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Chapter 14

MKT 702 Chapter 14 Notes.docx

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Ryerson University
MKT 702
John Peco

Chapter 14 MKT702 Notes Changing Pricing Environment Buyers can do: 1. Get instant price comparisons from thousands of vendors. The comparison shopper, a service- offered by Canada Post, allows Canadian consumers to compare prices of millions of products across hundreds of stores 2. Name there price and have it met. 3. Get products free Sellers can do: 1. Monitor customer behaviour and tailor offers to individuals 2. Give certain customers access to special prices. 3. Negotiate prices in online auctions and exchanges or even in person How Companies Price For an organization, effectively designing and implementing pricing strategies require a thorough understanding of consumer pricing psychology and a systematic approach to setting, adapting, and changing prices. Consumer Psychology and Pricing Consumers were “price takers” and accepted prices at “face value” or as given. Markets, however, recognize that consumers often actively process price information, interpreting it from the context of prior purchasing experience, formal communication ( advertising, sales calls, and brochures), informal communications ( friends, colleagues, or family members) point-of-purchase or online resources, and other factors Reference Pricing Surprisingly few can accurately recall specific prices. When examining products, however, they often employ reference prices comparing an observed price to an internal reference price they remember or an external frame of reference such as posted “regular retail price” When consumers evoke one or more of these frames of reference, their perceived price can vary from the stated price. Price-Quality Inferences Consumers use price as an indicator of quality. Image pricing is especially effective with-sensitive products such as perfumes, expensive cars, and designer clothing. Price and quality perceptions of cars interest. Higher-priced cars are perceived to possess high quality. Higher-quality cars are likewise perceived to be higher priced than they actually are. Chapter 14 MKT702 Notes Some brands adopt exclusivity and scarcity to signify uniqueness and justify premium pricing. Price Endings Pricing cues such as sale signs and prices that end in 9 are more influential when consumers price knowledge is poor, when they purchase the item infrequently or are new to the category, and when product designs vary over time, prices vary seasonally, or quality or sizes vary across stores Setting the Price A firm must set a price for the first time, when it develops a new product, when it introduces its regular product into a new distribution channel or geographical area, and when it enters bids of new contract work. The firm must decide where to position its product on quality and price. Step 1: Selecting the Price Objective Survival: Companies pursue survival as their major objective if they are plagued with overcapacity, intense competition, or changing consumer wants. As long as prices cover variable costs are some fixed costs, the company stays in business. Maximum Current Profit Companies estimate the demand and costs associated with alternative prices and choose the price that produces maximum current profit, cash flow, or rate of return on investment. This strategy assumes the firm knows its demand and cost functions. Maximum Market Share Market penetration pricing – Companies believe that a higher sales volume with lead to lower unit costs and higher long-run profit. They set the lowest price, assuming the market is price sensitive. The Conditions favour adopting a market-penetration pricing strategy 1) The market is highly price sensitive and a lower prices stimulates market growth 2) Production and distribution costs fall with a accumulated production experience 3) A low price discourages actual and potential competition Maximum Market Skimming Market Skimming Pricing , Prices start and slowly drop over time. Market skimming makes sense under the following conditions 1) A sufficient number of buyers have a high current demand 2) The unit costs of producing a small volume are high enough to cancel the advantage of charging what the traffic will bear 3) The high initial price does not attract more competitor to the market 4) The high price communicates the image of a superior product Chapter 14 MKT702 Notes Product Quality Leadership A company will aim to be the product-quality leader in the market. Brands strive to be affordable luxuries ‘products or services characterized by high levels of perceived quality, taste and status and with a price just high enough not to be out of consumers reach. Other Objectives Non-profit and pubic organizations may have other pricing objectives. A university aims for partial cost recovery, knowing that it must rely on private gifts and public grants to cover its remaining costs. Step 2: Determining Demand The normally inverse relationship between price and demand is captured in a demand curve, the higher the price, the lower the demand. For prestige goods, the demand curve sometimes slopes upward. One perfume company raises its price and sold more rather than less. Pricing Sensitivity The demand curve shows the market`s probably purchase quantity at alternative prices. It sums the reactions of many individuals with different price sensitivities. The first step in estimating demand is to understand what affects price sensitivity. 1) There are new or no substitutes or competitors 2) They do not readily notice the higher prices 3) They are slow to change their buying habits 4) They think the higher prices are justified 5) Price is only a small part of the total cost of obtaining, operating, and servicing the product over its lifetime Estimating Demand Curves 1. Surveys can explore how any units consumers would buy at different proposed prices 2. Price experiments can vary the prices of different products in a store or charge different prices for the same product in similar territories to see how the change affects sales. 3. Statistical analysis of past prices, quantities sold, and other factors can reveal their relationships. One large retail chain was selling a line of `good-better-best`power`. In measuring the price-demand relationship, the market researcher must control for various factors that will influence demand. Price Elasticity of Demand Chapter 14 MKT702 Notes Markets need to know how responsive, or elastic, demand is to a change in price. Consider the two demand curves . In demand curve a) a price increase from $10 to $15 lead to a relatively small decline in demand. The higher the elasticity, the greater the volume growth resulting from a 1 percent price reduction Step 3: Estimating Costs Demand sets a ceiling on the price the company can charge for its product. Costs set the floor. He company wants to charge a price that covers its costs of producing, distributing, and selling the product, including a fair return for its effort and risk. Types of Costs and Levels of Production Fixed costs: Also known as overhead, are costs that do not vary with production level or sales revenue. Variable costs: Vary directly with the level of production. Total Costs – Consist of the sum of the fixed and variable costs for any given level of production. Average Cost: The cost per unit at that level of production it equals total costs divided by production Accumulated Production Experience curve or learning curve –The decline in the average cost with accumulated production experiences Experience-Curve – Pricing nevertheless carries major risk. Aggressive pricing might give the product a cheap image. It assumes that competitors are weak followers Target- Costing Costs change with production scale and experience. They can also change as a result of a concentrated effort by designers, engineers, and purchasing agents to reduce them through Target Costing. The firm must examine each cost element – design, engineering, manufacturing sales – and bring down costs so that the final cost projections are in the target range Step 4: Analyzing Competitors` Costs, Prices, and Offers Within the range of possible prices determined by market demand and company costs, the firm must take competitors costs, prices and possible price reactions into account If it has a profit-maximization objective, it may react by increasing its advertising budget or improving product quality Chapter 14 MKT702 Notes Step 5: Selecting a Pricing Method Markup Pricing – The most elementary pricing method is adding standard markup to the products cost. Target-Return Pricing Target-return pricing – Firm determines the price that yields its target rate of return on investment. Perceived-Value
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