Bmgt 411 week_8

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Bmgt 411 week_8

  1. 1. BMGT 411: Week 8 Kottler: Chapters 12 - Pricing Strategies Wood: Chapter 7 - Pricing Strategies 1
  2. 2. BMGT 411: Chapter 12 Developing Pricing Strategies and Programs 2
  3. 3. Chapter Questions • How do consumers process and evaluate prices? • How should a company set prices initially for products or services? • How should a company adapt prices to meet varying circumstances and opportunities? • How should a company initiate a price change and respond to a competitor’s price change? 3
  4. 4. Premium Pricing 4
  5. 5. Synonyms for Price • Rent • Tuition • Fee • Fare • Rate • Toll • Premium • Honorarium • Special assessment • Bribe • Dues • Salary • Commission • Wage 5
  6. 6. Internet: Empowers Consumers 6
  7. 7. Common Pricing Mistakes • Determine costs and take traditional industry margins • Failure to revise price to capitalize on market changes • Setting price independently of the rest of the marketing mix • Failure to vary price by product item, market segment, distribution channels, and purchase occasion 7
  8. 8. Consumer Psychology and Pricing • Reference prices: Comparing an observed price to an internal reference price they remember or an external frame of reference such as a posted “regular retail price” • Kohl’s uses reference pricing to make their sales look even bigger • Price-quality inferences: When consumer’s use price as an indicator of quality • Luxury cars, perfume, designer clothes • Price endings: $299 Vs $300, consumers process prices left to right, $299 seems like it is in the $200 range Vs $300 range 8
  9. 9. Steps in Setting Price 1. Select the price objective 2. Determine demand 3. Estimate costs 4. Analyze competitor price mix 5. Select pricing method 6. Select final price 9
  10. 10. Step 1: Select the price objective 1. Survival Pricing: Often a short term objective if they are plagued with overcapacity, intense competition, or changing customer wants (Blackberry?) 2. Maximum Current Profit: Estimating the demand, competition and choose a price that yields a maximum profit, cash flow, or ROI (Business to Business markets where there is lower competition) 3. Market Penetration Pricing: Setting the lowest price, leading to higher volume, lower unit costs, and higher long run profit (Walmart, Target) 4.Market-Skimming Pricing: Prices start high, and as demand increases, prices slowly drop over time (Roku Box) 5. Product Quality Leader Pricing: High prices that come with tastes, quality, or customer service (BMW, Apple) 10
  11. 11. Step 2: Determine demand • Price sensitivity: How customers react to higher and lower prices • Rule of thumb: less sensitive to low cost items and items bought infrequently • Because food is purchased so often, it is often noticed and very sensitive to price changes • Estimate demand curves: Estimating different demands based on different pricing strategies. Often meeting in the middle to set prices • Price elasticity of demand: Depends on how responsive, or elastic, demand is to a change in price 11
  12. 12. Inelastic Demand Demand hardly changes with a small change in price - demand is inelastic - If gas went up 5%, demand would almost remain unchanged 12
  13. 13. Elastic Demand When demand changes considerable when prices change, we call that demand is elastic - Example - Beef and other Food sources (Because there are often cheaper substitutes) 13
  14. 14. Table 12.1 Factors Leading to Less Price Sensitivity • The product is more distinctive • Buyers are less aware of substitutes • Buyers cannot easily compare the quality of substitutes • Expenditure is a smaller part of buyer’s total income • Expenditure is small compared to the total cost • Part of the cost is paid by another party • Product is used with previously purchased assets • Product is assumed to have high quality and prestige • Buyers cannot store the product 14
  15. 15. Step 3: Estimating Costs • Types of costs: • Fixed Costs: Overhead, do not vary with increased production (Rent, salaries, etc) • Variable Costs: Varies directly with the level of production (Raw materials) • Total Costs: The sum of the fixed costs and variable costs for a given level of production • Average Cost: The cost per unit at the total level of production 15
  16. 16. Step 3: Estimating Costs Figure 12.1 Cost per Unit as a Function of Accumulated Production 16
  17. 17. Target Costing Bringing down the costs to target levels marketers want to achieve 17
  18. 18. Step 4: Analyzing Competitor’s Costs, Prices, and Offers 18
  19. 19. Step 5: Selecting a Pricing Method • Markup pricing • Target-return pricing • Perceived-value pricing • Value pricing • Going-rate pricing • Auction-type pricing 19
  20. 20. Markup Pricing • Unit Cost = Variable Cost + Fixed Costs/Unit Sales • = $10 + $300,000/50,000 = $16 Per Unit • If they wish to earn 20 percent markup, the formula is as follows • Markup Price = Unit Cost/ (1 - Desired return on sales) • = $16 / (1 - .2) = $20 Variable Cost Per Unit: $10 Fixed Costs: $300,000 Expected Unit Sales: 50,000 Invested Capital = $1,000,000 20
  21. 21. Target Return Pricing • Target Return Cost = Unit Cost + (Desired Return x Invested Capital)/ Unit Sales • If they wish to earn 20 percent markup, the formula is as follows • $16 + (.2 x $1,000,000)/50,000 = $20 Variable Cost Per Unit: $10 Fixed Costs: $300,000 Expected Unit Sales: 50,000 Invested Capital = $1,000,000 21
  22. 22. Target Return Pricing Figure 12.3 Break-Even Chart for Determining Target-Return Price and Break-Even Volume 22
  23. 23. Target Return Pricing - Break Even Point • Break Even Volume = Fixed Cost / (Price - Variable Cost) • = $300,000/ ($20 - $10) = 30,000 Variable Cost Per Unit: $10 Fixed Costs: $300,000 Expected Unit Sales: 50,000 Invested Capital = $1,000,000 23
  24. 24. Perceived Value Pricing Basing the price on the customer’s perceived value 24
  25. 25. Value Pricing Winning loyal customers by charging a fairly low price for a quality offering EDLP Model - Everyday Low Price High Low Pricing - Charges higher prices on everyday items partnered with sales 25
  26. 26. Other Pricing Methods • Going Rate Pricing: Charging based mostly on what other competitors are charging, not very scientific • Popular in business to business marketing with little competition, and service industries (Plumbers, etc) • Auction Pricing: Bidding the price up or down • English - One seller, many buyers (Ebay Model) • Dutch, or Reverse - Buyer announces something they want to buy, and sellers compete to offer the lowest price (Popular in the printing industry) 26
  27. 27. Step 6: Selecting the Final Price • Impact of other marketing activities: Prices must align with overall brand strategy, image, and customer expectations • Company pricing policies: Cannot alienate customers with pricing that does not fit the companies model • Impact of price on other parties: Will partners be left with room to make a profit as well? They may not carry the product if not • In 2009, Costco stopped selling Coke due to a pricing dispute 27
  28. 28. Other Pricing Considerations Geographical Pricing: Pricing varies by location Very common in the hotel business, same hotel in different locations are very different prices 28
  29. 29. Other Pricing Considerations • Discount: Discount for paying bills within a desired timeframe • Quantity discount: Discount to buyers who buy large volumes • Functional discount: Discount offered for selling or storing a product • Seasonal discount: Discounts on out of season goods • Allowance: Example, trade ins, discounts for displaying product 29
  30. 30. Promotional Pricing Tactics • Loss-leader pricing • Special-event pricing • Cash rebates • Low-interest financing • Longer payment terms • Warranties and service contracts • Psychological discounting 30
  31. 31. Differentiated Pricing • Customer-segment pricing: Students or Senior Citizen Pricing • Product-form pricing: Different versions of the product are priced differently • Channel pricing: Different pricing for different channels (Coke in vending, restaurants, C-store) 31
  32. 32. Key Concepts from the Marketing Plan Handbook Chapter 7 - Pricing Strategies 32
  33. 33. Value • Need to research and analyze value. • Consider how the product’s value will be communicated. • Customers’ perceptions of value and price sensitivity can be used to deal with imbalances in supply and demand. 33
  34. 34. Price Elasticity (cont’d) Change in Price Inelastic Demand Elastic Demand Small Increase Demand drops slightly Demand drops significantly Small Reduction Demand rises slightly Demand rises Significantly 34
  35. 35. Factors Impacting Elasticity • Customers are less sensitive to price when: • It is a relatively small amount of product • Comparisons to possible substitutes are not easy • Switching costs are involved • The product’s quality, status, or another benefit justifies the price • The cost is shared with others • Perceive the price as fair 35
  36. 36. Samples of Pricing Objectives Type of Objective Sample Pricing Objective Financial For profitability: Set prices to achieve gross margin of 40%. Marketing For higher market share: Set prices to achieve a market share increase of 5% within 6 months. Societal For philanthropy: Set prices to raise $10,000 for charity during the second quarter of the year. 36
  37. 37. Sample of Consumer Pricing in the Retail Channel 37
  38. 38. Some examples of ethical issues in pricing: • Is it ethical to raise prices during an emergency, when products may be scarce or particularly valuable? • Should a company set a high price for an indispensable product, knowing that some customers will be unable to pay? 38
  39. 39. Costs and Break- Even Objectives • Costs typically establish the theoretical “floor” of the pricing range. • Break-even point: the sales level at which revenues cover costs. 39
  40. 40. Break-Even Example • Break-even volume = fixed cost/price-variable cost. • Example: • Given: • Fixed cost = $30,000 • Variable cost = $10 per unit • Price = $50 per unit 40
  41. 41. Break-Even Example • Break-even volume = fixed cost/price-variable cost. • Example: • Given: • Fixed cost = $30,000 • Variable cost = $10 per unit • Price = $50 per unit • Therefore: • Break-even = $30,000/($50 - $10) • Break-even = $30,000/$40 • Break-even = 750 41
  42. 42. Pricing Strategy: The Product Life Cycle • Introduction: Decision between skim and penetration pricing. • Growth: Pricing used to stimulate demand, drive toward break-even point. • Maturity: Pricing used to defend market share, retain customers, pursue profitability, and expand into additional channels. • Decline: Pricing can be used to stimulate demand and “clear out” old products, or to “milk” existing products for profitability at end of life. 42
  43. 43. BMGT 411 - Preparing for Week 9 • Read Chapters: • Kottler: Chapters 13,14 • Wood: Wood Chapter 8 43

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