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- 1. Principles of Marketing MKT3010 Chapter 14 Pricing Concepts for Establishing Value Patricia Knowles, Ph.D. Associate Professor Clemson University 1
- 2. 2 Principles of Marketing MKT3010 2 Pricing Concepts for Establishing Value These are the learning objectives guiding the chapter and will be explored in more detail in the following slides. List the four pricing orientations. Explain the relationship between price and quantity sold. Explain price elasticity. Describe how to calculate a product’s break- even point. Indicate the four types of price competitive levels. LO1 LO2 LO3 LO4 LO5
- 3. 33 Price Price refers not just to money but also other costs such as time. Principles of Marketing MKT3010 Benefits Sacrifice
- 4. 44 The Role of Price in the Marketing Mix Principles of Marketing MKT3010 Price is the only marketing mix element that generates revenue Price is usually ranked as one of the most important factors in purchase decisions ChadBaker/RyanMcVay/GettyImages
- 5. 55 The 5 Cs of Pricing Principles of Marketing MKT3010 These are the Cs of pricing.
- 6. 66 1st C: Company Objectives Principles of Marketing MKT3010 Each firm has a specific orientation in the marketplace that dominates its pricing strategy. Profit- oriented firms do not use value as a consideration but rather focus on generating a set level of profit from each sale.
- 7. 77 2nd C: Customers Principles of Marketing MKT3010 The following slides address different parts of this graph; this slide serves as an introduction to the topic of demand curves.
- 8. 88 Demand Curves Principles of Marketing MKT3010 Name a prestige product. Why do they think people are willing to pay a higher price. For example, why will someone pay a higher price for a BMW than a Saturn. They will mention product quality but also branding issues including the esteem offered to the owner from the BMW. Not all are downward sloping Prestigious products or services have upward sloping curves
- 9. 99 Principles of Marketing MKT3010 Price Elasticity of Demand For pricing, elasticity is a crucial concept. Elastic (price sensitive) Inelastic (price insensitive) Consumers are less sensitive to price increases for necessities ©PhotoLink/Getty Images
- 10. 1010 Principles of Marketing MKT3010 Factors Influencing Price Elasticity of Demand Wal-Mart stresses good service in the holiday season, but as always, ends their ad with messaging related to their low price offerings and the importance of low price (live better). Income effect Substitution effect Cross- price elasticity
- 11. 1111 3rd C: Costs Principles of Marketing MKT3010 No discussion of price would be complete without a discussion of cost. The price must at least cover the cost of the item. However, as you may have learned in your finance courses, understanding costs is rarely easy. • Variable Costs • Vary with production volume • Fixed Costs • Unaffected by production volume • Total Costs • Sum of variable and fixed costs Michael Rosenfeld/Stone/Getty Images
- 12. 1212 Break Even Analysis and Decision Making Principles of Marketing MKT3010
- 13. 1313 Principles of Marketing MKT3010 Break Even Analysis Although profit, which represents the difference between the total cost and the total revenue (total revenue or sales = selling price of each unit sold number of units sold), can indicate how much money the firm is making or losing at a single period of time, it cannot tell managers how many units a firm must produce and sell before it stops losing money and at least breaks even. Total Variable Cost = Variable Cost per unit X Quantity Total Cost = Fixed Cost + Total Variable Cost Total Revenue = Price X Quantity Fixed Costs Contribution per unit Break-Even Point (units) =
- 14. 1414 4th C: Competition Principles of Marketing MKT3010 Less Price Competition More Price Competition Fewer Firms Many Firms Oligopoly A handful of firms control the market Ingram Publishing/SuperStock. Monopoly One firm controls the market ©Brand X Pictures/PunchStock. Monopolistic Comp. Many firms selling differentiated products at different prices Steve Cole/Getty Images. Pure Competition Many firms selling commodities for the same prices ©Corbis – All Rights Reserved.
- 15. 1515 5th C: Channel Members Principles of Marketing MKT3010 Have you ever bought books marked “Instructor Copy: Not for Resale” or “International Student Edition”? Is the bookstore engaging in unethical behavior? Whom does this gray market benefit? Whom does it hurt? The purchase of gray market textbooks hurt the publisher and authors. These books do not help recover the costs of all the ancillary packages that are provided to instructors. Courtesy Apple, Inc. • Manufacturers, wholesalers and retailers can have different perspectives on pricing strategies • Manufactures must protect against gray market transactions
- 16. 1616 Check Yourself Principles of Marketing MKT3010 1. What are the five Cs of pricing? 2. Identify the four types of company objectives. 3. What is the difference between elastic versus inelastic demand? 4. How does one calculate the break-even point in units?
- 17. 1717 Economic Factors Principles of Marketing MKT3010 Firms and consumers alike should constantly monitor the economic environment, because economic conditions have a direct impact on pricing. How many people cross-shop? Do you believe this practice has influenced the way some firms price their merchandise? It has made prestige products more expensive and more moderately priced merchandise even less expensive. Local economic conditions Increasing disposable income Cross- shopping Increasing status consciousness Increasing globalization
- 18. 1818 Check Yourself Principles of Marketing MKT3010 1. How have the Internet and economic factors affected the way people react to prices?
- 19. 1919 Glossary Principles of Marketing MKT3010 Break-even analysis enables managers to examine the relationships among cost, price, revenue, and profit over different levels of production and sales. Cross-price elasticity is the percentage change in the quantity of Product A demanded compared with the percentage change in price in Product B. Fixed costs are those costs that remain essentially at the same level, regardless of any changes in the volume of production. Income effect is the change in the quantity of a product demanded by consumers due to a change in their income. Maximizing profits strategy assumes that if a firm can accurately 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 at which its profits are maximized. Price is the overall sacrifice a consumer is willing to make to acquire a specific product or service.
- 20. 2020 Glossary Principles of Marketing MKT3010 Substitution effect refers to consumers’ ability to substitute other products for the focal brand. Target profit pricing is implemented by firms to meet a targeted profit objective. The firms use price to stimulate a certain level of sales at a certain profit per unit. Target return pricing occurs when firms employ pricing strategies designed to produce a specific return on their investment, usually expressed as a percentage of sales. Total cost is the sum of the variable and fixed costs. Variable costs are the costs that vary with production value.