Your SlideShare is downloading. ×
0
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Bmgt 411 week_8
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

Bmgt 411 week_8

111

Published on

Published in: Business, Technology
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
111
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
7
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. BMGT 411: Week 8 Kottler: Chapters 12 - Pricing Strategies Wood: Chapter 7 - Pricing Strategies 1
  • 2. BMGT 411: Chapter 12 Developing Pricing Strategies and Programs 2
  • 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. Premium Pricing 4
  • 5. Synonyms for Price • Rent • Tuition • Fee • Fare • Rate • Toll • Premium • Honorarium • Special assessment • Bribe • Dues • Salary • Commission • Wage 5
  • 6. Internet: Empowers Consumers 6
  • 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. 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. 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. 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. 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. 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. 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. 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. 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. Step 3: Estimating Costs Figure 12.1 Cost per Unit as a Function of Accumulated Production 16
  • 17. Target Costing Bringing down the costs to target levels marketers want to achieve 17
  • 18. Step 4: Analyzing Competitor’s Costs, Prices, and Offers 18
  • 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. 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. 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. Target Return Pricing Figure 12.3 Break-Even Chart for Determining Target-Return Price and Break-Even Volume 22
  • 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. Perceived Value Pricing Basing the price on the customer’s perceived value 24
  • 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. 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. 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. 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. 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. 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. 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. Key Concepts from the Marketing Plan Handbook Chapter 7 - Pricing Strategies 32
  • 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. 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. 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. 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. Sample of Consumer Pricing in the Retail Channel 37
  • 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. 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. 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. 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. 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. BMGT 411 - Preparing for Week 9 • Read Chapters: • Kottler: Chapters 13,14 • Wood: Wood Chapter 8 43

×