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Chapter 11

MGT252 - Chapter 11 Notes.doc

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Matthew Osborne

Chapter 11 • 11.1 • Price • The amt. of money charged for a g+s, or the sum of the values that customers exchange for the benefits of having or using the g+s. • The only element in the marketing mix that produces revenue. • The others represent costs. • One of the most flexible marketing mix elements. • Direct impact on a firm’s bottom-line. • A small percentage improvement in price can generate a large percentage in profitability. • 11.2 • Customer perceptions of value • Customer perceptions of the product’s value set the ceiling for prices. • If customers perceive that the price is greater than the product’s value, they will not buy it. • Product costs set the floor for prices. • If the company prices the product below its costs, company profits will suffer. • Value-based pricing • Setting price based on buyers’ perceptions of value rather than on the seller’s cost. • P is considered along with the other marketing mix variables before the marketing program is set. Good value ≠ low price. • • A company using this pricing must find out what value buyers assign to different competitive offers. • Difficult to measure, as it’ll vary both for consumers and different situations. 2 types: good-value and value-added pricing • Good-ValuePricing Value-AddedPricing Offering just the right combination of quality Attaching value-added features and services and good service at a fair price. to differentiate a company’s offers and charging higher prices. Involves introducing less-expensive versions of established, brand-name products. Pricing power • E.g. Armani Collezioni vs. Armani Exchange • Power to escape price competition and justify higher prices and profit margins. Involves redesigning existing brands to offer • To increase pricing power, a firm must more quality for a given price or the same retain/build the value of its market offering. quality for less. • True for suppliers of commodity • E.g. Budget airlines products, which are characterized by little differentiation and intense price EDLP involves charging a constant, everyday competition. low price with few or no temporary price • E.g. Stag umbrellas discounts. High-low pricing involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items. • Company and product costs • Cost-based pricing • Setting prices based on the costs for producing, distributing, and selling the products plus a fair rate of return for effort and risk. • Companies with lower costs can set lower prices that result in smaller margins but greater sales and profits. Cost-BasedPricing 1. Design a good 2. Determine product 3. Set P based on 4. Convince buyers of product costs cost product’s value Value-BasedPricing 1. Assess customer 2. Set target P to 3. Determine costs 4. Design product to needs and value match customer that can be incurred deliver desired value perceptions perceived value at target P • Types of costs • FC (overhead) - costs that do not vary with production or sales level • VC - costs that vary directly with the level of production • Total costs - FC + VC for any given level of production Costs at different levels of production • • Costs as a function of production experience Experience/LearningCurve The drop in the ave./unit production cost that comes with accumulated production experience. Downward-sloping • Company’s unit production cost fall, and will fall faster if the company makes and sells more during a given time period. • Market has to stand ready to buy the higher output. • Company must also get a large market share early in the PLC. • Strategy: Low P --> sales will ↑ --> costs will ↓ through gaining more experience --> lower P Risks: • Aggressive pricing might give the product a cheap image. • Strategy assumes that competitors are weak and not willing to fight it out by meeting the company’s price cuts. • While the company is building volume under 1 tech., a competitor may find a lower-cost tech. that lets it start at prices lower than those of the market leader who still operates on the old experience curve. Cost-PlusPricing BEAnalysis&TargetProfitPricing Adding a standard markup to the cost of the Break-even/target profit pricing product Setting price to BE on the costs of making • and marketing a product, or setting price to Doesn’t make sense, since it ignores demand make a target profit and competitor prices. •Uses the concept of BE chart, which shows the TC and TR expected at different sales Popular volume levels. • Sellers are more certain about costs than •BE volume = FC / (P - VC) demand • Point where TR and TC lines cross. Simplify pricing, as they don’t need to • make frequent adjustments as demand changes. • When all firms in the industry use this pricing, prices tend to be similar and P- competition is min. • Many people feel that cost-plus pricing fairer to buyers and sellers. Markup P = Unit Cost / (1-Desired Return on Sales) • Other internal and external considerations affecting price decisions • Overall marketing strategy, objectives and mix • Pricing strategy is largely determined by decisions on market positioning. Target costing • • Pricing that starts with an ideal selling P, then targets costs that will ensure that the P is met. • Best strategy is not to charge the lowest price, but to differentiate the marketing offer to make it worth a higher price. • When product is positioned on non-P factors, then decisions about quality, promotion, and distribution will affect P. • If P is a crucial positioning factor, then P will strongly affect decisions made about the other marketing mix elements. • Organizational considerations • The market and demand • Pricing in different types of markets PureCompetition Monopolistic Oligopolistic PureMonopoly Competition Competition • Many buyers and • Many buyers and • Few sellers who are • One seller sellers trading in a sellers who trade highly sensitive to • Government, uniform commodity. over a range of each other’s pricing private No single buyer or prices rather than a and marketing regulated/non- • seller has much single market P. strategies. regulated monopoly. effect on the going • Sellers can • Alert to • Pricing handled market P. differentiate competitors’ differently in each Seller can’t charge their offers to strategies and case. • more than the going buyers. moves • Regulated: P. • Via free use of • Product can be Govt. permits • Buyers can branding, uniform or the company to obtain as much advertising and nonuniform. set rates that as they need at personal selling • Difficult to enter the will yield a “fair that P. • Sellers try to market return.” • Sellers won’t develop • Non-regulated: charge less than
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