COMM 1MA3 Chapter 11 Lecture Notes Chris Ling PDF

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CHAPTER 11 (not on midterm) Pricing Concepts and Strategies: Establishing Value Transacting Value The Importance of Pricing Price = Quality ● A strategic opportunity to create value ● Not an afterthought to the rest of the marketing mix ● Pricing signals quality or a lack of quality The Role of Price in the Marketing Mix ● Price is usually ranked as one of the most important factors in purchase decisions ● Price is the only element in the marketing mix that generates revenue ● Can be one of the most challenging 4Ps to manage, partly because it is often the least understood/misunderstood by managers

1. Company Objectives ➔ Profit Orientation ● Maximize profits ● Target return pricing ● Target profit pricing ➔ Sales Orientation ➔ Competitor Orientation ➔ Customer Orientation 2. Customers ● The most important C

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All about understanding consumers reactions to different prices Consumers want value Price is half of the value equation ➤ Psychological Pricing Odd-Even Pricing ● Odd numbers convey a bargain image ($.79, $9.99, $699) e.g. Kmart ● Even numbers convey a quality image ($10, $50, $100) e.g. Nordstrom

➤ Prestige Pricing Hermes uses prestige for its handbag. (e.g. sold a handbag for $300,000 at auction, which is $20,000 more than standard retail price) Price Elasticity of Demand ● How do consumers respond to price increases or decreases? ● This is measured by the price elasticity of demand

➤ Factors Influencing Price Elasticity of Demand ➔ Income Effects ◆ Generally, as people’s income increases, their spending behaviour changes ◆ Demand shifts from lower-priced products to higher-priced products ➔ Substitution Effects ◆ The greater the availability of substitution products, the higher the price elasticity of demand for any given product 3. ➔ ➔ ➔

Costs Variable Costs; vary with production volume Fixed Costs; unaffected by production volume Total Costs; sum of variable and fixed costs Break-Even Point

ZYX Company makes a product that has a MSRP of $10. The actual street price, however, is $9 and gives retailers a $4 profit margin. The unit variable cost is $3. Fixed costs include $17,000,000 for consumer advertising, $5,000,000 for consumer promotion, $12,000,000 for trade promotion, a $20,000,000 sales force budget, and $6,000,000 for general and administrative expenses.

4. Competition

5. Channel Members ● Manufacturers, wholesalers and retailers can have different perspectives on pricing strategies ● Manufacturers must protect against grey market transactions

Cost-Based Methods ● Cost-base pricing methods start with cost ● All costs calculated on a per unit basis ● Assumes costs don’t vary for different levels of production Competitor-Based Methods

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Set prices to signal information of how product compares with competitors ○ Premium pricing

Value-Based Methods ● Setting prices that focus on the overall value the production ● Consumer perceptions ○ Improvement Value Method: estimate of how much more more/less consumers are willing to spend relative to comparable products ○ Cost of Ownership Method; more expensive but lasts long, eventually will cost less in the long run

Everyday Low Pricing (EDLP)

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Value is created in different ways EDLP sales search costs of finding lowest overall prices High/low provides the thrill of the chance for the lowest price (e.g. Walmart)

High-Low Pricing

Relies on the promotion of sales, during which prices are temporarily reduced to encourage purchases ➤ opposite of EDLP New Product Pricing Strategies ➔ Price skimming ◆ Start with highest price and overtime reduce price ◆ Margins (e.g. video games) ➔ Market penetration pricing ◆ Set price low enough to get strong launch ◆ Volume

Consumer’s Use of Reference Prices The price against which buyers compare the actual selling price of the product and that facilitates their evaluation process (e.g. $100 $50)

Strategy is long term and then consider tactics Pricing Lining Mercedes Sudan ➔ A-Class starts at $39,000 ➔ C-Class starts at $55,000 ➔ E-Class starts at $65,700 ➔ S-Class starts at $123,500 Price Bundling ● Encourage sales of slow moving items ● Encourage stock up

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Encourage trial of new brand Incentive to purchase

Leader Pricing Enticing consumers into the store with the popular aggressively priced item and hoping they will pick up other items while shopping (e.g. milk, eggs, Best Buy)

Markdowns ● An integral component of high/low pricing strategy ● Enable retailers to get rid of slow moving or obsolete merchandise ● Used to generate store traffic Quantity Discounts for Consumers ● Size discount ● The more you buy the cheaper the unit cost Coupons & Rebates Coupons: retailer handles Rebate: manufacturer issues

Predatory Pricing When a firm sets a very low price for one or more of its products with the intent to drive its competition out of business Price Discrimination When a firm sells the same products to different resellers (wholesalers, distributors or retailers) at different prices ➔ Usually larger firms receive lower prices Price Fixing Practice of colluding with other firms to control prices...