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Chapter 11

Marketing Chapter 11 Notes.docx

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Ryerson University
MKT 100
Laila Rohani

Marketing: MKT100 Chapter 11 Notes Ch. 11: Pricing Concepts and Strategies: Establishing Value The Five C’s of Pricing • Company Objectives, Customers, Costs, Competition, Channel Members Company Objectives • Profit Orientation is a company objective that can be implemented by focusing on target profit pricing, maximizing profits, or target return pricing • Target profit pricing is a pricing strategy implemented by firms when they 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 strategy is a mathematical model that captures all the factors required to explain and predict sales and profits, which should be able to identify the price at which profits are maximized • Target return pricing is a pricing in strategy implemented 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 • Sales Orientation is a company objective based on the belief that increased sales will help the firm more than will increasing profits • Competitive Orientation is a company objective based on the premise that the firm should measure itself primarily against its competition • Competitive parity is a firm’s strategy of setting prices that are similar to those of major competitors • Customer Orientation is a pricing orientation that explicitly invokes the concept of customer value and setting prices to match consumer expectation Customers • Understanding the consumer’s reactions to different prices • A demand curve shows how many units of a product or service consumers will demand during a specific period at different prices • Prestige products or services are those that consumers purchase for status rather than functionality • Price elasticity of demand measures how change in price affect the quantity of the product demanded. % change in QD / % change in Price o Elastic: price sensitive market, small price changes cause large changes in QD o Inelastic: price insensitive market, small price changes do not cause large changes in QD • Income effect refers to the change in quantity of a product demanded because of a change in income • Substitution effect refers to the consumers’ ability to substitute other products for the focal brand, thus increasing the price elasticity of demand for the focal brand • Cross-price elasticity is the percentage change in demand for Product A that occurs in response to a percentage change in price for Product B • Complementary products are products whose demand curves are positively related • Substitute products are products whose demand curves are negatively related • Variable costs are those costs which vary with production volume • Fixed costs are those costs that remain the same regardless of changes in production level • Breakeven Point is the point at which the number of units sold generates just enough revenue to equal the total costs; i.e. zero profits • Contribution per unit equals the price less the variable costs per unit Competition • A monopoly occurs when only one firm provides the product or service in a particular industry • Oligopolistic competition occurs when only a few firms dominate a market • Price wars occur when two or more forms compete primarily by lowering their prices • Monopolistic competition occurs when many firms sell closely related but not homogenous products; these products may be viewed as substitutes but are not perfect substitutes • Pure competition occurs when different companies sell commodity products that consumers perceive as substitutable; price usually is set according to the laws of supply and demand Channel Members • Channel members are manufacturers, wholesalers and retailers • Grey markets employ 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 Other Influences on Pricing The Internet • The shift among consumers to acquiring more and more products, services and information online has made them more price sensitive and opened new categories of products to those who could not access them previously • The internet also provides search engines and auctions that enables consumers to find the best prices for products Economic Factors • Two interrelated trends that have merged to impact pricing decisions are the increase in consumers’ disposable income and status consciousness • Cross shopping is the pattern of buying both premium and low-priced merchandise or patronizing both expensive, status oriented retailers and price oriented retailers • The economic environment at local, regional, national and global levels influences pricing Pricing Strategies • Cost-based pricing method determines the final price to charge by starting with the cost, without recognizing the role that consumers or competitors’ prices play in the marketplace • Competitor-based pricing method is an approach that attempts to reflect how the firm wants consumers to interpret its products relative to the competitors’ offerings • Premium pricing is 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 • Value-based pricing method focuses on the overall value of the product offering as perceived by consumers, who determine value by comparing the benefits they expect the product to deliver with the sacrifice they will need to make to acquire the product • Improvement value method represents an estimate of how much (or less) consumers are willing to pay for a product relative to other comparable products • Cost of ownership method is a value-based method for setting prices that determined the total cost of owning the product over its useful life New Product Pricing Price Skimming • Price skimming is a strategy of selling a new product or service at a high price that innovators and early adopters are willing to pay to obtain it; after the high price market segment becomes saturated and sale begin to slow down, the firm generally lowers the price to capture (or skim) the next price-sensitive segment • For price skimming to work, the product or service must be perceived as breaking new ground in some way, offering consumers new benefits currently unavailable in alternative products • Also, competitors cannot be able to enter the market easily; otherwise price competition will force prices to lower and undermine the whole strategy. • The drawbacks for price skimming include high production and unit costs and some dissatisfaction of customers who see a
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