PRINCIPLES OF MARKETINGMRS. SORRELL

Price Determination

Pricing Objectives

Definition: Pricing objectives are the goals that tell what a marketer wants to achieve through pricing

Maximize profitMaximize salesIncrease market shareMeet competitionReturn on investment

Maximize Profit

Charge the highest price that customers will pay

Make as much money as quickly as possible Used when a product has a short life cycle Used when the company has a monopoly for a specific

event Popcorn and drinks at a movie theater

Introduce a new product Recover large amounts of money spent on R&D

Technology

Maximizing profit is often a short-term objective

Reality Check

Describe a situation in which you think the prices were set to maximize profit. Describe the products and the prices.

Maximize Sales

Offering the lowest price possible to get the largest number of customers to buy the product Sun Drop citrus soda introduced in 2001 Original price was $0.49 for a four-pack Attracted many customers from 7UP, Slice, Squirt, etc.

After building customer loyalty, prices will gradually increase

Reality Check

Describe 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.

Increase Market Share

Goal: increase the company’s market share of a product

Definition: Market share is one competitor’s percentage of the total sales of a specific product

To increase market share, the company must sell more products

They might lower prices or offer premiums Premiums are strategies to reduce price

BOGO Cents-off coupons

Meet Competition

Companies set their prices in relationship to the prices charged by the competition Higher (status) Equal to competitors (match) Lower (discounts/coupons)

Local competitors start PRICE WARS Common among gas stations and airline industry

Reality Check

Have you observed competitors trying to meet or beat each other’s prices? Describe the products and the prices.

You are going to shop today for one product of interest. Find the product at three different businesses and record the prices on the WORD document. Include the web address. Search for coupons on the web to further reduce your price.

Return on Investment

AKA ROI: a ratio that tells how much you earned as a percentage of the investment you made to earn the money

Simple ROI = Profit Investment

Suppose your company invests $100,000 in a new product. The selling of this product yields

$12,000 in profits.$12,000/$100,000 = 0.12 ROI = 12%

Return on Marketing Investment

ROMI—a metric (measurement) that measures the overall effectiveness and impact of a marketing campaign.

Amazon.com spent over $700 million in TV ads, until they realized that half of this money was wasted.

They developed affiliate websites that would track when customers click on the Amazon logo from another Web site, if they purchase, and how much they spend

ROMI, con’t.

New Customer Metrics—measure market share, cost of acquiring new customers, customer awareness levels, and brand awareness

Product metrics—may 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

ROMI Formula

Simple ROMI = Gross profit- Marketing Investment

Marketing Investment

Gross profit equals net sales minus cost of goods sold.

Marketing investment refers to the amount of money spent on the marketing activity

Effect of Price on Revenue

Revenue—money a business takes in from selling their products

Revenue equals the number of items sold times the price of the item

As prices increase, profits increaseAs costs go down, profits increaseQuantity sold refers to the number of items

soldAs the price of an item goes down, more

items are usually sold

Possible Effect on Price on Sales of Hypothetical Gadget

Price per Item Quantity Sold Revenue

$30 800 $24,000

$25 1,000 $25,000

$20 1,400 $28,000

For this product, lowering the price raises the revenue. The result might be different for a different type of product.

Break-Even Point

Definition: the point at which revenue from sales equals costs.

Expressed as the number of items that must be sold to recover the money spent to buy the items

Company is not losing or making money

Break-Even = (Cost per Item) x (Number of Items Purchased)

Point Selling Price

Break-Even Point Handout and Excel

Establishing Prices

Too high, might lose customersToo low, customers might question the qualitySimple method

Price = Cost + Profit

Cost Method Pricing Worksheet on Excel

Psychological Pricing

Odd pricing—ends in odd numbers like 5 or 9 convey the image of a bargain $9.99, $6.95, $12,495

Even pricing—end in zero or an even number convey the image of a quality product $4, $50, $300

Promotional Pricing—prices are lowered for running sales (i.e. coupons, BOGO, % reductions, rebates

Prestige pricing—prices set high to convey an image of status and high quality (i.e. Coach, Jaguar, Bose)

Price lining—different levels of prices indicate different quality levels for the same type of product

Psychological Pricing Worksheet

Other Pricing Techniques

Unit pricing—displaying the price of an item based on a standard unit of measure

Discount pricing—a reduction from the list price of the product Cash discount—reduction percentage given for paying bills

promptly (2/10, n30) Promotional discount—given to wholesalers and retailers Quantity discount—an incentive to purchase more product Seasonal discount—buying goods in advance of the season Trade discount—manufacturers quote prices to retailers and

wholesalers (a percentage off the MSRP)

Unit pricing stations & Channel of Distribution on Excel