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Pricing!!
Pricing in line with a Firm’s Objectives
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Price
Amount a buyer pays to a seller in exchange for products and services the economic sacrifice
Non-monetary price Barters, donations, and time
(Easier / Harder) to change than other elements in the marketing mix?
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Pricing Objectives
Market survival end of season sales charge for services (Long / Short) term objective
Sales / Market Share growth Market Share is ______________ penetration pricing productivity effects
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More Pricing Objectives
Profitability--optimal price a trade off between margins and number of sales to maximize profitability price skimming
ROI requirements:
Income before taxes
Total operating assets associated with the product (e.g., plant, equipment, inventory)
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Final Objectives
Competitive Effect price wars usually occur when
___________
Quality and Image prestige/premium pricing
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Discussion: How do managers make pricing decisions?
What did you find out???
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The Five C’s in Setting Prices
Customer
Costs
Competition
Government Controls
Channels of Distribution
Each price that the company charges will lead to different levels of demand
Traditional demand curve?
CONSUMER FACTORS --DEMAND
Q1 Q2
P2
P1
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IS the Demand Curve Always Downward Sloping?
Elasticity of Demand
Definition: How sensitive consumers are to changes in price
Elasticity =
Is elasticity always negative?
Q
P
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ELASTIC DEMAND
QQ QQ
PP PP
INELASTIC DEMAND
What would you do if you knew demand was elastic/inelastic?
Elasticity Cont’d
Determining Price Sensitivity
Price Sensitivity Measures from consumersOral-B’s Cross Action toothbrush has three types of
bristles that are set at different angles. It has a dense tip that cleans behind back teeth and an ergonomic rubberized handle.
Circle what is too cheapSquare what is too expensive
0.25 0.75 1.25 1.75 2.25 2.75 3.25 3.75 4.25 4.75 5.25 5.75 6.25 6.75 7.25 7.75 8.25
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Price Sensitivity Continued
0.25 0.75 1.25 1.75 2.25 2.75 3.25 3.75 4.25 4.75 5.25 5.75 6.25 6.75 7.25 7.75 8.25
Too cheap Too expensive
Cu
mu
lati
ve P
erc
en
t
100%
80%
60%
40%
20%
0%
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Influences on Elasticity
Substitute products
Income effect
Other Products (cross-elasticity)
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Customer Oriented Strategies
Demand-Backward Pricing
Perceived Value Pricing
Price Skimming
Price Penetration
Trial Pricing
Types of Costs:
Fixed
Variable
TOTAL COST
Cost Factors
BREAK-EVEN:
TR = TCP*Q = FC + (VC*Q)
Q = FCP - VC
COST AND PROFIT
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Break Even Analysis (Been there, done that!)
Fixed costsSales price - Variable Cost Per Unit
Fixed VariableSawsVarnishManagersWoodWarehouse Lease
WHY DO THIS?
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COST ORIENTED STRATEGIES
Target Return:P = AVC + TFC + r(INV) Q QAVC = average variable cost TFC = total fixed costQ = projected quantity soldr = targeted ROIINV = initial investment
PROBLEMS?
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Other Cost Strategies
Mark-Up on Cost (manufacturer)P = UTC + (UTC * MU%)
Mark-Up on Selling Price (retailer)P = cost
(1.00- MU%)
Price-Floor Pricing
PRODUCT DIFFERENTIATION
MARKET STRUCTURE Oligopoly – status quo Monopolistic – non-price competition
COMPETITIVE PRICING POLICIES
COMPETITION FACTORS
PRICE-LEADER
PRICE-CHALLENGER
PRICE-FOLLOWER
NICHE-MARKETER
Competition-Oriented Strategies
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Government Controls
Pricing law objectives:
ensure competition among companies within markets
protect consumer rights
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Important Pricing ActsSherman Act 1890
No price fixing
Federal Trade Commission Act 1914limits unfair and anti-competitive activities
Robison-Patman Act 1936 Limits price discrimination
Wheeler-Lea Act 1938No deceptive pricing
Consumer Goods Pricing Act 1975Limits wholesaler & manufacturer ability to set retail prices
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Discussion: What is Price Discrimination?
Definition:Selling the same product to different consumers at different prices
Is it legal?
Yes:
No:
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Other Legal Issues
Price gouging
Price comparisons with a “fake” price
Bait and Switch
Predatory Pricing
Price Fixing Horizontal Vertical
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INTERESTING ISSUES IN PRICING
PSYCHOLOGICAL PRICING
COMPARISON PRICING
DUMPING
BUNDLING
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Consumer’s and Pricing--A Test
Item Estimated Most you Actual High Price would pay Price Medium
or low?
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3. Psychological
Internal Reference PriceWhat you expect to pay
How is this formed? Past pricesCompetitions prices
Reservation PriceHighest price willing to pay
Perceived PriceConsumer’s reaction to a price– high/low; fair/unfair
COMPARE T0:
PROBLEMS:
Comparison Pricing
Pharmaceutical Firm Selling Brand Name Product
Sales 100,000 units @ &10/unitFixed Costs $500,000 for a capacity of 200,000
unitsVariable Costs $1
Assume you are entering the Generic Market and there is no cannibalization between the branded and generic market
What is the minimum profitable price you can charge?
Dumping
Movie studio sells to 2 cinema chains:Supreme Cinema
Fractured Flicks
We have two block-busters we are about to release:
MacbethNaked Gun XII
To be continued…..
Movies
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Cinema Chains’ Reservation Prices
Supreme Cinemas
$2,600
$1,200
Fractured Flicks
$1,000
$1,800
Macbeth
Naked Gun XII
Each cinema chain will only buy one copy of each film. How should your price the films in order to maximize revenue while at the same time not price discriminating.
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PRICE DISCOUNTING
TRADE FUNCTIONAL DISCOUNTQUANTITY DISCOUNTS
NONCUMULATIVE
CUMULATIVE
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TEMPORAL DISCOUNTING
10 Consumers willing to pay $5010 Consumers willing to pay $30Cost $20/dress to make
How should you price the dress?
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Things to consider when changing your price
Basic Price
Price mix Promotion mix
Components
Example
Objective
Long-term effect
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Price change concepts
Price Thresholds JND
Traps for price decreases low-quality--buyers question quality fragile market share trap--consumers
switch to any lower priced good shallow pockets trap--competitor can
maintain price cut longer than you