BUS 200 Lecture Notes - Lecture 11: Priceline.Com, Product Placement, Marketing Mix
8 Dec 2017
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Determining Prices
Pricing- determining what the customer pays and the seller receives in exchange for a product
Pricing to Meet Business Objectives
Pricing Objectives- goals that sellers hope to achieve in pricing products for sale
• Profit Maximizing Objectives
o Revenue = selling price x units sold
o Prices set to cover costs and achieve a target level of profit for the owners
o Want to sell the amount of units that will generate the highest profit
• Market Share (market penetration) Objectives
o Company’s percentage of the total industry sales for a specific type of product
o Prices of a new product are initially set low to get the interest of consumers even
though this generates a loss, but makes it available to the most amount of people
• Pricing for e-Business Objectives
o Sellers communicate directly with buyers so there is little need for warehousing and
retailers -> this reflects in the price of the item being lower
o Consumers are also able to directly compare similar products without the hassle of
driving around
Price Setting Tools
Price-Setting Tools- measuring the impact of price before deciding what to charge for a product
• Cost Oriented Pricing- pricing that considers the firm’s desire to make a profit and its need to
cover production costs
o Selling price = seller’s cost + profit
o Price of product includes rent, wages, utilities, displays, insurance
o Markup- amount added to an item’s purchase cost to sell it at a profit
▪ Markup % = (mark up)/(sales price) x 100
• A shirt that costs $8 but retails at $15 would have a markup of $7 and a
mark up % of 46.7
• Breakeven Analysis- for a particular selling price, assessment of the seller’s cost versus revenues
at various sales volumes
o Variable costs- change with the number of units of a product produced and sold
▪ Raw materials, sales commissions, shipping
o Fixed variable- regardless of how many units you sell, there is one set cost
▪ Rent, insurance, utilities,
o Breakeven- what is required to sell so that your costs and revenues generate no profit
(all costs are covered)
▪ Breakeven= (total fixed price)/(Price -variable costs)
• Zero Profitability
o Profit = (total revenue) – (Total fixed costs + total variable costs)
▪ Total revenue = units x selling price
▪ Total variable costs = units x variable costs
o The opposite of the breakeven but results in the same thing if the same numbers are
used
Pricing Strategies and Tactics
Pricing Existing Products
• Three options:
o Pricing above prevailing market prices for similar products to take advantage of the
common assumption that higher prices mean higher quality
o Pricing below market prices while offering a product of comparable quality to higher
priced competitors
o Pricing at or near market prices
Pricing New Products
• Price Skimming- setting an initial high price to cover development and introduction costs and
generate a large profit on every unit sold
o Only works if customers can be convinced the item is like no other on the market
• Penetration Pricing- setting an initial low price to establish a new product in the market
o Creates product interest and stimulates trial purchases
o Best for when product is expected to have competition immediately after entering
market
Fixed vs Dynamic Pricing for Online Business
• Fixed- prices remain static and do not change over time
• Dynamic- prices change due to circumstances
o eBay- sellers bid on an item. Flexibility between buyers and sellers to set a price.
Internet is used to instantly notify all buyers on price changes
o Priceline.com- buyers report what they would be willing to pay and sellers report back
to them if they find it acceptable
Pricing Tactics
• Price lining- setting a limited number of prices for certain categories of products
o Different price points attract different customers to similar items
• Psychological pricing- takes advantage of the fact consumers don’t always respond rationally to
a posted price
o Odd-even pricing- $14.99 looks like less than $15
o Discounts- price reduction offered as an incentive to purchase
Promoting Products and Services
Promotion- aspect of the marketing mix concerned with the most effective techniques for
communicating information about and selling a product
• Communicate uses, features, benefits of product
• Ultimate goal is to increase sales
Promotional Strategies
• Push strategy- a company aggressively pushes its product through wholesalers and retailers,
who then persuade customers to buy it
• Pull strategy- a company appeals directly to customers who demand the product from retailers,
which demand the product from wholesalers
Document Summary
Pricing- determining what the customer pays and the seller receives in exchange for a product. Fixed vs dynamic pricing for online business: fixed- prices remain static and do not change over time, dynamic- prices change due to circumstances, ebay- sellers bid on an item. Flexibility between buyers and sellers to set a price. Internet is used to instantly notify all buyers on price changes: priceline. com- buyers report what they would be willing to pay and sellers report back to them if they find it acceptable. Promotion- aspect of the marketing mix concerned with the most effective techniques for communicating information about and selling a product: communicate uses, features, benefits of product, ultimate goal is to increase sales. Advertising- pain, non-personal communication by which an identified sponsor informs an audience about a product: works to get customer to buy the product initially but customer"s experience with the product will determine if repeat purchases are made.
