Ch. 11 Media Pricing the Product

  Pricing the Product Chapter Objectives

• importance of pricing
• monetary & non-monetary
• forms of pricing
• pricing objectives
• for planning pricing strategies

  Chapter Objectives

• using costs, demands, and revenue
• to make pricing decisions
• environmental factors
• affecting pricing strategies

  Chapter Objectives

• key pricing strategies
• pricing tactics
• for single products
• multiple products,
• pricing on the Internet

  Chapter Objectives

• Internet pricing strategies
• Psychological aspects of pricing
• Legal aspects of pricing
• ethical aspects of pricing

  “Yes, but what does it cost?”

• Price:
• the assignment of value,
• or the amount the consumer must exchange _{• to receive the offering}
• Offerings:

  Money, goods, services, favors, votes, anything else that has value to the other party Figure 11.1: Steps in Price Planning

Step 1: Develop Pricing Objectives

• Sales or market share objectives
• Profit objectives
• Competitive effect objectives
• Customer satisfaction objectives
• Image enhancement objectives

  ROLLS-ROYCE

  Step 2

  

Estimate demand Step 2: Estimate Demand

• Demand:
• customers’ desires for a product
• How much of a product are customers willing to buy

  as its price goes up or down?

  Demand Curves

• Law of demand:
• as price goes up,  quantity demanded goes down.
• For prestige products,
• a price increase may actually result in an increase in quantity demanded.

  Shifts in Demand Curve

  (improved product, new advertising) or 2. non-marketing activities can cause upward or downward shifts in demand.

  At a given price , demand is greater or less

  Estimating Demand

• Marketers predict total demand by
• estimating potential buyers for a product,
• then multiplying number of buyers times • average amount of each buyer’s purchase.

• • Then they predict what the company’s

  share of the total market will be.

  Demand

  Elastic price results

• A change in
• in a substantial change in quantity demanded.

  If price is increased , revenues decrease, and vice-versa.

  Non-necessities (pizza) generate elastic demand.

  Availability of close substitute

  Demand

Inelastic

• A change in price
• has

  little or no effect on quantity demanded.

• If price is increased, revenues increase.
• The demand for necessities
• (food and electricity) • is generally inelastic.
of Demand

  other products affect a product’s demand.

  Cross-elasticity

• Changes in prices of
• Products are substitutes:
• increase in price of one will increase demand for other (bananas vs. strawberries).

• One product is essential for use of second:

• increase in price of one decreases demand for other (increasing price of gas lowers demand for tires).

  Step 3

  

Determine costs Step 3: Determine Costs

• Variable costs:
• costs of production that are tied to and

  vary depending on the number of units produced.

• Average variable costs may change
• as the number of products produced changes.

  Step 3: Determine Costs

• Fixed costs:
• costs of production that don’t change with number of units produced

  Rent, cost of owning/maintaining factory, utilities, equipment, fixed salaries of firm’s executives

  Step 3: Determine Costs

• Fixed costs:

  Average fixed cost: fixed cost per unit (total fixed costs divided by number of units produced) will decrease as number of units produced increases.

  Step 3: Determine Costs (cont’d)

• Total costs:
• total of fixed costs &
• variable costs for a set number of units produced.

  Song Airlines _Video Break-Even Analysis (cont’d)

  

Break-Even Analysis

• the number of units a firm must produce and sell at a given price to cover all its costs.
• Break-even point:
• point at which a firm doesn’t lose any money and doesn’t make any profit.

• Break-even point

  (in units)

• = (total fixed costs)
• divided by (

  contribution per unit )

• Contribution per unit:
• the difference between the price the firm charges for a product & the variable costs

  Break-Even Analysis (cont’d)

  in dollars )

• Break-even point (
• = (total fixed costs)
• divided by

  [1 - (variable cost per unit divided by price)] Marginal Analysis

• A method that uses
• cost and demand
• to identify the price • that will maximize profits .

  Marginal Analysis

• Marginal cost:
• increase in total costs from producing one additional unit of a product
• Marginal revenue:
• increase in total income or revenue from selling one

  (decreases with each additional unit of a product additional unit sold)

• Profit is maximized

•  where marginal cost is to marginal

  exactly equal revenue. Step 4:

  

Evaluate the Pricing Environment

  Step 4: Evaluate the Pricing Environment

• The economy

  Broad economic trends Recessions, Inflation

• The competition
• Consumer trends

  Step 5:

  

Choose a Price Strategy Step 5: Choose a Price Strategy

• Pricing strategies based on cost

  Simple to calculate and relatively risk free Cost-plus pricing : total all product costs and add markup

  Step 5: Choose a Price Strategy (cont’d)

• Pricing strategies based on

  demand

• Based on estimate of quantity
• a firm can sell at different prices

  Step 5: Choose a Price Strategy (cont’d)

• Pricing strategies based on

  demand

• Target costing:
• identify quality and functionality
• –customers need and
• price they’re willing to pay –before designing product.
Step 5: Choose a Price Strategy (cont’d)

  demand

• Pricing strategies based on
• Yield management pricing :
• charge different prices
• to different customers
• to manage capacity

Step 5: Choose a Price Strategy (cont’d)

• Pricing strategies based on the

  competition

• Pricing , , , or

  near at above below the competition

• :

  Price leadership strategy

• industry giant announces price, and
• competitors get in line
• or drop out

Step 5: Choose a Price Strategy (cont’d)

• Pricing strategies based on

  customers’ needs

• Value pricing or
• everyday low pricing ( EDLP ):
• pricing strategy in which a firm sets prices • that provide ultimate value to customers.

  Skimming price: a very high premium price

  Step 5: Choose a Price Strategy (cont’d)

• New-product pricing

  Step 5: Choose a Price Strategy (cont’d)

• New-product pricing

  : Penetration pricing a very low price to encourage more customers to purchase Step 5: Choose a Price Strategy (cont’d)

• New-product pricing

  Trial pricing: low price for a limited period of time

  Step 6:

  

Develop Pricing Tactics

  individual products Two-part pricing: offering two separate types of payments to purchase the product

  Step 6: Develop Pricing Tactics

• Pricing for

  Step 6: Develop Pricing Tactics

• Pricing for

  individual products

Payment pricing:

  breaking total price into smaller amounts payable over time Step 6: Develop Pricing Tactics (cont’d)

• Pricing for

  

multiple products Price bundling: selling two or more goods or services as a single package for one price Step 6: Develop Pricing Tactics (cont’d)

• Pricing for multiple products

  Captive pricing: pricing two products that work only when used together Step 6: Develop Pricing Tactics (cont’d)

  based pricing

• Distribution-

  F.O.B. (free on board) origin pricing F.O.B delivered pricing Basing-point pricing Uniform delivered pricing Freight absorption pricing Step 6: Develop Pricing Tactics (cont’d)

• Discounting

  for channel members (suggested retail price):

• price that manufacturer sets

  List price

• as appropriate

  end consumer to pay

• for

Step 6: Develop Pricing Tactics (cont’d)

• Discounting

  for channel members Trade or functional discounts:

• set percentage discounts
• off list price
• for each channel level

Step 6: Develop Pricing Tactics (cont’d)

• Discounting

  for channel members

• reduced prices

• for purchases of larger quantities

Quantity discounts:

  for channel members Cash discounts: enticements to customers to pay bills quickly

  Step 6: Develop Pricing Tactics (cont’d)

• Discounting

  (2% 10 days, net 30 days) (2/10 net 30) Step 6: Develop Pricing Tactics (cont’d)

• Discounting

  for channel members Seasonal discounts: price reductions

offered during certain times of year Other pricing issues

Pricing and Electronic Commerce

• Dynamic pricing strategies:
• seller easily adjusts price • to meet changes in marketplace.

  Pricing and Electronic Commerce • Dynamic pricing strategies:.

  Cost of changing prices on Internet is practically zero .

  Firms can respond quickly and frequently to changes in costs, supply, and/or demand.

  Pricing and Electronic Commerce

• Online auctions (eBay.com)
• E-commerce allows shoppers
• to purchase products through online bidding.

  Pricing and Electronic Commerce (cont’d)

• Pricing advantages for online shoppers Consumers gain control.
• Search engines and “

  shopbots ”

• make customers more price-sensitive.

• Consumers have more

  negotiating power. Issues in Pricing

  Psychological

• Buyer’s pricing

  expectation

• Internal reference price:
• consumers use a price/price range to evaluate product’s cost.
• Assimilation effect
• Contrast effect

  Issues in Pricing

  Psychological

• Buyer’s pricing expectation
• Price/quality inferences:

• • consumers assume higher-priced

  product • has higher quality.

  Pricing Strategies

  Psychological

• Odd-even pricing:
• prices ending in 99 rather than 00 lead to increased sales.
• Price lining:
• items in a product line sell at different price points.

  Considerations

  Legal and Ethical

• Deceptive pricing practices
• Going-out-of-business sale
• Bait-and-switch
Legal and Ethical

  Considerations

• Unfair sales acts
• Loss-leader pricing
• Unfair sales acts
• Illegal business-to-business (B2B) price discrimination

  Legal and Ethical Considerations in Pricing (cont’d)

• Price fixing:

  

two or more companies conspire

• to keep prices at a certain level
• Horizontal price fixing Vertical price fixing

Legal and Ethical Considerations in Pricing (cont’d)

• Predatory pricing:
• company sets a very low

  price

• for purpose of driving

  competitors out of business

  The end Real People, Real Choices

• Taco Bell (Danielle Blugrind)
• In order to differentiate itself from the competition, Taco Bell needed to update its value pricing menu. _{Option 1: price entire menu Option 2: price items at 99} at $1.29 _{Option 3: price items at} cents and $1.29

  99 cents, $1.19, and $1.29 _{TACO BELL}

  Real People, Real Choices

• Taco Bell (Danielle Blugrind)
• Danielle chose option 3: price items at 99 cents, $1.19, and $1.29 _{By carefully tuning its pricing strategy, money. purveyor of fast-food value for the} Taco Bell is reclaiming its position as

  Marketing Plan Exercise

• • A new seaside resort offers luxury rentals for

  a few days, a week, or longer. 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?

  Marketing in Action Case: You Make the Call

• • What is the decision facing True Religion?

• What factors are important in

  understanding this decision situation?

• What are the alternatives?
• What decision(s) do you recommend?
• What are some ways to implement your

  recommendation?

  

Keeping It Real: Fast-Forward to Next Class,

Decision Time at General Motors R*Works

• Meet Vince O’Brien, VP-Regional Managing Director for General Motors R*Works
• R*Works: regional promotional agency for GM; manages partnerships with sports organizations
• The decision: How to get dealers to support R*Works ski mountain promotional partnerships?

  Group Activity

• Your group are marketers for a candy bar manufacturer.

  You feel it’s time to increase price, but you’re concerned the increase might not be profitable. _{--How would you investigate elasticity of demand? --What findings would lead you not to increase it?} --What findings would lead you to increase price?

  Marketing Math Activity

• You and your friend have decided to go into business together manufacturing handbags.
• You know fixed costs will be $120,000 a year, and you expect variable costs to be $28 per bag.

•  --If you plan to sell the bags to retail stores for $35,

  how many must you sell to break even?

  Discussion

• • In what ways is a price leadership strategy

  good or bad for consumers?

• Should governments allow price

  leadership?

  Discussion

• In pricing new products, marketers may

  choose a skimming or a penetration pricing strategy.

• --What is the advantage or disadvantage of this

  practice for consumers?

• --For the industry as a whole?

  Discussion

• Consumers often make

  price-quality inferences about products.

• --What are some products for which you make price-quality inferences?
• --Do your inferences make sense?

  Discussion

• In loss-leader pricing, retailers advertise

  and sell an item below cost to get customers into the store.

• --Do you consider this an unethical practice?
• --Who benefits and who is hurt by it?

•  --Should the practice be made illegal (some states

  have done so)?

•  --How is loss-leader pricing different from bait-and-

  switch pricing? Figure 11.3: Shift in Demand Curve

  Figure 11.2: Demand Curves for Normal and Prestige Products

  unit sales that results from a percentage change in price .

  Price Elasticity of Demand

• The percentage change in

  Figure 11.7: Break-Even Analysis

  Figure 11.8: Marginal Analysis

  Figure 11.6: Variable Costs at Different Levels of Production