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MGCR 352 (26)
Chapter 13


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McGill University
Management Core
MGCR 352
Sameer Mathur

Part 3 -Chapter 13 Price Value: if you are used to paying $ 12.99 for a medium pizza from Pizza Pizza, wouldn’t a large pizza at the same price be more valuable? Many marketers often engage in the practice of value pricing— increasing product or service benefits while maintaining or decreasing price. Consumers will often make comparative value assessments. That is, the consumer will judge one product or service against other alternatives or substitutes. In doing so, a “ reference value” emerges, which involves comparing the prices and benefits of substitute items. New low- cost world : consumers may not always perceive lower prices as connoting poor value or poor quality. pricing decisions influence both total revenue and total cost, which makes pricing one of the most important decisions marketing executives face. Steps: 1. Identifying pricing constraints and objectives constraint: Demand for the Product Class, Product, and Brand The number of potential buyers for the product class Newness of the Product: Stage in the Product Life Cycle The newer a product and the earlier it is in its life cycle, the higher the price that can usually be charged. Single Product versus a Product Line When Sony introduced its CD player, not only was it unique and in the introductory stage of its product life cycle but also it was the only CD player Sony sold, and so the firm had great latitude in setting a price. Cost of Producing and Marketing the Product .In the long run, a firm’s price must cover all the costs of producing and marketing a product. If the price does not cover the cost, the firm will fail, and so in the long term, a firm’s costs set a floor under its price. Type of Competitive Markets The seller’s price is constrained by the type of market in which it competes. Economists generally delineate four types of competitive markets: pure monopoly, oligopoly, monopolistic competition, and pure competition. *The products can be undifferentiated ( aluminum) or differentiated ( mainframe computers) and informative advertising that avoids head- to-head price competition is used. Competitors’ Prices Finally, a firm must know or anticipate what specific price its present and potential competitors are charging now or will charge in the future. Objectives: Profit: Three different objectives relate to a firm’s profit, -managing for long- run profits( many Japanese firms) -maximizing current profit objective, (such as during this quarter or year, is common in many firms because the targets can be set and performance measured quickly. ) -target return objective involves a firm, such as Irving Oil or Mohawk, setting a goal ( such as 20 percent) for pretax ROI. *Distribution chain: profit shared through the chain. Sales :its objectives may be to increase sales revenue. --> lead to increases in market share and profit. Market Share : Companies often pursue a market share objective when industry sales are relatively flat or declining. Unit Volume:Using unit volume as an objective can be counterproductive if a volume objective is achieved, say, by drastic price cutting that drives down company profit-ability. Survival Social Responsibility A firm may forgo higher profit on sales and follow a pricing objective that recognizes its obligations to customers and society in general ( example: government agency). 2. Estimating demand and revenue 1. Consumer tastes. these depend on many factors, such as demographics, culture, and technology. Because consumer tastes can change quickly, up- to- date marketing research is essential. 2. Price and availability of other products. As the price of close substitute products falls ( the price of Time) and their availability increases, the demand for a product declines 3. Consumer income. In general, as real consumer income ( allowing for inflation) increases, demand for a product also increases. Price elasticity of demand. Total Revenue= Price x Q 3. Estimating cost, volume, and profit relationships Understanding the role and behaviour of costs is critical to all marketing decisions, particularly pricing decisions. Many firms go bankrupt because their costs get out of control, causing their total costs to exceed their total revenues over an extended period of time. Smart marketing managers make pricing decisions that balance both their revenues and costs. Three cost concepts are important in pricing decisions: total cost, fixed cost, and variable cost. Total cost :the sum of fixed costs and variable costs. Fixed cost is the firm’s expenses that are stable and do not change with the quantity of product that is produced and cost. ( salaries of executives and lease charges on a building) Variable cost is the sum of the expenses of the firm that vary directly with the quantity of products that is produced and sold. (direct labour and materials used in producing the product or sales commissions that are tied directly to the quantity sold.) The break- even point ( BEP) is the quantity at which total revenue and total costs are equal. Profit comes from any units sold beyond the BEP. 4. Selecting an approximate price level Demand oriented Skimming: • A firm introducing a new or innovative product can use skimming pricing, setting the highest initial price that customers who really desire the product are willing to pay. • These customers are not very price sensitive because they weigh the new product’s price, quality, and ability to satisfy their needs against the same characteristics of substitutes. • Skimming pricing is an effective strategy when ( 1) enough prospective custom-ers are willing to buy the product immediately at the high initial price to make these sales profitable, ( 2) the high initial price will not attract competitors, ( 3) lowering price has only a minor effect on increasing the sales volume and reducing the unit costs, and ( 4) customers interpret the high price as signifying high quality. Penetration Pricing Setting a low initial price on a new product to appeal immedi-ately to the mass marketThe conditions favouring penetration pricing are the reverse of those supporting skimming pricing: ( 1) many segments of the market are price s
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