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Chapter 11

CHAPTER 11.pdf

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Ryerson University
MKT 100
Asif Salam

CHAPTER 11: PRICING 5 C’s of Pricing Company Objectives PROFIT ORIENTATION  target profit pricing strategy by firms when have profit goal as overriding concern; uses price to stimulate a certain level of sales at a certain profit per unit  maximizing profits strategy mathematical model that captures all factors required to explain/predict sales and profits, should be able to identify the price at which its profits are maximized  target return pricing strategy by firms less concerned w/ absolute lvl of profits and more interested in rate at which profits are generated relative to their investments; designed to produce specific return on investment (expressed as % of sales) SALES ORIENTATION  belief that increasing sales will help the firm more than will increasing profits  e.g. new health club – set lower membership fee, accept less profit at first  e.g. tiffany & co. focus on dollar sales and maintain higher prices (sells fewer units at $$$ price)  concerned over ALL MARKET SHARE than dollar sales, reflects success market conditions than do sales alone  firms set low prices discourage new firms from entering mkt encourage current firms to leave mkt, take mkt share from competitors, gaining all mkt share COMPETITOR ORIENTATION  based on the premise that the firm should measure itself primarily against its competition  competitive parity strategy of setting prices that are similar to those of major competitors CUSTOMER ORIENTATION  pricing orientation that explicitly invokes the concept of customer value and setting prices to match consumer expectations  very high priced “state of the art” prod/serv full anticipation of limited sales  designed to enhance company reputation/image, increases value  Paradigm speakers as low as $320 per pair to high end $8500  “no haggle” price structure to make purchase process simpler/easier for consumers  lowering overall price which increasing value (car companies) Customers Understanding consumers reactions to different prices DEMAND CURVES & PRICING  demand curve shows # units of prod/serve consumers will demand during specific period at different prices  enables firm to examine diff prices in terms of resulting demand and relative to its overall objective  total $10,000,000 = ($10x1,000,000 units or $15x500,000 units) either $10 or $15  everything else remains unchanged  assumes firm will not increase expenditures on advertising and economy won’t change  straight downward sloping (demand increases as price decreases) PRICE ELASTICITY OF DEMAND = % change in quantity demanded % change in price  Measures how changes in price affect quantity of product demanded; ratio of % change in quantity demanded to the % change in price  Elastic – mkt for product is price sensitive, relatively small changes in price will generate large changes in quantity demanded  Inelastic – mkt for product that is price insensitive, small changes in price wont generate large changes in quantity demanded  income effect change in quantity of product demanded by consumers because of a change in income  as income increases, spending behavior changes  income drops, buy less or less expensive alternatives  shift demand from lower-priced to higher  substitution effect consumers ability to substitute other products for focal brand, increasing price elasticity of demand for focal brand  the greater availability of substitute prod, the higher the price elasticity of demand for any given product will be  if Skippy ↑ price, consumers will find lower-priced substitutes  cross-price elasticity % change in demand for Product A that occurs in response to a % change in price of Product B  consumer wants to buy printer for sale, but finds out the ink cartridge is more expensive  COMPLEMENTARY products demand curves are positively related, they rise/fall together; % increase in demand for one results in a % increase in demand for other  SUBSTITUTE products changes in demand are negatively related, % increase in quantity demanded for ProdA results in decrease in quantity demand for Prod B Costs  VARIABLE COSTS primarily labour and materials, which vary with production volume  FIXED COSTS remain essentially at the same level, regardless of any changes in volume of production  TOTAL COST = variable costs + fixed costs  BREAK-EVEN ANALYSIS & DECISION MAKING  Has limitations: 1) used for an average price, if service variable costs are different 2) prices often get reduced as quantity increases because cost decreases 3) cannot indicate for sure how many units will sell at given price  Total Variable Cost = Variable Cost/unit x Quantity  Total Cost = Fixed Cost + Total Variable Cost  Total Revenue (Profit) = Price x Quantity  Break Even Points (units) = __ Fixed Costs__________ Contribution/unit (equals price less variable cost per unit) (the point which # units sold generates just enough revenue to equal total costs; profits are 0 at this point) Competition (less price competition) (more price competition) MONOPOLY one firm controls the market OLIGOPOLY occurs when only a few firms dominate a market (utilities industry) – Hydro One in Ontario (banking industry, retail gasoline, commercial air travel) A monopoly that restricts competition by controlling Reactions to prices: Price war occurs when two (+) firms an industry can be deemed illegal and broken apart by compete primarily by lowering their prices the government MONOPOLISTIC COMPETITION many firms selling PURE COMPETITION large # firms selling commodities for the differentiated products at different prices (substitutesame prices, price set at laws of supply and demand (wrist watch industry) (grains, spices, gold, minerals) Most common, highly differentiated. Timex – prestige, Timex – durability, Swatch – style Channel Members Manufacturers, wholesalers, retailers have diff perspective on pricing strategies  Grey market employs irregular, but not illegal methods; legally circumvents authorized channels of distribution to sell goods at prices lower than those intended by the manufacturer  Manufacturer must avoid grey market transactions require retailers to sign agreement that demands certain activities  Could tarnish image of the manufacturer (fail to provide sufficient return policies) Other Influences on Pricing Internet: Economic Factors: - Increased price sensitivity among consumers - Increasing consumers disposable income - Opened new categories of prod to those who couldn’t - Increasing consumers status consciousness access them previously - Competition, disposable income, unemployment - Growth of online auctions (Ebay, Kijiji) - Cross-shopping buying premium and low priced - Online daily coupon promos (Groupon, WagJag) merchandise/patronizing both expensive, status orientated retailers and price-orientated retailers - Increasing globalization (local, regional, national) Pricing Strategies Cost-Based Methods Determines final price to charge by starting w/ COST, without recognizing the role that consumers/competitors prices play in mktplace  All costs are calculated on per unit basis  Assumes costs don’t vary for different levels of production  If they do, prices need to be raised/lowered according to production level  Prices usually set on basis of estimates of average costs Competitor-Based Methods Attempts to reflect how firm wants cosumers to interpret its products relative to the competitor’s offerings  set prices to signal info of how product compares w/ competitors (greater features, better quality)  PREMIUM PRICING firm deliberately prices a product above prices set for competing products to capture those consumers who always shop for the best/for who price does not matter Value-Based Methods Focuses on overall value of product offering as perceived by consumers, who determine value by comparing the benefits which they expect the product to deliver w/ the sacrifice they will need to make to acquire the product  IMPROVEMENT VALUE method represents an estimate of how much more/less consumers are willing to pay for product compared to other prod  research methods: survey  get customer to asses new product compared to another product/ provide estimate of how much better it is  COST OF OWNERSHIP method setting prices that determines total cost of owning the product over its useful life  will eventually cost less to own than a cheaper alternative  require a great deal of consumer research to be successful New Product Pricing Price Skimmering Selling new prod at a high price that innovators/early adopters are willing to pay to obtain it; after high-price mkt-segment is saturated, sales begin to slow down, firm lowers the price to capture(skim) the next most price sensitive segment  iPhone 4, luxury products stay high price  prestige image  product must offer consumers new benefits currently unavailable  competitors
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