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Pricing!!

Pricing in line with a Firm’s Objectives

2

Price

Amount a buyer pays to a seller in exchange for products and services the economic sacrifice

Non-monetary price Barters, donations, and time

(Easier / Harder) to change than other elements in the marketing mix?

3

Pricing Objectives

Market survival end of season sales charge for services (Long / Short) term objective

Sales / Market Share growth Market Share is ______________ penetration pricing productivity effects

4

More Pricing Objectives

Profitability--optimal price a trade off between margins and number of sales to maximize profitability price skimming

ROI requirements:

Income before taxes

Total operating assets associated with the product (e.g., plant, equipment, inventory)

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Final Objectives

Competitive Effect price wars usually occur when

___________

Quality and Image prestige/premium pricing

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Discussion: How do managers make pricing decisions?

What did you find out???

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The Five C’s in Setting Prices

Customer

Costs

Competition

Government Controls

Channels of Distribution

Each price that the company charges will lead to different levels of demand

Traditional demand curve?

CONSUMER FACTORS --DEMAND

Q1 Q2

P2

P1

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IS the Demand Curve Always Downward Sloping?

Elasticity of Demand

Definition: How sensitive consumers are to changes in price

Elasticity =

Is elasticity always negative?

Q

P

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ELASTIC DEMAND

QQ QQ

PP PP

INELASTIC DEMAND

What would you do if you knew demand was elastic/inelastic?

Elasticity Cont’d

Determining Price Sensitivity

Price Sensitivity Measures from consumersOral-B’s Cross Action toothbrush has three types of

bristles that are set at different angles. It has a dense tip that cleans behind back teeth and an ergonomic rubberized handle.

Circle what is too cheapSquare what is too expensive

0.25 0.75 1.25 1.75 2.25 2.75 3.25 3.75 4.25 4.75 5.25 5.75 6.25 6.75 7.25 7.75 8.25

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Price Sensitivity Continued

0.25 0.75 1.25 1.75 2.25 2.75 3.25 3.75 4.25 4.75 5.25 5.75 6.25 6.75 7.25 7.75 8.25

Too cheap Too expensive

Cu

mu

lati

ve P

erc

en

t

100%

80%

60%

40%

20%

0%

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Influences on Elasticity

Substitute products

Income effect

Other Products (cross-elasticity)

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Customer Oriented Strategies

Demand-Backward Pricing

Perceived Value Pricing

Price Skimming

Price Penetration

Trial Pricing

Types of Costs:

Fixed

Variable

TOTAL COST

Cost Factors

BREAK-EVEN:

TR = TCP*Q = FC + (VC*Q)

Q = FCP - VC

COST AND PROFIT

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Break Even Analysis (Been there, done that!)

Fixed costsSales price - Variable Cost Per Unit

Fixed VariableSawsVarnishManagersWoodWarehouse Lease

WHY DO THIS?

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COST ORIENTED STRATEGIES

Target Return:P = AVC + TFC + r(INV) Q QAVC = average variable cost TFC = total fixed costQ = projected quantity soldr = targeted ROIINV = initial investment

PROBLEMS?

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Other Cost Strategies

Mark-Up on Cost (manufacturer)P = UTC + (UTC * MU%)

Mark-Up on Selling Price (retailer)P = cost

(1.00- MU%)

Price-Floor Pricing

PRODUCT DIFFERENTIATION

MARKET STRUCTURE Oligopoly – status quo Monopolistic – non-price competition

COMPETITIVE PRICING POLICIES

COMPETITION FACTORS

PRICE-LEADER

PRICE-CHALLENGER

PRICE-FOLLOWER

NICHE-MARKETER

Competition-Oriented Strategies

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Government Controls

Pricing law objectives:

ensure competition among companies within markets

protect consumer rights

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Important Pricing ActsSherman Act 1890

No price fixing

Federal Trade Commission Act 1914limits unfair and anti-competitive activities

Robison-Patman Act 1936 Limits price discrimination

Wheeler-Lea Act 1938No deceptive pricing

Consumer Goods Pricing Act 1975Limits wholesaler & manufacturer ability to set retail prices

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Discussion: What is Price Discrimination?

Definition:Selling the same product to different consumers at different prices

Is it legal?

Yes:

No:

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Other Legal Issues

Price gouging

Price comparisons with a “fake” price

Bait and Switch

Predatory Pricing

Price Fixing Horizontal Vertical

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INTERESTING ISSUES IN PRICING

PSYCHOLOGICAL PRICING

COMPARISON PRICING

DUMPING

BUNDLING

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Consumer’s and Pricing--A Test

Item Estimated Most you Actual High Price would pay Price Medium

or low?

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3. Psychological

Internal Reference PriceWhat you expect to pay

How is this formed? Past pricesCompetitions prices

Reservation PriceHighest price willing to pay

Perceived PriceConsumer’s reaction to a price– high/low; fair/unfair

COMPARE T0:

PROBLEMS:

Comparison Pricing

Pharmaceutical Firm Selling Brand Name Product

Sales 100,000 units @ &10/unitFixed Costs $500,000 for a capacity of 200,000

unitsVariable Costs $1

Assume you are entering the Generic Market and there is no cannibalization between the branded and generic market

What is the minimum profitable price you can charge?

Dumping

Movie studio sells to 2 cinema chains:Supreme Cinema

Fractured Flicks

We have two block-busters we are about to release:

MacbethNaked Gun XII

To be continued…..

Movies

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Cinema Chains’ Reservation Prices

Supreme Cinemas

$2,600

$1,200

Fractured Flicks

$1,000

$1,800

Macbeth

Naked Gun XII

Each cinema chain will only buy one copy of each film. How should your price the films in order to maximize revenue while at the same time not price discriminating.

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PRICE DISCOUNTING

TRADE FUNCTIONAL DISCOUNTQUANTITY DISCOUNTS

NONCUMULATIVE

CUMULATIVE

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TEMPORAL DISCOUNTING

10 Consumers willing to pay $5010 Consumers willing to pay $30Cost $20/dress to make

How should you price the dress?

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Things to consider when changing your price

Basic Price

Price mix Promotion mix

Components

Example

Objective

Long-term effect

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Price change concepts

Price Thresholds JND

Traps for price decreases low-quality--buyers question quality fragile market share trap--consumers

switch to any lower priced good shallow pockets trap--competitor can

maintain price cut longer than you