$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
What should we charge? What can we charge? Marketing Mix Product Place Promotion Price
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 …
Is the assignment of value , or the amount (of?) the consumer must exchange to receive the offering.
It is what is given (by customer) in exchange for acquiring a good or service.
Is a mechanism used by companies to capture some of the value they have created .
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
Case in point.... A gym membership costs $50 per month. What are the non-monetary “ costs ” associated with the membership? * TIME * CONVENIENCE * PSYCHOLOGICAL * SENSORY
Pricing Services is… Convenience/Time Actual Price Time/Convenience Time/Convenience Psychological/sensory Really Hard Dentist Cost for Filling Distance to Dentist Wait Period for an Appointment Time in Waiting Room Anesthesia A $50 15 miles 3 Weeks 1.5 hour None B $75 15 miles 1 Week .5 hour Novocain C $125 3 miles 1 Week 1 hour Novocain D $200 3 miles 1 Week No wait Nitrous Oxide and Novocain Variability
And not just services...
Do you have reference prices for any of these?
A party clown
A live Charlie Sheen Show
Legal representation: DUI
A week vacation in Kenya
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.
Do you have reference prices for any of these?
Vending machine Coke
¼ Pounder with cheese
A gallon of gas
End Module 1
Chapter 11 Module 2
Price Planning is a Careful Process! Develop Objectives Estimate Demand Determine Costs Evaluate the Environment Choose a Strategy Choose Tactics
Sales or market share objectives
Competitive effect objectives
Customer satisfaction objectives
Image enhancement objectives
Demand = Customers ’ desire for a product
Key concept is elasticity
Law of demand:
For most products, as price goes up, quantity demanded goes down
For prestige products, a price increase may result in more demand (Veblen effect)
Consumers ’ response to prices changes. Estimate Demand
Other things affect demand too - Competitive Entry - Trends - Stages in PLC - Change in norms/values/CB - Substitute & complimentary products
But let ’ s go back to Price.
The percentage change in sales that results from a percentage change in price
When changes in price have large effects on the amount demanded, demand is elastic
When changes in price have little or no effect on the amount demanded, demand is inelastic
Price Elasticity of Demand: It ’ s all about how sensitive demand is to price Price in Change % Demanded Quantity in Change %
How To Do This: Very sensitive demand Elasticity coefficient (e) Q new – Q old Q old P new – P old P old
Very insensitive demand If e < 1.0 Q new – Q old Q old P new – P old P old
Pizza (generally - but not PJ in our example) Gasoline $10 $9 $4 $2 $0.50 $6
End Module 2
Chapter 11 Module 3
The costs of production that are tied to and vary depending upon the number of units produced
The costs of production that do not change with the number of units produced
Fixed + variable costs for a set number of units produced
Average Cost = Total Cost / # units produced We need to know so that we don ’ t price under our costs and lose money!! What ’ s our BEP? Determine Costs
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 = PxQ TC = FC + VC Profit = 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?
But Pricing is not just a function of end user purchase price and manufacturer costs!
In general in the economy
In the geography where we operate
Regulations or new legislation?
Are the new consumer trends? (saving, luxury shopping)
Evaluate the Environment
End Module 3
Chapter 11 Module 4
Cost-based - “ markup ” actual costs by x%
Target - work backwards to see if products can be produced for what people are willing to pay.
Yield Management - different prices for different customers.
Price Leadership - set the market price
(Perceived) customer needs
Skimming - high price
Penetration - to encourage purchase
Choose a Strategy
Pricing for multiple products
Price bundling : selling two or more goods or services as a single package for one price
Captive pricing : pricing two products that work only when used together
The Psychology of Pricing Marketers must understand that price is an important cue for customers.
have internal reference prices
experience assimilation and contrast effects
are likely to make price-quality inferences
Marketers use consumer psychology to set pricing strategies: