MARK Chapter 14 Notes
MARK Chapter 14 Notes MARK 3001
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This 14 page Class Notes was uploaded by Kyla Brinkley on Wednesday October 28, 2015. The Class Notes belongs to MARK 3001 at University of Georgia taught by Kimberly Grantham in Summer 2015. Since its upload, it has received 50 views. For similar materials see Principles of Marketing in Marketing at University of Georgia.
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Date Created: 10/28/15
Kyla Brinkley MARK 3001 Notes Fall 2015 l Chapter 14 Pricing Concepts for Establishing Value a b Tn cert Knowing how consumers arrive at their perceptions of value is critical to developing successful pricing strategies Developing a good pricing strategy is huge challenge to firms c Good pricing strategy may not remain effective tomorrow d Price the overall sacrifice a consumer is willing to make money time energy to acquire a specific product or service i Includes money that must be paid and other sacrifices like vale of time or other monetary costs Price is the only element of the marketing mix that generates revenue instead of costs i Very important if price is wrong salesrevenue won t accrue Price is important factor in consumer decisions Price is most challenging of 4Ps to manage i Least understood Price is powerful indicator of quality The 5 C s of Pricing i Company Objectives 1 Different firms embrace different goals which affect pricing strategy 2 How does firm intend to grow a Profit orientation a company objective that can be implemented by focusing on target profit pricing maximizing profits or target return pricing i Target profit pricing a pricing strategy implemented by firms when they have a particular profit goal as their overriding concern uses price to stimulate a certain level of sales at a certain profit perun ii Maximizing profits a profit strategy that relies primarily on economic theory It a firm can accurately specify a mathematical model that captures all the factors required to explain amp predict sales amp profits it should be able to identify the price at which its profits are maximized 1 Difficult Target return pricing a pricing strategy implemented by firms less concerned with the absolute level of profits and more interested in the rate at which their profits are generated relative to their investments designed to produce a specific return on investment usually expressed as a percentage of sales b Sales Orientation a company objective based on the believe that increasing sales will help the firm more than will increasing profits Some firms may be more concerned about overall market share than dollar sales though these are often connected 1 Believe market share better reflects success relative to market conditions than sales alone Adopting a market share objective sometimes implies low prices but not usually 1 Premium brands that dominate the market a Nike Heinz crest Premium pricing a competitorbased pricing method by which the firm deliberately prices a product above the prices set for competing products to capture those consumers who always shop for the best or for whom price doesn t matter 1 if product is perceived as high quality price is seen to be fair c Competitor Orientation a company objective based on the premise that the firm should measure itself primarily against its competition i Competitive parity a firm s strategy of setting prices that are similar to those of major competitors ii Status quo pricing a competitor oriented strategy in which a firm changes prices only to meet those of competition Customer orientation a company objective based on the premise that the firm should measure itself primarily according to whether it meets its customer s needs i Firms may offer high priced state of the art products in full anticipation of limited sales 1 Designed to enhance company s reputationimage and increase value in minds of consumers After company has good grasp on overall objectives must implement pricing strategies that enable it to achieve objectives 3 Customers a 9 When firms have developed objectives turn to understanding consumer s reactions to different prices Customers want value Demand Curves and Pricing i Demand curve shows how many units of a product or service consumers will demand during a specific period at different prices 1 Straight or curved 2 Assume firm won t increase spending on advertising and the economy won t change 3 As price increases demand for product decreases 4 Knowing demand curve for a product lets firm examine different prices in terms of the resulting demand Prestige products or services those that consumers purchase for status rather than functionality 1 Higher pricegreater statusgreater exclusivity because less people can afford it 2 Higher price might lead to greater quantity sold but only up to a certain point d Price Elasticity of Demand measures how changes in a price affect the quantity of the product demanded specifically the ratio of percentage change in quantity demanded to the percentage change in price Responses vary depending on product Consumers are less sensitive to price increases for necessary items like milk because they need them However if price of a steak increases people will buy less because there are substitutes Elastic refers to a market for a product or service that is price sensitive relatively small changes in price will generate fairly large changes in the quantity demanded 1 Price elasticity is less than 1 2 Lowering prices will increase sales but raising prices will decrease sales Inelastic refers to a market for a product or service that is price insensitive relatively small changes in price will not generate large changes in the quantity demanded 1 Price elasticity is more than 1 2 Lowering prices or raising prices doesn t significantly affect sales vi Consumers are usually more sensitive to price increases than to price decreases 1 Easier to lose customers with price increase than gain new customers with price decrease e Factors Influencing Price Elasticity of Demand Income effect refers to the change in the quantity of a product demanded by consumers do to a change in their income 1 lfyou just got paid you re more likely to buy steak instead of hamburger or splurge on a five star hotel 2 lfyou don t have much money you re going to cut back Substitution effect refers to a consumer s ability to substitute other products for the focal brand thus increasing the price elasticity of demand for the focal brand 1 If Tropicana raised its prices many people would just buy Minute Maid instead 2 If you are brand loyal however you will stick with Tropicana because you are willing to pay a higher price because you think it has more value 3 Marketing is important to make customers brand loyal Crossprice elasticity the percentage change in demand for product A that occurs in response to a percentage change in price of product B 1 Depends whether products are complementary or substitutes 2 Complementary products products whose demand curves are positively related so they rise or fall together a percentage increase in demand for one results in a percentage increase in demand for the other a Ex Bluray discs and Bluray players b Pb ampj 3 Substitute products products for which changes in demand are negatively related a percentage increase in the quantity demanded for product A results in a percentage decrease in the quantity demanded for product B a Ex dvd and Bluray players b Coke and Pepsi 4 Costs a To make effective pricing decisions firms must understand their cost structures so they can determine the degree to which their products or services will be profitable at different prices b Prices shouldn t be based on costs Variable Costs those costs primarily labor amp materials that vary with production volume i Each unit of a product usually has the same cost so marketers express variable costs on a perunit basis ii More complex in service industry d Fixed Costs those costs that remain essentially at the same level regardless of any changes in the volume of production i Rent utilities insurance administrative salaries e Total Costs the sum of the variable and fixed costs 5 BreakEven Analysis and Decision Making a Breakeven analysis technique used to examine the relationships among cost price 9 revenue and profit over different levels of production and sales to determine the break even point b breakeven point the point at which the number of units sold generates just enough revenue to equal the total costs at this points profits are zero c profit represents the difference between the total cost and the total revenue and can indicate how much money the firm is making or losing at a single period of time i can t tell how many units firm must produce and sell before it stops losing money and breaks even this is what breakeven point does d The lowest point the total costs can ever reach is equal to the total fixed costs Beyond that point the total cost curve increases by the amount of variable costs for each additional unit 6 MarkUp and Target Return Pricing a In many situations manufacturer may want to achieve a standard markup b Ex 10 of cost c See formulas below 7 Competition a Monopoly one firm provides the product or service in a particular industry i Results in less price competition ii Controls industry iii Can be deemed illegal and broken up by gov b Oligopolistic competition occurs when only a few firms dominate a market i Sometimes reactions to prices in oligopoly can result in price war occurs when 2 or more firms compete primarily by lowering their prices ii Can result in predatory pricing a firm s practice of setting a very low price for one or more of its products with the intent to drive its competition out of business illegal under both the Sherman Antitrust Act and the Federal Trade Commission Act c Monopolistic competition occurs when there are many firms that sell closely related but not homogeneous products these products may be viewed as substitutes but aren t perfect substitutes i Products aren t differentiated ii As more firms enter the market products become more differentiated Pure competition occurs when different companies sell commodity products that consumers perceive as substitutable price usually is set according to the laws of supply amp demand i Large number of sellers ii Key is not always low prices decommoditize products 1 Ex Tyson s chicken marketed as better than regular chicken 2 Distinct for customers 8 Channel Members a Unless channel members manufacturers wholesalers retailers carefully communicate pricing goals and select channel partners that agree with them conflict will arise Gray market employs irregular but not necessarily illegal methods generally it legally circumvents authorized channels of distribution to sell goods at prices lower than those intended by the manufacturer i Can tarnish image of manufacturer ii Some manufacturers discourage this with disclaimers that show that product warranty etc are void unless product was purchased from authorized dealer Pricing Strategies 1 Everyday Low Pricing EDLP a strategy companies use to emphasize the continuity of their retail prices at a level somewhere between the regular nonsale price and the deepdiscount sale prices their competitors may offer a Reduces search costs adding value b Consumers spend less time comparing prices at different stores c Ex Walmart i For average purchase Walmart is cheaper d Use odd prices suggesting low prices but also can suggest low quality 2 HighLow Pricing a pricing strategy that relies on the promotion of sales during which prices are temporarily reduced to encourage purchases a attracts 2 market segments i those who aren t price sensitivewilling to pay high price ii those who are price sensitivewait for low sale price b creates excitement i get them while they last c Reference price the price against which buyers compare the actual selling price of the product and that facilitates their evaluation process i Labeled as regularoriginal price ii Used to compare to sale price and increase perception of value of the deal 3 New Product Pricing Strategies a Challenging b Approximate value to similar products established c Market Penetration Pricing i Market penetration strategy a growth strategy that employs the existing marketing mix and focuses the firm s efforts on existing customers 1 Incentive to purchase immediately 2 Ex common with security software 3 Used with a Experience curve effect refers to the drop in unit cost as the accumulated volume sold increases as sales continue to grow the costs continue to drop allowing even further reductions in price b Discourages competitors from entering market because their costs will be higher until they increase volume too 4 drawbacks a Firm must be able to satisfy rapid rise in demand b Low price doesn t signal high quality c Firms should avoid penetration strategy if some segments of market are willing to pay more for product because then they re leaving money on the table d Price Skimming a strategy of selling a new product or service at a high price that innovators and early adopters are willing to pay to obtain it after the highprice market segment becomes saturated and sales begin to slow down the firm generally lowers the price to capture skim the next most price sensitive segment i Common in tech markets 1 People will wait for video games for hours innovators 4 Legal and Ethical Aspects of Pricing a Prices fluctuate naturally amp respond to varying market conditions b Deceptive or Illegal Price Advertising i price ads should never deceive consumers to the point of causing harm ii if claims aren t true they are considered decep ve iii EU stricter on puffery than US iv Deceptive Reference Prices 1 If reference price is inflated or fake ad is deceptivecan cause harm Hard to tell if they are real or not Better Business Bureau says at least 50 of sales must have occurred at that price to be a regular price c Loss Leader Pricing loss leader pricing takes the tactic of leader pricing one step further by lowering the price below the store s cost i Ex buy1 get1 free 1 Doesn t make up enough revenue to cover cost d Bait and Switch a deceptive practice of luring customers into the store with a very low advertised price on an item bait only to aggressively pressure them into purchasing a higherpriced model switch by disparaging the lowpriced item comparing it unfavorably with the higherpriced model or professing an inadequate supply of the lowerpriced item i Laws are difficult to enforce because upselling is part of salespeople s jobs ii Hard to prove deception is intent of the seller 5 Predatory Pricing a Firm setting low price for products with intent to drive competition out of business pow b Illegal under Sherman Antitrust Act amp Federal Trade Commission Act i Constrains free trade ii Unfair competition iii Promotes oligopoly c hard to prove i Firm intended to drive out competition ii Prove firm charged prices lower than avg cost d Ex Google s dominance in search engine market 6 Price Discrimination the practice of selling the same product to different resellers wholesalers distributors or retailers or to the ultimate consumer at different prices some but not all forms of price discrimination are illegal a Quantity discounts must be available to all customers and not favor certain buyers over others b lllegal under Clayton Act and Robinson Patman Act 7 Price Fixing the practice of colluding with other firms to control prices a Horizontal price fixing occurs when competitors that produce amp sell competing products collude or work together to control prices effectively taking price out of the decision process for consumers i lllegal under Sherman Antitrust Act ii Reduces competition b Vertical price fixing occurs when parties at different levels of the same marketing channel ex manufacturers amp retailers collude to control the prices passed on to consumers i Manufacturers encourage retailers to sell merch at manufacturer s suggested retail price MSRP 1 Reduce retail price competition among retailers 2 Stimulate retailers to provide complimentary services 3 Support manufacturer s merch 4 Ability to enforce MSRP to be decided on case by case basis supreme court For Review review charts in textbook The 5 C s of Pricing 1 Competition 2 Costs 3 Company objectives 4 Customers 5 Channel members These all surround value Pricing Strategies 1 Profit oriented 2 Sales oriented 3 Competitor oriented 4 Customer oriented Equations Price elasticity of demand ochange in quantity demanded change in price Calculating price elasticity of demand for teeth whitening kit ochange in quantity demanded 1 000000 500000 1000000 50 ochange in price 10 15 10 50 So Price elasticity of demand 50 50 1 Breakeven analysis Total variable cost variable cost per unit X quantity Total Cost fixed cost total variable cost Total revenue price X quantity Breakeven point units fixed costs contributions per unit Profit contribution per unit X quantity fixed cost Profit price X quantity fixed cost variable cost X quantity Breakeven point units fixed costs target profit contributions per unIt MarkUp and Target Return Pricing Target return price variable cost fixed cost expected unit sales X 1 target return Target return is expressed as decimal