MKT 300 Lecture Notes - Lecture 7: Price Elasticity Of Demand, Reed Business Information, Warren Buffett
14 Jan 2017
School
Department
Course
Professor
Module #7 - November 5, 2016
Introduction
● Module is about applying business models and micro-economic/consumer analysis to
assess pricing strategies
● About Pricing Strategy
● Price elasticity of demand and optimal pricing which are key metrics for the development
and evaluation of profitable pricing strategies
Readings
● Marketing Metrics: Chapter Seven – Sections 7.3-7.4
● Starbucks Pricing Strategy: http://www.priceintelligently.com/blog/bid/184451/How-
Starbucks-Uses-Pricing-Strategy-for-Profit-Maximization
Module Business Models 7.1
● A business model is a way to explain how a company makes money (ie. what products
or services does it sell that generate rev.)
● It’s critical that companies have a business model that will generate profits
○ Dotcom companies (spending millions of dollars attracting price sensitive
customers by offering products or services well below cost) never materialize
● Sometimes, some business models are that you buy one thing, but you must constantly
buy a part of that one thing for as much as that one thing or even more (ie. Printers are
cheap, but their replacement inks are as much or even more)
● There are Video Game Business Models, Computer Software Business Models, and
Airline Business Models
○ Computer Software Business Models
■ An example of divergent business models as there is virtually no cost to
develop or market software updates
● (ie. Microsoft charges each user approximately $100 for the latest
operating system they release every two to three years. For this
software license fee customers get free customer support for
usually a year and free software updates for several years.
Microsoft's main costs to develop and market the software are
fixed R&D and the salaries of thousands of software developers.
Linux is a free operating system. A community of users develops
and improves the software free of charge. There is no free
customer support for users of Linux. Instead you purchase
customer support services or pay to have the software
customized.)
○ Airline Business Models
■ Usually the pricing strategy is low base fares which cover only basic
services. And then additional fees for baggage, seat selection, food, etc.
are charged to generate profits
find more resources at oneclass.com
find more resources at oneclass.com
PRICING STRATEGY
Pricing - Understanding and Capturing Customer Value
● Warren Buffett: “Price is what you pay. Value is what you get.”
● Price is simply the amount of money charged for a product or service
● Price is the sum of values that consumers exchange for the benefits of having and using
the product or the service
● One of the biggest challenges for marketers: “finding the right price” that customers are
willing to pay for the product value
General Pricing Approaches
There are 3 general pricing approaches that companies can employ (either as a single strategy
or as part of a more complex pricing strategy):
1. Cost-Based Pricing or “What margin should we make?”: In this approach to pricing,
company and product costs set the pricing floor or lowest price and customer
perceptions of value set the price ceiling or the highest price above which there is no
demand (also known as the maximum reservation price which we will be discussing as
part optimal pricing strategy).
2. Value-Based Pricing or “What does the customer perceive?”: This approach uses the
customer's perceptions of value, rather than the company's cost as the key to pricing.This
means that price is considered with the other elements of the marketing mix before the
creation of a marketing program. The key to a successful value-based pricing strategy is
offering the right combination of quality and service at the right price. This can involve
less expensive versions of established brand-name products such as the "value-menus"
offered by McDonald's or adopting value-added strategies through value-added services
to differentiate offers which support higher margins, such as enhanced virtual shopping
environments. Other types of value-based pricing include everyday low pricing as a retail
strategy to charge a constant, everyday low price with few or temporary price discounts.
As well, using high-low pricing as a retail strategy to charge higher everyday prices with
frequent promotions to temporarily lower prices on certain items to below the everyday
low pricing levels.
3. Competition-Based Pricing or “What do the competitors charge?: This approach means
that a company sets its price based on competitors' strategies, prices, costs, and market
offerings. This is based on the premise that customers base their judgments of a
product's value on the prices that competitors charge for similar products. The
company's price will depend on the customer's perception the value of its products or
services vis à vis its competitors. Greater perceived value would support a higher price.
Lesser perceived value would require a lower price or efforts by the company to re-
position the relative perceived value in the mind of the consumer.
find more resources at oneclass.com
find more resources at oneclass.com
Comparison of Cost-Based Pricing, Competition-Based Pricing and Value-Based Pricing
Profitable Pricing Best Practices
Research conducted by The Advantage Group, a Toronto-based global business research
consultancy, suggests that companies with successful pricing strategies follow five best
practices:
1. Develop a one percent pricing mindset: As a one percent difference in price may
have a significant impact on profit, it is vital that a company understand the importance
of maintaining prices and have a clear understanding of the margin impact of short-term
discounts.
2. Consistently deliver more value: Successful companies consistently deliver more
value to their customers, resulting in increased margins. Delivering value requires
consumer insights which are only gained if companies are close to their customers, as
satisfied customers are profitable customers.
3. Price strategically, not opportunistically: Companies should only pursue price-
conscious customers if they are the company's core target market. In general, when a
company caters to price-conscious non-core customers, it puts its core business at risk
by targeting customers who do not value the company's particular product or service
more than price.
4. Know the competition: Companies should price based on knowledge rather than fear
of competitive offerings.
5. Have a pricing process: Pricing should be based on a rigorous and pro-active continual
process, rather than being an ad-hoc reactive process.
Other considerations for pricing best practices include: balance cost-recovery with customer value;
ensure prices are revised to reflect market changes; consider the other three elements of the
marketing mix; and employ consideration of different products, market segments and purchase
occasions.
Factors Affecting Pricing Decisions
● Internal factors which affect pricing decisions include the company's marketing
objectives, marketing mix strategy, product considerations, its cost structure, operational
considerations and other organizational elements.
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Module is about applying business models and micro-economic/consumer analysis to assess pricing strategies. Price elasticity of demand and optimal pricing which are key metrics for the development and evaluation of profitable pricing strategies. Marketing metrics: chapter seven sections 7. 3-7. 4. A business model is a way to explain how a company makes money (ie. what products or services does it sell that generate rev. ) It"s critical that companies have a business model that will generate profits. Dotcom companies (spending millions of dollars attracting price sensitive customers by offering products or services well below cost) never materialize. There are video game business models, computer software business models, and. An example of divergent business models as there is virtually no cost to develop or market software updates (ie. microsoft charges each user approximately for the latest operating system they release every two to three years.
