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Chapter 11Module 1
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Principles of Pricing
Chapter 11
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3
$1,000
Your job is to buy the “best” Oriental rug. One rug is priced at $800 while another is priced at $1000. Which one is the best? How did you make that decision?
$800
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MarketingMarketingMixMix
ProductProduct PlacePlace
PromotionPromotion PricePriceWhat should we
charge?
What can we charge?
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Why care about price?
1% improvement in… operating profit improvement of…
Price
Variable Cost
Volume
Fixed Cost
11.1%
7.8%
3.3%
2.3%
The Biggest Lever the Marketer Has …
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Priceo Is the assignment of valueassignment of value, or the amount (of?) the
consumer must exchange to receive the offering.
o It is what is given (by customer) in exchange for acquiring a good or service.
o Is a mechanism used by companies to capture some of the value they have created.
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Price & Value$Price is not just a dollar figure$What are the non-monetary costs
associated with acquiring a product/service?
* TIME* CONVENIENCE* PSYCHOLOGICAL * SENSORY
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Case in point....A gym membership costs $50 per
month. What are the non-monetary “costs” associated with the
membership?* TIME* CONVENIENCE* PSYCHOLOGICAL * SENSORY
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Pricing Services is…Pricing Services is… Really HardReally Hard
Dentist Cost for Filling Distance to Dentist
Wait Period for an Appointment
Time in Waiting Room Anesthesia
AA $50 15 miles 3 Weeks 1.5 hour None
BB $75 15 miles 1 Week .5 hour Novocain
CC $125 3 miles 1 Week 1 hour Novocain
DD $200 3 miles 1 Week No wait Nitrous Oxideand Novocain
Variability
Convenience/TimeActual Price Time/ConvenienceTime/Convenience Psychological/sensory
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And not just services...And not just services...
o Do you have reference prices for any of these?• A party clown• A live Charlie Sheen Show• Whole-life insurance• Legal representation: DUI• A week vacation in Kenya
o Do you have reference prices for any of these?
• Vending machine Coke• NKU sweatshirt• ¼ Pounder with cheese• A gallon of gas• XM Radio
How do you know what these things SHOULD cost, if you’ve never purchased them before?? What drives their price?
Pricing. Is. Tough. Can. Make. Or. Break. You. Pricing. Is. Tough. Can. Make. Or. Break. You. 10
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End Module 1
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Chapter 11Module 2
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Price Planning is a Careful Process!
DevelopObjectives
EstimateDemand
DetermineCosts
Evaluatethe
Environment
Choose aStrategy
ChooseTactics
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Sales or market share Sales or market share objectivesobjectivesProfit objectives Profit objectives Competitive effect objectives Competitive effect objectives Customer satisfaction Customer satisfaction objectivesobjectivesImage enhancement Image enhancement objectivesobjectives
DevelopObjectives
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EstimateDemand
Demand = CustomersCustomers’’ desire for a productdesire for a productoKey concept is elasticityelasticity
Law of demand: oFor most products, as price goes up,
quantity demanded goes downoFor prestige products, a price increase
may result in more demand (Veblen effect)
ConsumersConsumers’’ response to prices changes. response to prices changes.
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Other things affect demand too
- Competitive Entry- Trends- Stages in PLC- Change in norms/values/CB- Substitute & complimentary products
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But let’s go back to Price.
The percentagepercentage change in sales that results from a percentagepercentage change in price• When changes in price have large effects on the amount
demanded, demand is elasticelastic• When changes in price have little or no effect on the amount
demanded, demand is inelasticinelastic
Price Elasticity of Demand:Price Elasticity of Demand:
Price in Change %
Demanded Quantity in Change %
ItIt’’s all about how s all about how sensitivesensitive demand is to price demand is to price
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How To Do This:How To Do This:Qnew – Qold
Qold
Pnew – Pold
Pold
Very Very sensitivesensitive demand demand
Elasticity coefficient (e)Elasticity coefficient (e) 18
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Very Very insensitiveinsensitive demand demand
Qnew – Qold
Qold
Pnew – Pold
Pold
If e < If e < 1.01.0
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Pizza (generally - but not PJ in our example)
Gasoline
$10
$9
$4
$2
$0.50
$6
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End Module 2
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Chapter 11Module 3
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DetermineCosts
o VariableVariable• The costs of production that are tied to and varyvary
depending upon the number of units produced
o FixedFixed• The costs of production that do not changedo not change with
the number of units produced
o Total:Total: • Fixed + variableFixed + variable costs for a set number of units
produced
Average Cost Average Cost = TotalTotal CostCost/ # units produced
We need to know so that we don’t price under our costs and lose money!!
What’s our BEP?
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Break Even tells us the sales volume we need to achieve in order to make a profit. This is largely dependent on price since it drives our contribution margin.TR = PxQTC = FC + VCProfit = TR - TC
TR = TC
Break Even = TFC _________contr. per unit to FC (Price-AVC)
Unit selling Price = $2.AVC = $1
Contr. Per unit to fixed costs = ???
If TFC = $2,000, how many units do we need to sell @ $2
each to break even?
What about at $3 each?
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But Pricing is not just a function of end user purchase price and manufacturer costs!
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Evaluatethe
Environment
o In general in the economyo In the geography where we operateo Regulations or new legislation?o Are the new consumer trends?
(saving, luxury shopping)o Competitor Prices?
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End Module 3
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Chapter 11Module 4
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Choose aStrategy
Pricing StrategiesPricing Strategieso Cost-based - Cost-based - ““markupmarkup”” actual costs by x% actual costs by x%o Demand-basedDemand-based
• Target - work backwards to see if products can Target - work backwards to see if products can be produced for what people are willing to pay.be produced for what people are willing to pay.
• Yield Management - different prices for Yield Management - different prices for different customers.different customers.
o Competition-basedCompetition-based• Price Leadership - set the market pricePrice Leadership - set the market price
o (Perceived) customer needs (Perceived) customer needs o Yield ManagementYield Managemento New productNew product
• Skimming - high priceSkimming - high price• Penetration - to encourage purchasePenetration - to encourage purchase• Trial Trial
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ChooseTactics
o Pricing for multiple products• Price bundlingPrice bundling: selling two or more goods or
services as a single package for one price• Captive pricingCaptive pricing: pricing two products that
work only when used together
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The Psychology of Pricing
Marketers must understand that price is an important cue for customers.
Consumers • have internal reference prices• experience assimilation and contrast effects• are likely to make price-quality inferences
Marketers use consumer psychology to set pricing strategies:• Odd-even pricing• Price Lining• Prestige Pricing
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End Chapter 11