MK323 Chapter 14 Notes PDF

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MK323 Chapter 14 Notes...

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5 C’s of Pricing ● Competition ● Costs ● Company objectives ● Customers ● Channel members 14.1 Company Objectives (5 C’s of Pricing) ● Each firm embraces objectives that seem to fit with where management thinks the firm needs to go to be successful in whatever way it defines success ● Objectives may not be mutually exclusive because they might embrace 2 or more noncompeting objectives ● Profit orientation is implemented by companies who focus on target profit pricing, maximizing profits or target return pricing ○ Firms implement target profit pricing when they have particular profit goals ○ Maximizing profits relies on economic theory. If firms can specify a mathematical model that captures all the factors required to explain and predict sales and profits, it should be able to identify the price where profits are maximized ○ Target return pricing is when firms are less concerned with the level of profits but rather the rate at which their profits are generated relative to their investments ■ Employ pricing strategies designed to produce a specific return on their investment expressed as a percentage of sales ● Sales orientation = firms use to when they believe that increasing sales will help the firm more than increasing profits ○ Ex: new health club might focus on unit sales and be willing to set a lower membership fee and accept less profit at first and focus on generating more sales ○ Firms might set low prices to discourage new firms from entering the market and encourage current firms to leave the market ○ Premium pricing = firm deliberately prices a product above the prices set for competing products to capture those customers who always shop for the best or for whom the price does not matter ● Competitor orientation = strategize according to the premise that they should measure themselves primarily against their competition ○ Some firms focus on competitive parity which is that they set prices that are similar to those of major competitors ○ Status quo pricing = changes prices only to meet those of competitors ● Customer orientation = sets a pricing strategy based on how it can add value to its products or services ○ Ex: CarMax promising “no-haggle” pricing = exhibits customer orientation because it provides additional value to potential used car buyers by making the process simple and easy

14.2 Customers (5 C’s of Pricing) ● Customers want value and price is half of the value equation ● Demand curve = shows how many units of a product or service consumers will demand during a specific period of time at different prices ○ Demand curves can be straight or curved ○ The horizontal axis represents the quantity demanded ○ The vertical axis represents the price ● Prestige products or services = consumers purchase for their status rather than for their functionality ○ The higher the price, the higher the status associated with it and the greater the exclusivity ○ Ex: Hermes ○ A higher price may lead to a greater quantity sold but only up to a certain point ● Price elasticity of demand = how consumers respond to actual changes in price ○ Ex: Consumers are generally less sensitive to price increases for necessary items such as milk because they have to purchase it regardless of price increase ○ Measures how changes in a price affect the quantity of the product demanded ■ Price elasticity = % change in quantity demanded/%change in price ○ Elastic means that the item is price sensitive and the elasticity is -1. ■ Ex: elasticity of -0.5 means 1% increase in price results in 0.5% decrease in quantity sold ■ Good if firms want to raise prices ■ Not good to lower prices ● Consumers are generally more sensitive to price increases than to price decreases ○ Easier to lose current customers than to gain new customers ● Dynamic pricing = the process of charging different prices for goods or services based on the type of customers, time of day, week, or even season and level of demand ● Factors that influence price elasticity of demand: ○ Income effect = the change in the quantity of a product demanded by consumers due to changes in their income ■ As people’s incomes increase, their spending behavior changes ○ Substitution effect = consumer’s ability to substitute other products for the local brand ■ The greater the availability of substitute products, the higher the price elasticity of demand will be ○ Cross-price elasticity = percentage change in quantity of product A demanded compared with the percentage change in price of product B ■ If product A price increases, product b’s price could either increase or

decrease depending on whether the products are complementary or substitute 14.3 Costs (5 C’s of Pricing) ● Variable costs = costs primarily labor and materials that vary with production volume ○ As firms produce more or less of a good, the total variable cost increase or decrease or stay the same ○ Service industry variable costs are more complex ■ Ex: Hotel, incurs certain variable costs each time it rents a room ● Fixed costs = costs that remain essentially at the same level regardless of any changes in the volume of production ○ Includes rent, utilities, insurance, administrative salaries, and depreciation of PPE ● Total cost = the sum of variable and fixed costs 14.4 Break-Even Analysis and Decision Making (5 C’s of Pricing) ● Break-even point = the point at which the number of units sold generates just enough revenue to equal the total costs (profit = 0) ● Break even point (in units) = Fixed costs / Contribution per unit ● To find target profit: ○ Break-even point (units) = FC + Target Profit / Contribution per unit 14.5 Markup and Target Return Pricing (5 C’s of Pricing) ● Ex: manufacturer would like to calculate the price at which it would make a 10% markup ● VC/unit = $8, FC = $1M, Expected Sales = 1M units ● Target return price = (VC + (FC / Expected unit sales)) x (1 x target return %) ○ = ($8 + ($1M/1M)) x (1+0.10) = $9 x 1.1 = $9.90 14.6 Competition (5 C’s of Pricing) ● Monopoly = one firm provides the product or service in a particular industry which results in less price competition ○ Ex: Time Warner Cable in NY, Comcast in New England ● Oligopolistic competition = only a few firms dominate ○ Firms typically change their prices in reaction to competition to avoid upsetting an otherwise stable competitive environment ○ Ex: soft drink market and commercial airline travel ○ Price war = when 2 or more firms compete primarily by lowering their prices ● Monopolistic competition = when many firms are competing for customers in a given market but their products are differentiated ○ Ex: Sunglass market where different brands make different frames to differentiate themselves ● Pure competition = large number of sellers offer standardized products or commodities that consumers perceive as substitutable ○ Ex: grains, gold, meat, spices, or minerals

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In such markets, price usually is set according to the laws of supply and demand

14.7 Channel Members (5 C’s of Pricing) ● Channel members -- manufacturers, wholesalers, and retailers -- have different perspectives when it comes to pricing strategies ● Developing a price that allows all channel members to earn their requisite profits requires careful planning ● Retailers’ cooperative = helps its members achieve economics of scale by buying as a group...