MKT 340 Lecture Notes - Lecture 5: Premium Pricing, Marketing, Profit Margin
7 Feb 2020
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Chapter 14 - Pricing Concepts for Establishing Value
The 5 C’s of Pricing
● What is Price?
○ Overall sacrifice a consumer is willing to make to
acquire a specific product or service
■ Money that must be paid to the seller to acquire
the item
■ Other sacrifices
● Monetary: travel costs, taxes, shipping
costs
● Non-monetary: searching time, waiting
● Company Objectives
○ Each company has different goals → spill down to the
pricing strategy
Company objective
Examples of Pricing Strategy Implications
Profit-oriented
Institute a company wide policy that all products
must provide for at least an 18% profit margin to
reach a particular profit goal for the firm
Sales-oriented
Set prices very low to generate new sales and
take sales away from competitors, even if profits
suffer
Competitor-oriented
To discourage more competitors from entering
the market, set prices very low
Customer-oriented
Target a market segment of consumers who
highly value a particular product benefit and set
prices relatively high (referred to as premium
pricing)
○ Profit Orientation: can be implemented by focusing on target profit pricing,
maximizing profits, or target return pricing
■ Target profit pricing: when firms have a particular profit goal as their
overriding concern; uses price to stimulate a certain level of sales at a
certain profit per unit
■ Maximizing profits: relies primarily on economic theory. If firm can
accurately specify a mathematical model that captures all the factors
required to explain and predict sales and profits, it should be able to
identify the price at which its profits are maximized
■ Target return pricing: used 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
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○ Sales Orientation: used to set prices that are believed increasing sales will help
the firm more than will increasing profits
■ Some firms may be more concerned about their overall market share
than about dollar sales per se bc they believe that market share better
reflects their success relative to the market conditions than do sales alone
■ Premium pricing: A competitor-based 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 does not matter
■ The concept of value is not overly expressed in sales-oriented strategies
■ Sales Maximization
● Short-term objective to maximize sale
● May be used to sell of excess inventory
○ Competitor Orientation: when firms strategize according to the premise that
they should measure themselves primarily against their competition
■ Competitive parity: firm focuses on setting prices that are similar to
those of their major competitors
■ Status quo pricing: changes prices only to meet those of the
competition
■ Copying prices of competitors may provide value to provide
■ Setting prices according to the competitors’ pricing
■ Price signal
● Setting a price very close to competitors price?
○ Signals to consumers that the products are similar
● Setting the price much higher than a competitors price?
○ Greater features and better qualities in the product
○ Customer Orientation: when it sets pricing strategy based on how it can add
value to its products or services
■ Customers perceptions of value
● Value-based pricing
■ No demand above this price
● Customers
○ Firms need to understand consumers’ reactions to different prices
○ Customers want value (price is half of the value equation)
○ Demand Curves and Pricing
■ Demand curve: show how many units of a product or service
consumers will demand during a specific period of time at different
prices
● Understand customers reactions to different prices
■ Prestige products or services: products purchased for the
consumers status rather than their functionality
● A higher price may lead to more quantity sold - up to a certain
point
● Price demos how rare, exclusive and prestigious the product is
● Have upward sloping curves
○ Not all demand curves are downward sloping
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■ Price Elasticity of Demand: measures how changes in price affect
the quantity of the product demanded
● Price Elasticity of Demand = % change in quantity demanded/
% change in price
○ % change in quantity demanded = (D2-D1)/D1
○ % change in price = (P2 -P1)/P1
○ Find % changes and then find price elasticity of
demand
○ How to interpret:
■ E > 1 → Elastic
■ 0 <= E < 1 → Inelastic
■ E = 1 → Unitary
● Elastic: refers to a market for a product or service that is price
sensitive, that is, relatively small changes in price will generate
fairly large changes in the quantity demanded; when elasticity
less than -1
● Inelastic: refers to a market for a product or service that is price
insensitive, that is, relatively small changes in price will not
generate large changes in the quantity demanded; when
elasticity is greater than -1
● Consumers are generally more sensitive to price increases than to
price decreases
● Dynamic or Individualized Pricing: refers to the process of
charging different prices for goods or services based on the type
of customer, time of day, week, or even season
■ Factors Influencing Price Elasticity and Demand
● Income Effect
○ Income effect: refers to the change in the quantity of the
product demanded by consumers due to changes in their
incomes
○ Income increased = switch to higher priced alternatives
● Substitution Effect
○ Substitution effect: refers to consumers’ ability to substitute
other products for the focal brand
○ The greater the availability of substitute products - the
higher the price elasticity of demand for any given product
● Cross-Price Elasticity
○ Cross-price elasticity: is the percentage change in the
quantity of Product A demanded compared with the
percentage change in price in Product B.
