Marketing ConceptsMarketing Concepts

PricePrice

MKTG 3110-004Spring 2014

Mrs. Tamara L. Cohen

Classes #18-19

KEY TERMSKEY TERMS

• price

• barter

• value

• total revenue

• average revenue

• marginal revenue

• total cost

• fixed cost

• variable cost

• marginal cost

• price fixing

• price discrimination

• predatory pricing

KEY CONCEPTSKEY CONCEPTS

• demand curve

• price elasticity of demand

• break-even analysis

• discounts

• allowances

• FOB pricing

• uniform delivered pricing

PRICING PRICING STRATEGIESSTRATEGIES

• Skimming pricing• Penetration pricing• Prestige pricing• Price lining• Odd-even pricing• Target pricing• Bundle pricing• Yield-management pricing

• Standard mark-up pricing• Cost-plus pricing• Experience curve pricing

• Target profit pricing• Target return-on-sales

pricing• Target return-on-

investment pricing

• Customary pricing• Above-, at-, or below-

market pricing• Loss-leader pricing

• One-price policy• Flexible-price policy

= amount of money charged for a product or service

= sum of all values the consumer exchanges for the benefits of owning or using a product or service

≠ cost

PRICE is • the only element in the marketing mix that produces

revenue; all other elements represent costs• one of the most flexible elements of marketing mix:

price can be changed quickly• the biggest problem for many marketing executives• historically the major factor affecting buyer choice

(but this has waned in recent years)

What is PRICE?What is PRICE?

““PRICE” has many PRICE” has many namesnames

Tuition

Rent

Interest

Premium

Fee

Dues

Fare

Salary

Wage

Commission

$1$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

The PRICE you see is The PRICE you see is not the PRICE you paynot the PRICE you pay

PRICE = LIST PRICE – DISCOUNTS + FEES

What about TAXES?$ ?

PRICE as an indicator PRICE as an indicator of VALUEof VALUE

value = consumer’s perceived benefit from product/service

Value =

Perceived Benefits

Price

“Give people something of value, and they’ll happily pay for it.”

Value PricingValue Pricing

McDonald’s began its Supersize program in the 1990s. Other fast foods followed. All were discontinued by 2006.

concentrated soap powder

Profit equationProfit equation

PROFIT = TOTAL REVENUE – TOTAL COST

unit price fixed cost

x +

quantity sold variable cost

6 steps in setting 6 steps in setting priceprice

6 steps in setting 6 steps in setting priceprice

6 steps in setting 6 steps in setting priceprice

6 steps in setting 6 steps in setting priceprice

6 steps in setting 6 steps in setting priceprice

6 steps in setting 6 steps in setting priceprice

Step 1: Step 1: Identify pricing Identify pricing objectivesobjectives & constraints & constraints

Objectives:• Profit - long-run and/or short-run or not at all

• Sales

• Market share

• Unit volume

• Survival

• Social responsibility

Step 1: Step 1: Identify pricing Identify pricing objectives & objectives & constraintsconstraints

Constraints:

• Market size / demand

• Newness / life cycle

• Strength / status versus competition

• Cover costs of production & marketing

• Lag time

• Type of competitive market

Pricing, product, & advertising strategies Pricing, product, & advertising strategies available to firms in 4 types of competitive available to firms in 4 types of competitive

marketsmarkets

Step 2:Step 2: Estimate Estimate demanddemand & & revenuerevenue

The demand curve shows us that for most products and services:

When prices are high, few consumers are willing to buy.

When prices drop, more consumers are willing to buy.

When prices are low, many consumers are willing to buy.

Step 2:Step 2: Estimate demand & Estimate demand & revenuerevenue

Total Revenue (TR) = total money received from sale of product

TR = P x Q where P = unit price of product

and Q = quantity of product sold

Average Revenue (AR) = average amount of money received for selling one unit of a product = PRICE of that unit

AR = TR ÷ Q = P

Marginal Revenue (MR) = change in total revenue from producing & marketing one additional unit of product

MR = change in TR ÷ 1 unit increase in Q

= ΔTR ÷ ΔQ = slope of TR curve

Price Elasticity of DemandPrice Elasticity of Demand

• measures sensitivity of consumer demand to changes in product’s price Price elasticity of demand = E =

% change in quantity demanded % change in price

INELASTIC demand: A slight change in

price has very little effect on demand.

ELASTIC demand: A slight change in

price has a big effect on demand.

Elasticity examplesElasticity examples

INELASTIC

• Necessities

e.g. toothpaste;

open-heart surgery• Gasoline price strategy

e.g. Gas prices tend to rise in summer, but this doesn’t stop many people from driving extensively

ELASTIC

• Luxuries

e.g. yacht;

skiing vacation• Public policy implications

e.g. Increase price of cigarettes in NY via higher excise tax causes less smoking by teens, who often have limited spending money, i.e. price elastic re cigarettes

Step 3:Step 3: Determine cost, Determine cost, volume & profit volume & profit

relationshipsrelationshipsTotal Cost (TC) = total expense to produce & market a product

Fixed Cost (FC) = company’s expenses that are stable, and do not change with quantities of product produced & sold

Variable Cost (VC) = company’s expenses that change directly with the quantity of product produced & sold

TC = FC + VC

Marginal Cost (MC) = change in total cost from producing one more unit of product

MC = change in TC ÷ 1 unit increase in Q = ΔTC ÷ ΔQ = slope of TC curve

Break-Even AnalysisBreak-Even Analysis

= analysis of relationship between total cost and total revenue to determine profitability at various levels of production

Break-Even Point = quantity where TC = TR (i.e. Total Cost = Total Revenue)

Profit will come from units sold AFTER Break-Even Point.

Profit is maximized where MC = MR (i.e. Marginal Cost = Marginal Revenue)

Break-even analysis chart for a picture Break-even analysis chart for a picture frame store shows the break-even point at frame store shows the break-even point at

400 pictures400 pictures

4 approaches for selecting approximate 4 approaches for selecting approximate price levelprice level

4.1 4.44.34.2

Step 4:Step 4: Select an Select an approximate price levelapproximate price level

Demand-oriented approaches to pricing:

1. Skimming

2. Penetration

3. Prestige

4. Price lining

5. Odd-even

6. Target

7. Bundle

8. Yield management

4.14.1 DEMAND-oriented DEMAND-oriented pricing approachpricing approach

1. Skimming

2. Penetration

3. Prestige pricing

4. Price lining

4.14.1 DEMAND-oriented DEMAND-oriented pricing approach pricing approach (cont.)(cont.)

5. Odd-even pricing

6. Target pricing

7. Bundle pricing

8. Yield-management pricing

4.24.2 COST-oriented COST-oriented pricing approachpricing approach

1. Standard mark-up pricing

2. Cost-plus pricing

3. Experience curve pricing

4.34.3 PROFIT-oriented PROFIT-oriented pricing approachpricing approach

1. Target profit pricing

2. Target return-on-sales pricing

3. Target return-on-investment pricing

4.44.4 COMPETITION-oriented COMPETITION-oriented pricing approachpricing approach

1. Customary pricing

2. Above-, at-, or below-market pricing

3. Loss-leader pricing

Step 5:Step 5: Set the List or Quoted Set the List or Quoted PricePrice

One-price policy = fixed pricing

Flexible-price policy = dynamic pricing

Effects on PricingEffects on Pricing

Company effects• product substitutes & complementary products• product line pricing

Customer effects• beware of setting different kinds of middlemen

against one another

Competitive effects• price war (successive price cutting by

competitors)

Step 6:Step 6: Adjust the List or Quoted Adjust the List or Quoted PricePrice

Discount = straight reduction in price on purchases during stated period of timeAllowance = promotional money paid by manufacturers to retailers in return for featuring manufacturer’s products

FOB pricing = geographical pricing strategy where goods are placed Free On Board (FOB) a carrier; customer pays freight from factory to destinationDelivered pricing = geographical pricing strategy where company charges same price plus freight to all customers, regardless of locationCIF pricing = geographical pricing strategy where price includes Cost + Insurance + Freight (CIF)

3 special adjustments to list or quoted price 3 special adjustments to list or quoted price include discounts, allowances, & include discounts, allowances, & geographical adjustmentsgeographical adjustments

Several pricing practices are affected by legal & Several pricing practices are affected by legal & regulatory restrictions, which benefit both regulatory restrictions, which benefit both

consumers & firmsconsumers & firms

Laws & Regulations in Laws & Regulations in PricingPricing

price fixing = conspiracy among companies to set prices for a product; illegal in the US (Sherman Act & Consumer Goods Pricing Act)

price discrimination = charging different prices to different buyers for the same products; illegal in the US (Robinson-Patman Act)

predatory pricing = charging a very low price in order to drive competitors out of business; illegal in the US (Sherman Act & Federal Trade Commission Act)

5 most common deceptive pricing 5 most common deceptive pricing practicespractices

Next class March 26 & 31 : Place

Preparation: Read ch.15 pp.378-9; pp.392-3; p.395 ch.16 pp.404-5; pp.423

Homework #7: Retailer Comparison