1. Marketers generally believe that price promotions damage profitability, but increased price promotions have not led to lower profits while high-profile attempts to discontinue price promotions have suffered.

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Higher discounts are associated with higher prices and margins

Phillip Morris 1987 1992

Packs Sold 10.8 B 10.7 B

Marlboro 6.7 B 6.2 B

Prem. Packs 10.5 B 8.6 B

Discount Packs .3 B 2.1 B

Marlboro Share 23.6% 24.5%

Indust. A & P $2.4 B $4.0 B

Oper. Profits after Mktg $2.7B ?

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$5.2 B

Price is not important to consumers or B2B buyers as mangers believe.◦ Studies show that consumers don’t know,

can’t remember prices paid (Dickson & Sawyer (1990), Dickson, Sawyer, Urbany (2000)

◦ The “New Luxury” goods are growing and now account for as much as 20% of expenditures.

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McDonald’s Wal-Mart/Aldi/

Migros Southwest/Ryan Air Dell Linux

Starbucks Tiffany’s Swissair/Lufthansa IBM Microsoft

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Many (most) studies show that higher advertising leads to greater price sensitivity, lower market (average) prices.

Highly advertised and marketed brands have higher prices relative to unadvertised brands

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Studies of manufacturer price elasticity and advertising generally show advertising is associated with lower price elasticity.

Studies of retail price elasticity generally show advertising (manufacturer and retailer) is associated with higher price elasticity.

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Example of Promotional “Spikes” used to estimate Price Elasticity

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Leader Follower Laggard

Retail Price $1.00 $0.90 $0.80

Retail Margin $0.10 $0.18 $0.24

Mfg Price $0.90 $0.72 $0.56

Mfg COGS $0.50 $0.50 $0.50

Mfg Profit $0.40 $0.22 $0.06

Price Leadership

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Mfg 1

Mfg 2

P.L.

Ret 1

Ret 2

Ret 3

Easy to ComparePrices, Margin

Pressure on RetailersHigh Price Elasticity

For Red Salesbetween retailers.

High Retail PowerLow Mfg Power

Low Price Elasticity for Mfg1 versus, High for Private Label

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90 91 92 93 94 950

0.1

0.2

0.3

0.4

0.5

Intel PC Makers

"Intel inside":Two Words PC Makers Hate!

Annual Operating Profit Margins

Brand Equity is often associated with “trust”◦ The capitalized value of the trust between the

company and the consumer.” CEO, J&J Marketers use “trust” established by

brand equity to have customers pay more.◦ Brands are “a tax.” CEO, Loblaw’s◦ it [is] hard to avoid the conclusion that

consumers are often presented with the opportunity to pay higher prices than they need to for a given quality and that many probably do so (p. 177). Ratchford, et al. (1996)

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Marketing and brand equity measures emphasize the ability to command a price premium in the absence of other differences.

At least some marketers and economists believe that advertising is pro-competitive and is increasingly permitted, even when costs are of great social concern (prescription drugs)

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Marketing creates/amplifies perceived product differentiation, reduces substitutability and price elasticity, allows prices to increase.

Higher prices increase unit profit margins, increasing optimal Marketing/Sales ratios

Establishment of brands increase willingness to invest in risky R&D to generate new, higher-quality products.

Intel announced yet another round of price cuts between 11% and 24% for its Celeron line of low-end PC chips. That means that Intel chips will now sell for as low as $63. In response, AMD announced price cuts late Monday on its PC chips that bring its lowest-priced chip to $62.

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