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- 1. Chapter 11 Module 1
- 2. Principles of Pricing <ul><li>Chapter 11 </li></ul>
- 3. $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
- 4. What should we charge? What can we charge? Marketing Mix Product Place Promotion Price
- 5. 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 …
- 6. Price <ul><li>Is the assignment of value , or the amount (of?) the consumer must exchange to receive the offering. </li></ul><ul><li>It is what is given (by customer) in exchange for acquiring a good or service. </li></ul><ul><li>Is a mechanism used by companies to capture some of the value they have created . </li></ul>
- 7. 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
- 8. Case in point.... A gym membership costs $50 per month. What are the non-monetary “ costs ” associated with the membership? * TIME * CONVENIENCE * PSYCHOLOGICAL * SENSORY
- 9. 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
- 10. And not just services... <ul><li>Do you have reference prices for any of these? </li></ul><ul><ul><li>A party clown </li></ul></ul><ul><ul><li>A live Charlie Sheen Show </li></ul></ul><ul><ul><li>Whole-life insurance </li></ul></ul><ul><ul><li>Legal representation: DUI </li></ul></ul><ul><ul><li>A week vacation in Kenya </li></ul></ul>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. <ul><li>Do you have reference prices for any of these? </li></ul><ul><li>Vending machine Coke </li></ul><ul><li>NKU sweatshirt </li></ul><ul><li>¼ Pounder with cheese </li></ul><ul><li>A gallon of gas </li></ul><ul><li>XM Radio </li></ul>
- 11. End Module 1
- 12. Chapter 11 Module 2
- 13. Price Planning is a Careful Process! Develop Objectives Estimate Demand Determine Costs Evaluate the Environment Choose a Strategy Choose Tactics
- 14. <ul><li>Sales or market share objectives </li></ul><ul><li>Profit objectives </li></ul><ul><li>Competitive effect objectives </li></ul><ul><li>Customer satisfaction objectives </li></ul><ul><li>Image enhancement objectives </li></ul>Develop Objectives
- 15. <ul><li>Demand = Customers ’ desire for a product </li></ul><ul><ul><li>Key concept is elasticity </li></ul></ul><ul><li>Law of demand: </li></ul><ul><ul><li>For most products, as price goes up, quantity demanded goes down </li></ul></ul><ul><ul><li>For prestige products, a price increase may result in more demand (Veblen effect) </li></ul></ul>Consumers ’ response to prices changes. Estimate Demand
- 16. Other things affect demand too - Competitive Entry - Trends - Stages in PLC - Change in norms/values/CB - Substitute & complimentary products
- 17. But let ’ s go back to Price. <ul><li>The percentage change in sales that results from a percentage change in price </li></ul><ul><ul><li>When changes in price have large effects on the amount demanded, demand is elastic </li></ul></ul><ul><ul><li>When changes in price have little or no effect on the amount demanded, demand is inelastic </li></ul></ul>Price Elasticity of Demand: It ’ s all about how sensitive demand is to price Price in Change % Demanded Quantity in Change %
- 18. How To Do This: Very sensitive demand Elasticity coefficient (e) Q new – Q old Q old P new – P old P old
- 19. Very insensitive demand If e < 1.0 Q new – Q old Q old P new – P old P old
- 20. Pizza (generally - but not PJ in our example) Gasoline $10 $9 $4 $2 $0.50 $6
- 21. End Module 2
- 22. Chapter 11 Module 3
- 23. <ul><li>Variable </li></ul><ul><ul><li>The costs of production that are tied to and vary depending upon the number of units produced </li></ul></ul><ul><li>Fixed </li></ul><ul><ul><li>The costs of production that do not change with the number of units produced </li></ul></ul><ul><li>Total: </li></ul><ul><ul><li>Fixed + variable costs for a set number of units produced </li></ul></ul>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
- 24. 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 <ul><li>Break Even = TFC _________ </li></ul><ul><ul><ul><ul><li>contr. per unit to FC (Price-AVC) </li></ul></ul></ul></ul>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?
- 25. But Pricing is not just a function of end user purchase price and manufacturer costs!
- 26. <ul><li>In general in the economy </li></ul><ul><li>In the geography where we operate </li></ul><ul><li>Regulations or new legislation? </li></ul><ul><li>Are the new consumer trends? (saving, luxury shopping) </li></ul><ul><li>Competitor Prices? </li></ul>Evaluate the Environment
- 27. End Module 3
- 28. Chapter 11 Module 4
- 29. Pricing Strategies <ul><li>Cost-based - “ markup ” actual costs by x% </li></ul><ul><li>Demand-based </li></ul><ul><ul><li>Target - work backwards to see if products can be produced for what people are willing to pay. </li></ul></ul><ul><ul><li>Yield Management - different prices for different customers. </li></ul></ul><ul><li>Competition-based </li></ul><ul><ul><li>Price Leadership - set the market price </li></ul></ul><ul><li>(Perceived) customer needs </li></ul><ul><li>Yield Management </li></ul><ul><li>New product </li></ul><ul><ul><li>Skimming - high price </li></ul></ul><ul><ul><li>Penetration - to encourage purchase </li></ul></ul><ul><ul><li>Trial </li></ul></ul>Choose a Strategy
- 30.
- 31. <ul><li>Pricing for multiple products </li></ul><ul><ul><li>Price bundling : selling two or more goods or services as a single package for one price </li></ul></ul><ul><ul><li>Captive pricing : pricing two products that work only when used together </li></ul></ul>Choose Tactics
- 32. The Psychology of Pricing Marketers must understand that price is an important cue for customers. <ul><li>Consumers </li></ul><ul><li>have internal reference prices </li></ul><ul><li>experience assimilation and contrast effects </li></ul><ul><li>are likely to make price-quality inferences </li></ul><ul><li>Marketers use consumer psychology to set pricing strategies: </li></ul><ul><li>Odd-even pricing </li></ul><ul><li>Price Lining </li></ul><ul><li>Prestige Pricing </li></ul>
- 33. End Chapter 11

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