Chapter 13 Price Determination
Unit 3: The Marketing Mix Chapter 13Price Determination Ch13 Learning Goals Explain five common objectives of pricing
Describe the impact of price on revenue Determine the break-even point for a product with a given cost and selling price List and explain five psychological pricing techniques List and explain five discount pricing techniques Day 1 Response Journal You have made an excellent batch of granola bars for the school sale. What factors would you take into account in order to price them? *** Save As Jan 5 in your Response Journal folder *** Price Determination Think of the prices of some of the items you have purchased recently Maybe you bought a box of gel pens for $1.48 or a video game for $ How did the marketers decide on these prices? The price of a company's product plays a big part in determining whether the product and the company are successful Companies need to decide on their pricing objectives Once they have pricing objectives in mind, they can establish their pricing policies Pricing Objectives ___________________ are the goals that tell what a marketer wants to achieve through pricing The 5 Common Pricing Objectives are; Maximize profit Maximize sales Increase market share Meet competition Return on investment Pricing Objectives 1. Maximize Profit The strategy is to
Charge the highest price customers are willing to pay The goal is to make as much money as quickly as possible This strategy is often used when The product has a short life E.g. A toy that may only be popular for one Christmas season The company has a monopoly E.g. Popcorn and drinks at a movie theater 1. Maximize Profit A new product is introduced The goal is to make back the large amounts of money spent on research and development of the product Technology products are often priced this way For example, microwave ovens and video cameras were very expensive when the first ones came on the market. Now their prices are now much lower because of time and competition Maximizing profit is often a short-term objective because The product life span is short Competition will soon drive prices down 2. Maximize Sales The strategy is to
Offer the lowest price possible to get the largest number of customers to buy This strategy is often used for New products to attract customers away from competition This type of pricing is often used by utility companies, especially phone, cable, or satellite TV companies, as a way to draw customers away from their regular providers After building customer loyalty, prices will increase 2. Maximize Sales ______________ are commonly used to reduce the price of a product, yet allow the price to rise later Popular premiums are buy-one-get-one-free or cents-off coupons Another popular premium is a discount offered for bundling products Fast-food restaurants bundle products as combos Utility and insurance companies offer a percentage discount if the customer buys a bundle of products, and not just one Premiums 3. Increase Market Share The strategy is
Similar to the strategy to maximize sales The goal is to increase the company's market share of a product In Ch 6, you learned that market share is one competitor's percentage of the total sales of a specific product A company's goal might be to increase its market share from 10% to 13% In order to increase market share, the company has to sell more products Used to lure customers away from competitors products Ch13 4. Meet Competition The strategy is
Set prices in relation to competitors prices A company may decide to set prices higher than, equal to, or lower than the competition depending on companys goal and image Products that have status attached to them, such as Gucci purses or BMW cars, are purposely priced higher than the competitors' prices to increase the image of prestige 5. Return on Investment The strategy is to
Price products so that they earn a certain return on the investment These companies may establish prices that will earn a specific percentage of return on the amount that was invested For example, a company may only carry products that will earn at least 12 percent return on the investment. If a product does not meet that goal, it would be dropped 5. Return on Investment ____________________, or ROI, is a ratio that tells you how much you earned as a percentage of the investment you made In this context, profit is also called return, because profit is the money that returns to you For example, suppose your company invests $100,000 in a new product. The selling of this product yields $12,000 in profits Therefore, the ROI for this investment would be 12% Return on Investment Profit = Simple ROI Investment 5. Return on Investment Return on Marketing Investment
When firms cut costs, become financially leaner, and try to increase productivity, all areas of a business must be financially accountable Even during economic growth, a responsible company continually tracks information to make sure it is on target to reach its goals For a long time, companies did not measure the impact of marketing on their businesses That view has changed and companies now routinely calculate the _______________________________, or (ROMI) Return on Marketing Investment Return on Marketing Investment
Return on Marketing Investment is a ratio that measures the overall effectiveness and impact of a marketing campaign ROMI is a subcategory of ROI The ROMI data that marketers gather helps them make better decisions on how to spend their marketing budgets Marketing Investment Gross Profit = Simple ROMI Investment Return on Marketing Investment
For example, at one point, Amazon spent more than $700 million in TV advertising. Once Amazon realized that at least half of this money was wasted, it began to develop affiliate websites. These affiliate websites are completely measurable. Amazon can track when customers click on the Amazon logo from another website, if they purchase, and how much they spend. Today anyone can become an Amazon affiliate by going to the Amazon website and clicking on "Amazon Associate". These affiliate sites drive customers to Amazon's website, which in turn increases Amazon's sales. When a purchase is made, a percentage of the sale goes to the affiliate website. This allows Amazon to easily measure the ROMI. Return on Marketing Investment
Some common ways to measure ROMI include; New customer metrics Measure market share, cost of acquiring new customers, customer awareness levels, and brand awareness Product metrics Measure ease of use, customer satisfaction, ease of learning a product, and first-time user satisfaction Customer retention metrics Measure customer retention rate, customer abandonment rate, brand loyalty, return visits, and the likelihood to refer a brand Return on Marketing Investment
Suppose your marketing class project for the year was to sell yearbooks using a new marketing campaign. The class sent home notices, paid for an ad on the school's website, placed ads in the school's online and print newsletters and the fall sports program, and sent anto all parents and caregivers through the school'sListserve. The class sold 700 books at $50 each for a total of $35,000 in net sales. The cost of each yearbook was $40. The cost of goods sold was $28,000 (700 books times $40 per book). The gross profit was $7,000 ($35,000 minus $28,000). The marketing investment was $1,000. The ROMI for this investment would be 16.7 percent Return on Marketing Investment ***Save As Ch 13 Day 1 in your Unit 3 folder***
Day 1 Assigned Work Students please complete the following; K & U Questions #2, 4 & 5 on page 192 Thinking Questions #2 & 3 on page 192 Application Questions #2 & 5 on pages 192/193 ***Save As Ch 13 Day 1 in your Unit 3 folder*** Day 2 Response Journal Identify a product that you think was priced to maximize sales. Describe the product, its price, and why you think it was priced to maximize sales. *** Save As Jan 6 in your Response Journal folder *** Effect of Price on Quantity Sold
__________________is a term used to refer to the number of items sold Have you ever gone into a store for an item, and thought to yourself, "If that item were cheaper, I would buy two." That thought summarizes the effect of price on quantity sold As price goes down, more items are usually sold As price goes up, fewer items are usually sold Quantity Sold Effect of Price on Revenue
As a result, higher prices do not always lead to higher revenues _______________is the money a business takes in for the products it sells Revenue equals the number of items sold times the price of the item Revenue = Number of Items Price Therefore, If marketers raise the price, but sell fewer items,revenue will fall If marketers lower the price, but sell more items,revenue will rise Revenue Effect of Price on Quantity & Revenue
Suppose that you are selling a new gadget for $25 You want to increase revenue. Should you raise or lower the price? You might raise the price to increase revenue However, you also know that fewer customers will buy your gadget at a higher price Effect of Price on Quantity & Revenue
In this example, you are currently selling the gadget for $25 If you want to increase revenue, you can raise the price to $30. However, 200 fewer customers would buy the gadget at that price. As a result, your revenue would be only $24,000 You might lower the price to $20. At that price, 400 more people would buy your gadget, and you would earn $28,000 in revenue For this particular product, lowering the price would raise the revenue Effect of Price on Quantity & Revenue
Sometimes lowering the price raises the revenue. However, this doesnt occur with all products. Ch13 Number of Items Purchased
Break-Even Point When does a product start making profit? A product starts making profit when the revenue from the product equals the cost to make the product This is the Break-Even Point The ____________________ occurs when revenue equals costs Break-Even Point Cost Per Item Number of Items Purchased Break-Even Point x = Selling Price Break-Even Point The break-even point is often expressed as the number of items that must be sold to recover the money spent to buy the items At the break-even point the company is not losing or making money they are breaking even (making $0) Once you break even, any additional revenue is profit Break-Even Point Example
Suppose your class wants to raise money by selling a stuffed animal toy wearing a shirt with your school logo The minimum order is 100 toys at a cost of $2.50 each Your class decides to sell the stuffed toys for a price of $5 each How many toys would you have to sell to cover the cost of buying the toys? Multiply the cost per toy ($2.50) by the number of toys (100), and then divide by the selling price ($5) Answer: Your class would have to sell 50 toys in order to break even ***Save As Ch 13 Day 2 in your Unit 3 folder***
Day 2 Assigned Work Students please complete the following; K & U Questions #6, 8 & 9 on page 192 Calculating the Break Even Point Worksheet Handout provided ***Save As Ch 13 Day 2 in your Unit 3 folder*** Day 3 Response Journal Companies often price their products ending in $0.99. For example, I may decide to price my product at $24.99 instead of $ What do you believe is the reasoning behind pricing a product this way? *** Save As Jan 7 in your Response Journal folder *** Establishing Prices Making a profit is important to the success of a business In order to make a profit, businesses must set prices high enough to cover their costs and make a profit If you price your products too high, you might lose customers If you set your prices too low, customers might question the quality of the product So, how do you determine price? Establishing Prices There are 4 common ways to set prices;
Cost plus profit Psychological pricing Unit pricing Discount pricing 1. Cost Plus Profit This is the simplest way to set a price
Take cost of producing the product and add the amount of desired profit Price = Cost + Profit Example: Selling cookies The total cost of ingredients for each cookieis $0.35 You want $0.50 profit on each cookie Therefore, you price each cookie at $0.85(Price = $ $0.50 = $0.85) 2. Psychological Pricing
____________________ is a set of pricing techniques used to create an image of a product and to entice customers to buy The 5 most common psychological techniques are; Odd pricing Even pricing Promotional pricing Prestige pricing Price lining Psychological Pricing Supermarket Psychology 2. Psychological Pricing
a) Odd Pricing Prices ending in an odd number, such as a 5 or a 9 E.g. $9.99, $99.95, and $19,995 - People tend to think of these prices as $9.00, $99.00, and $19000, even though the prices are actually closer to $10, $100, and $20000 Odd pricing tends to convey a bargain image b) Even Pricing Prices ending in zero or an even number, such as 4 E.g. $4, $50, and $300 Even pricing tends to convey an image of quality 2. Psychological Pricing
c) Promotional Pricing Prices are lowered for some kind of sale Promotional pricing includes dollars off, percent reductions, rebates, coupons, and buy-one-get-one-free E.g. $10 off, 50% off, a $100 rebate, etc. Promotional pricing is a short-term technique 2. Psychological Pricing
d) Prestige Pricing Prices are set high Done to convey an image of status and high quality Jeans priced at $100, tennis shoes for $250, and a car for $80000 will make customers think they are better products Coach (purses), Jaguar (cars), and Bose (radios) are all examples of companies that use prestige pricing 2. Psychological Pricing
e) Price Lining Prices are set at different levels to indicate different quality levels for the same type of product Appliance stores often use price lining E.g. a dishwasher with three features may be priced at $350, a dishwasher with four features at $400, and a dishwasher with five features at $450 Price lining gives customers options and allows them to choose the features and value they want in a product 3. Unit Pricing Many retailers price their items by the package
This is especially true for grocery items, such as bottles of shampoo or bags of pretzels Since packages come in so many different sizes, it is often difficult for consumers to compare prices As a result, many stores voluntarily use unit pricing _______________ consists of displaying the price of an item based on a standard unit of measure, such as a gram Unit Pricing Ch13 3. Unit Pricing For example, a bag of chips might be priced at $1.99. If there are 225 grams of chips in the bag, the unit price is $0.009 per gram. The shelf would display the total price of $1.99 per bag and the price of $0.90 per 100 grams This makes it easier to compare prices for products packaged in different quantities 4. Discount Pricing Companies that sell to other businesses (B2B) often use discount pricing A _____________ is a reduction in price ____________________ offers a reduction from the regular or list price of the product The 5 major types of discount are; Cash discount Promotional discount Quantity discount Seasonal discount Trade discount Discount Discount Pricing 4. Discount Pricing a) Cash Discount
Offered to retailers who pay their bills promptly Cash discounts are written on the invoice in the following format: 2/10 n30 The 2 equals the percent off the price; the 10 equals the number of days to pay the bill and take the discount; and the 30 equals the number of days to pay the entire bill (without the discount) if you do not pay early Cash discounts are sometimes used to encourage retailers to pay their invoices quickly 4. Discount Pricing b) Promotional Discount
Offered to retailers and wholesalers in exchange for promotions to customers When you see a product advertised in an ad sponsored by a retail store, the retail store probably got a promotional discount when they purchase that product c) Quantity Discount Offered for purchasing large quantities of a product An incentive for retailers to purchase more 4. Discount Pricing d) Seasonal Discount
Given to retailers if they buy goods in advance of the season For example, buyers for December gift-giving season will often travel to Vancouver, Toronto, or New York the January before to place their orders. They are buying 11 months before they need the goods to sell Similarly, summer clothing orders are placed at least six months in advance of the season Seasonal discounts help manufacturers plan production and reduce inventories 4. Discount Pricing e) Trade Discount
Manufacturers offers the wholesaler or retailer a percentage off the list price A trade discount is not really a discount It is actually the way that manufacturers quote prices to retailers and wholesalers The manufacturer typically offers the wholesaler or retailer a percentage off the list price E.g. a trade discount may be 20% off the list price ***Save As Ch 13 Day 3 in your Unit 3 folder***
Day 3 Assigned Work Students please complete the following; K & U Question #10 on page 192 Thinking Question #4 on page 192 Application Questions #4, 6 & 7 on page 193 ***Save As Ch 13 Day 3 in your Unit 3 folder***