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MKT 201
Smita Kulkarni

CHAPTER 13: PRICING CONCEPTS FOR ESTABLISHING VALUE Price • Overall sacrifice a consumer is willing to make to acquire a specific product or service (benefits) The Role of Price in the Marketing Mix • Price is usually ranked as one of the most important factors in purchase decisions • Price is the only marketing mix element that generates revenue I. THE 5 C’S OF PRICING st 1 C: Company Objectives Profit-oriented: Focus on target profit pricing (use price to stimulate a certain level of sales at a certain profit per unit), maximizing profits (relies primarily on economic theory  Mathematical model), or target return pricing (produce a specific return on their investment) Sales-oriented: Increasing sales will help the firm more than increasing profits will. Premium Pricing means the firm deliberately prices a product above the prices set for competing products to capture those customers who always shop for the best or for whom price does not matter Competitor-oriented: Strategy based on the premise that they should measure themselves primarily against their competition. Competitive Parity means they set prices that are similar to those of their major competitors. Status quo pricing means changing prices only to meet those of the competition Customer-oriented: Explicitly invokes the concept of value 2nd C: Customers • Customers want value for money • Customers compare the performance of a product to its price to determine the overall value Demand Curves • Demand curve shows how many units of a product or service consumers will demand during a specific period of time at different prices • Prestigious expensive products are purchased by the consumers for status rather than their functionality. Greater the price, higher the status Price Elasticity of Demand • Measures how changes in a price affect the quantity of the product demanded • • Elastic (price sensitive, price elasticity < -1) vs Inelastic (price insensitive) • Consumers are less sensitive to price increases for necessities and more sensitive to price increases than price decreases Factors Influencing Price Elasticity of Demand • Income effect: Incomes drop Consumers turn to less expensive alternatives or purchase less • Substitution effect: The greater the availability of substitute products, the higher the price elasticity of demand for the product will be. Brand loyalty reduces the substitution effect • Cross-Price elasticity: The percentage change in the quantity of Product A demanded compared with the percentage change in price of Product B. Complementary Products are products whose demands are positively related (Blu-ray disc & Blu-ray player). Substitute Products are products whose demands are negatively related (Blu-ray player & DVD player) 3rd C: Costs • Prices should not be based on costs because consumers make purchase decisions based on their perceived value not the firm’s cost • Variable Costs: Vary with production volume • Fixed Costs: Unaffected by production volume • Total Cost: Sum of variable and fixed costs Break Even Analysis • Does not help setting prices but helps assessing pricing strategies  Clarifies the conditions in which different prices may make a product/service profitable • Disadvantages: Represents an average price that attempts to account for variances; Prices often get reduced as quantity increases because costs decrease; Cannot indicate how many units will sell at a given price Total Variable Cost = Variable Cost per unit X Quantity Total Cost = Fixed Cost + Total Variable Cost Total Revenue = Price X Quantity Fixed Costs Break-Even Point (units) = Contribution per unit 4th C: Competition Monopoly: 1 firm provides the product/service in a particular industry  Less price competition Oligopolistic: Only a few firms dominate  Firms typically change their prices in reaction to competition to avoid upsetting the stable competitive environment. Price War occurs when 2 or more firms compete primarily by lowering their prices. Predatory Pricing is when a firm sets a very low price for 1 or more of its products with the intent to drive its competition out of business Monopolistic: Many firms competing got customers in a given market but their products are differentiated Pure Competition: Large number of sellers of standardized products/commodities that consumers perceive as substitutable  Price is set according to the laws of supply and demand 5th C: Channel Members • Manufacturers, wholesalers and retailers can have different perspectives on pricing strategies • Manufactures must protect against gray market transactions (employs irregular but not necessarily illegal methods; generally, it legally circumvents authorized channels of distribution to sell goods at prices lower than those intended by the manufacturer) II. MACRO INFLUENCES ON PRICING The Internet • Opened new categories of products to those who previously have no access • Introduced search engines  Best prices for any products  Increase price sensitivity • Growth of online auctions Economic Factors • Increasing disposable income & status consciousness  Willing to spend more money for products that convey a status (Mercedes, Rolex watches,..) • Cross- shopping: The pattern of buying both premium and low-priced merchandise or patronizing both expensive, status-oriented retailers and price-oriented retailers • Local economic environment • Increasing globalization CHAPTER 14: STRATEGIC PRICING METHODS I. CONSIDERATIONS FOR SETTING PRICE STRATEGIES • Cost Based Pricing Method: Determine the final price to charge by starting with the cost  Do not recognize the role that consumers or competitors’ prices play in the marketplace • Competition Based Pricing Method: A firm sets the prices to reflect the way they want consumers to interpret the prices relative to the competitors’ offerings  May lose profits • Value Based Pricing Method: The firm sets prices with the focus on the overall value of the product offering as perceived by the consumer  Improvement Value Method: Estimates how much more the consumers are willing to pay for a product relative to other comparable products  Cost of Ownership Method: Determines the total cost of owning the product over its useful life II. PRICING STRATEGIES Everyday Low Pricing vs High/Low Pricing • Create value in different ways • EDLP saves search costs of finding lowest overall prices • Odd Prices: Mentally truncate the actual price, making the perceived price appear lower than it really is ($29.99)  May imply lower quality High/Low Pricing • Relies on promotion of sales, during which prices are temporarily reduced to encourage purchases  Attracts 2 distinct market segments: Price-sensitive and Non Price-sensitive • Provides the thrill of the chase for the lowest price • Reference Price: The price against which buyers compare the actual selling price of the product and that facilitates their evaluation process (Regular vs Sale price) The Price-Quality Relationship • EDLP and High Low Strategies are influenced by price quality relationships • Most inexperienced consumers use price as an indicator of quality • Price becomes crucial when consumers have little knowledge about certain products/brands • Price Lining: When marketers establish a price floor and a price ceiling for an entire line of similar products and then set a few other price points in between to represent distinct differences in quality III. NEW PRODUCT PRICING STRATEGIES Market Penetration • Firms set the initial price low for the introduction of the new product or service  Build sales, market share, and profits quickly & Discourage competitors from entering the market because of low profit margin • Experience Curve Effect: Unit cost drops significantly as the accumulated volume sold increases • Disadvantages: Firm must have the capacity to satisfy a rapid rise in demand; Low price does not signal high quality; Should not use if some segments of the market are willing to pay more for the products Market Skimming • It appeals to consumers who are willing to pay the premium price to have the innovation first • After the high-price market segment becomes saturated and sales begin to slow down, companies generally lower the price to capture (or skim) the next most price sensitive market segment  Prevents competitors from entering the market because of inability to copy the innovation or the high cost of entry • Disadvantages: Only works if the product or service is perceived as breaking new ground; High units cost often associated with producing small volumes of products; Ultimately, firms have to lower the price as demand decreases CHAPTER 15: SUPPLY CHAIN AND CHANNEL MANAGEMENT Supply Chain Management: Refers to a set of approaches and techniques firms employ to efficiently and effectively integrate their suppliers, manufacturers, warehouses, stores, and transportation intermediaries into a seamless operation in which merchandise is produced and distributed in the right quantities, to the right locations, and at the right time, as well as to minimize systemwide costs while satisfying the service levels their customers require Wholesalers: Firms that buy products from manufacturers and resell them to retailers, and retailers sell products directly to customers I. SUPPLY CHAIN, MARKETING CHANNELS, AND LOGISTICS ARE RELATED • Marketing Channel: The set of institutions that transfer the ownership of and move goods from the point of production to the point of consumption; it consists of all the institutions and marketing activities in the marketing process (Virtually same as supply chain) • Logistics Management: The integration of 2 or more activities for the purpose of planning, implementing, and controlling the efficient flow of raw materials, in-process inventory, and finished goods from the point of origin to the point of consumption. Element of supply chain management that concentrates on the movement and control of physical products (Supply Chain includes an awareness of the relationships among channels and the need to coordinate) • Similar goals but different solutions II. SUPPLY CHAINS ADD VALUE The numbers of transactions are eliminated, the supply chain becomes more efficient, which adds value for customers by making it more convenient and less expensive to purchase merchandise Supply Chain Management Streamlines Distribution Firms stockpile inventory at each level of the supply chain  Huge and wasteful expense  Minimal inventory (Zara) Supply Chain Management Affects Marketing Every marketing decision is affected by and has an effect on the supply chain. When products are designed and manufactured, how and when the critical components reach the factory must be coordinated with production Distribution Center: A facility for the receipt, storage, and redistribution of goods to company stores or customers, may
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