Such as broad economic trends, consumer trends, social trends, and intensity of competition When the economy is growing, inflation occurs and prices rise. When times are tougher, prices stagnate or contract to keep sales stable, and consumers may be less likely to buy luxury items. Competitors can also start price wars and dumping in an attempt to ‘kill off’ competition (Chinese tires & US chicken). Oligopolies can also work together to maintain a status quo pricing so that all participants prosper. 38

39. Steps in Price Planning 39

40. Step 5: Choose a Price Implementation Strategy: How should we price to meet our objective? Cost-plus pricing: total all product costs and add markup (very simple and common to implement) Demand based Pricing - basing prices on an estimate of the quantity that can be sold at different prices – 2 types: 1) Target costing: a type of demand-based pricing where firms identify product category price point(s) customers are willing to pay. Identify quality and functionality customers need. Identify these factors before designing product, then match product to expectations. 2) Yield management pricing: a type of demand-based pricing where firms charge different prices to different customers to manage capacity (ex: airlines) 40

41. Competition-based Pricing - Pricing near, at, above, or below the competition Price leadership strategy: industry giant announces price cuts, and competitors match them, target different customers, differentiate on other than price or drop out – price dumping is common Pricing strategies based on customers’ needs - Value pricing or everyday low pricing (EDLP): pricing strategy in which a firm sets prices and do not discount afterwards. 41 Step 5 (cont.) : Choose a Price Implementation Strategy

42. New-product (Innovation) pricing -which would you use? Skimming price: charge a very high premium price during the introductory stage – works for innovative products which have no substitute Penetration pricing: charging a very low price to encourage more customers to purchase – also keep competitors out of the market. Trial pricing: charging a introductory discounted price for a limited period of time 42 Step 5: Choose a Price Implementation Strategy What about New Products?

43. Step 5: Choose a Price Implementation Strategy based on Product lifecycle Pricing Objective chosen also depends on where the product is in its product life cycle and based on amount of competition introduction – set price to recoup R&D (skimming strategy?) growth stage – set price to gain market share (target costing?) maturity – set price for competitive effect (ward off competition – keep customers loyal), and extend product line – try to raise prices on new variations of product, or bundled items, keep price on mature version low (competition-based strategy) decline – set EDLP to customers satisfied? target costing strategy? (price points?), what would you do? 43

44. Just as common…many companies prefer to keep price low when they introduce a product to market. Keep price low during growth phase to max unit sales and ward off competition. (or flood market with cheap alternative) When the firm has captured and ‘made loyal’ (locked in?) a sizable percentage of the market THEN raise prices to reap profit, and THEN offer upward line stretch products. When customers are brand loyal then they are less price sensitive. Go ahead and raise prices later, rather than sooner (sound like any company you know?) 44 Step 5: Choose a Price Implementation Strategy for new products

45. Steps in Price Planning 45

46. Step 6: Develop Pricing Tactics How you gonna charge? With the pricing strategies set – now they can be implemented (put into operation) using pricing tactics (payment methods) Two-part pricing: two separate types of payments to purchase the product or service (ex country club, cell phone) Payment pricing: breaking total price into smaller amounts payable over time 46

47. Step 6: Develop Pricing Tactics Pricing for multiple products Price bundling (packaging): selling two or more goods or services as a single package for one price (cable companies, others?) Often bundled products are discounted which reduces the profit margin on any product/service in the bundle. But the CRM goal is % of consumer (for the long-term) right? Captive pricing: pricing two products that work only when used together (iPod/iTunes, Gillette razors, HP printers and ink) Others? 47

48. Step 6: Develop Pricing Tactics Who pays for shipping? Distribution-based pricing –pricing tactic that establishes how firms handle the cost of shipping products and liability during shipping F.O.B. (free on board) origin pricing – customer pays for shipping and takes title of material @shipping dock (and therefore buys insurance to cover shipping mishaps) F.O.B delivered pricing – seller pays for shipping (costs are included in sales price) Basing-point pricing – customers pay shipping from an agreed distribution (base) point (ex: nearest distribution center) Uniform delivered pricing – charging same delivery price to all customers – (ex: 4.95 shipping and handling) Freight absorption pricing – seller pays freight 48

49. Step 6: Develop Pricing Tactics Discounting for channel members List price (mfr suggested retail price MSRP): price that manufacturer sets as appropriate for end consumer to pay Trade or functional discounts: set percentage discounts off list price for distributors, wholesalers, retailers Quantity discounts: reduced price-point for larger qty. purchases, single orders or cumulative business (rebates) Cash discounts: enticements to customers to pay bills quickly (2% 10 days, net 30 days) Seasonal discounts: price reductions offered during certain times of year (off-seasonal sales of equipment) 49

50. Pricing and Electronic Commerce Is pricing different for e-commerce purchases? Pricing is dynamic: the web-server can easily adjust displayed price (or available incentives\discounts) to meet supply/demand changes in marketplace, - auctions are great for this Dynamic pricing means different consumers pay different prices – i.e., based on consumer classification (new, returning, VIP) 50

51. Pricing and Electronic Commerce Online auctions have changed pricing of online consumers – shoppers bid online for products. Sellers set reserve price and shills can bid up the price Open auctions (all bidders know the current price and compete to purchase the product) with reserve pricing (floor price to sell product) Reverse (Dutch) auction – in B2B marketplaces sellers compete to provide products or services Search engines and “shopbots” (roving and alerting shopping software, ie lowest airline ticket price to cabo) make customers more price-sensitive. 51

52. Psychological Issues in Pricing Buyer’s pricing expectation – over time and after numerous shopping trips, consumers develop an internal reference price: an expected (fair) price & price range for the product category – acts as an anchor. Prices out of this norm are questioned Assimilation effect – consumers naively reason that similarly priced products are of equivalent quality (Kunnan) Contrast effect - consumers reason that a markedly different product is superior or inferior Price/quality inferences - consumers typically assume the higher-priced product has higher quality. OK now what are some interesting retail pricing strategies? 52

53. Psychological Pricing Strategies Psychological pricing – a pricing method designed to encourage purchases that are emotional rather than rational. Prices are set to match consumer accepted norms – why does a logo hat cost $33?, 3 sixpacks for $13? Odd-even pricing: prices ending in odd numbers lead to increased sales (except for luxury items) from your experience, is this true? Price lining: items in a product line sell at different price points. Consumers are accustomed to paying a certain price (vendors can change quality and customers may not notice) Hmm what pricing do women prefer? Odd or Even? 53

54. Legal and Ethical Considerations in Pricing Deceptive pricing practices Going-out-for-business sale Bait-and-switch No fixed pricing: haggling Some consumer protections exist Unfair sales acts Loss-leader pricing (impossible to enforce online) Predatory pricing (intentional dumping) Price fixing (oligopolies) Selective discounting (only protects B2B) 54

55. Marketing Pricing Exercise A new seaside resort offers luxury rentals for a few days, a week, or longer. What pricing objective would you choose? Please consider possible pricing strategies -- cost-plus, yield management, everyday low pricing, skimming, and penetration and trial pricing. --What pricing strategy do you recommend for the resort ? --What pricing tactics do you suggest? 55

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