Chapter 10 and 11 - Summary Principles of Marketing PDF

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BUS2600, Professor Freeman Wu...

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Chapters 10 and 11 Balancing the marketing mix with price  Price: the only part of the marketing mix that actually makes money  Nature of price:  Most flexible of 4Ps  Most easily copied of the 4Ps (competitive weapon; price wars)  Not a sustainable strategy to compete solely on price (because of the above 2 points)  Key component of profit equation (profit = revenue - costs) Price has symbolic value for consumers: price as a signal  Inferences of value of product/service based on what is being charged  Prices can be both too high and too low  Price set too low may signal poor quality  Price set too high might signal low value 3 key pricing topics: 1. Pricing concepts  Price--the amount of money a customer must give up in exchange for the benefits of a product/service  Value to customer = benefits - price  Higher prices tend to make customers search for more information/be more involved in the buying process  Costs beyond money:  Privacy/data  Time  Effort (physical or mental)  Opportunity cost--the value of what else I could have done with my time or my money (the value of what I am giving up in exchange; the counterfactual)  Determinants of price: internal  Marketing objectives  Maximize profit  Gain market share  Infer a level of quality  Survive  Marketing mix strategy  Price needs to be consistent with other 3Ps  Company costs  Fixed costs--do not change as output changes/with production level  Variable costs--vary with level of output ["same thing can be either fixed or variable"]  Determinants of price: external 1.Competition  Competitor's prices  Strength of competition 2.Economy  Cost of components (natural resources)  Economic conditions 3.Demand for your product  What is product demand?

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Refers to customers' desire for products  Quantity desired  How will this desire change as price goes up or down?  Demand curves:  Shows the quantity of a product that customers will buy in a market at various prices if all other factors remain the same  Y axis represents different prices  X axis shows quantity demanded  For most goods, there is a negative correlation between price and quantity demanded  For luxury goods, this is curved; violates the typical demand curve  Price elasticity--how much the demand for a product will be affected by a change in price  Elasticity = % change in quantity demanded of good A / % change in price of good A  Elastic--price changes really affect demand  Usually products with many substitutes  Flat demand curve (price changes cause significant change in quantity demanded)  Inelastic--price changes do not really affect quantity demanded  Products typically have fewer substitutes  Steep demand curve (price changes cause little change in demand) 2. Major pricing strategies  Cost-based pricing (not ideal)  Design a good product --> determine product costs --> set price based on costs + profit --> convince buyers of product's value  Value-based pricing (ideal)  Assess customer needs and value perceptions --> set target price to match customer value perceptions --> determine costs that can be incurred --> design actual product to deliver desired value at target price  Begin by thinking about how the product will benefit customers (the core product)  And which benefits our consumers are capable of perceiving  We then price actual and augmented product based on those predictions  Customer-driven vs. product-driven (cost-based pricing)  Competitive pricing (vs. value-based)  Setting prices based on competitors' strategies, prices, and market offerings  Typically intended to gain market share  Risky  Partly allowing competition to drive our pricing strategy  Easy to get into price wars  Smaller companies typically end up losing out  Pricing strategies for new products  Price skimming--setting high initial prices for a new product to "skim" maximum revenues layer by layer from segments willing to pay the high price  Ex. Apple: normalizing the $1,000 iPhone  Works best with the following conditions:

 Inelastic demand  Superior product  Legal protection of the product  Technological breakthrough  Limited production  Market penetration--setting a low initial price for a new product in order to attract a large number of buyers quickly and gain a large market share  Only works under these situations:  Elastic demand  Production costs decrease as sales volume increases  Low prices must keep competition out of the market (must be low enough that competitors won't decrease as well)  Typically increase prices once market has been penetrated  Ex. Lays Stax (initial price was $.69)  Ex. Android phones  Penetration vs. predatory pricing  Predatory pricing--setting prices very low to force competitors out of the market, establish a monopoly, and create barriers to entry for new competitors  A matter of degree: if penetration is taken to the extreme, it can become predatory pricing  But note; predatory pricing is hard to prove (it is illegal, but companies can easily claim market penetration, which is legal)  Ex. Amazon 2. Price adjustment strategies  Psychological pricing  Prices aren't just numbers  Consumers don't just respond in the most rational, economic sense  How do consumers evaluate prices?  Reference prices  Reference prices: internal  Subjective evaluation matters  Ex. if a game costs $57, if reference price is $60, they will feel good about buying; if reference price is $50, they may not feel as good  Consumers have a set price or price range in their mind  If actual price is way higher, consumers will feel the product is overpriced  If it is way below the internal reference price, consumers may assume its quality is inferior  Reference prices: external  Pricing a product at a moderate level and positioning it next to a more expensive model or brand (making comparisons)  Decoy pricing--increasing sales of high profit items by introducing a decoy product that is only there to make the product or the package seem like a really great deal  Ex. may not want to spend $30 dollars on a bottle of wine, but when decoy offered for $50, the $30 seems like a much better deal in comparison

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Ex. Netflix: people choose standard plan when premium plan is introduced (and the standard plan was the original goal of Netflix)  Everyday low pricing vs. high/low pricing  Create value in different ways  EDLP saves search costs of finding lowest overall prices  High/low provides the thrill of the chase for the lowest price  Odd/even pricing  A psychological pricing tactic in which numeric value is utilized to affect the customer's perception of product value  Odd pricing refers to a price ending in an odd number just under a round number  Seems as "more of a deal"  Even pricing refers to a price ending in a whole number or tenths  Often used to distinguish luxury items  Price-quality relationship  Most inexperienced consumers use price as an indicator of quality  Price becomes crucial when consumers have little knowledge about certain products/brands  Ex. Peloton sales actually increased when they increased their price from $1,200 to $2,000 Perceived price change vs. actual price change  Hidden price increases via downsizing  Some brands now highlighting that they are not downsizing their product (just so we know they aren't) Price segmentation  Ex. matinee pricing is usually lower  Ex. resorts charging lower prices in off-season  Ex. discounts for seniors  Ex. better seats/worse seats on airplanes (different prices for different levels of services)  Many types of price segmentation "fences"  Customer characteristics (student discount)  Purchase quantity (Costco)  Product features (car features; airplane seat)  Negotiation  Time of purchase/use (Tuesday happy hour)  Place of purchase/use (seat in concert)...