MGMA01H3 Chapter Notes - Chapter 11: Marketing Mix, Ikea, Market Power

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Chapter 11
Price is the amount of money charged for a product or service. It is the sum of all the values that consumers
give up in order to gain the benefits of having or using a product or service.
Price is the only element in the marketing mix that produces revenue; all other elements represent costs
Factors that reduce price sensitivity: income, fewer perceived substitutes (Disney theme park, concerts,
patented tech), unique value/strong brand (LV, Bentley), storability of product
Cost-based pricing: involves setting prices based on the costs for producing, distributing, and selling the
product plus a fair rate of return for its effort and risk (product driven)
Markup price = unit cost/ (1-desired rate of return)
Value-based pricing uses the buyers’ perceptions of value, not the sellers cost, as the key to pricing.
Price is considered before the marketing program is set (customer driven)
Good-value pricing: offers the right combination of quality and good service to fair price. (McDonald’s
value menus, Armani Exchange)
Everyday low pricing (EDLP) involves charging a constant everyday low price with few or no temporary price
discounts (Wal-Mart)
High-low pricing involves charging higher prices on an everyday basis but running frequent promotions to
lower prices temporarily on selected items (Sears)
Value-added pricing attaches value-added features and services to differentiate offers, support higher prices,
and build pricing power (Mustang)
External factors:
Pure competition is a market with many buyers and sellers trading uniform commodities where no single
buyer or seller has much effect on market price
Monopolistic competition is a market with many buyers and seller who trade over a range of prices rather
than a single market price. A range of prices occurs because sellers can differentiate their offers to buyers
Oligopolistic competition is a market with few sellers who are highly sensitive to each other’s pricing and
marketing strategies. There are fewer sellers because it is difficult for sellers to enter the market
Pure monopoly is a market with only one seller. In a regulated monopoly, the government permits a price that
will yield a fair return. In a non-regulated monopoly, companies are free to set a market price.
Reacting to price competition
1. Focus your reactive price cut on only those customers who are likely to be attracted by the
competitor’s offer – flanking brand strategy (Intel)
2. Focus your reactive price cut on a particular geographic area or product line where the competitor has
the most to lose, relative to you, from cutting the price. (Kodak)
3. Raise the cost to the competitor of its discounting (Rogers vs. Bell; Price-matching)
Pricing strategies:
New product pricing strategies:
Market skimming pricing: a strategy with high initial prices to “skim” maximum revenues layer by
layer from the market. The company makes fewer but more profitable sales. (Sony HD TV)
Why does it work?
Product quality and image must support the price
Competitors should not be able to enter the market easily
There are distinguishable groups of buyers who would like to pay for the product at different price
levels
Market penetration pricing: sets a low initial price in order to penetrate the market quickly and
deeply to attract a large number of buyers quickly to gain market share (Dell, IKEA)
why does it work?
Price sensitive market
The firm has a significant cost advantage
The firm has a broader line of complementary products
Product mix pricing strategies
Optional product pricing takes into account optional or accessory products along with the main
product
(Automobile companies must decide which items to include in the base price and which to offer as
options)
Captive product pricing involves products that must be used along with the main product
In the case of service, captive pricing is called two-part pricing. The price of the service is broken into:
fixed fee & variable usage fee (HP printers, video game consoles)
Product bundle pricing combines several products at a reduced price (Newspaper)
Factors to consider when setting prices
Types of costs: fixed costs, variable costs, total costs
Costs as a function of production experience: experience or learning curve is when average cost falls
as production increases because fixed costs are spread over more units
Break-even analysis and target profit pricing
Break-even pricing is the price when total costs are equal to total revenue and there is no profit
Target profit pricing is the price at which the firm will break even or make the profit it is seeking

Document Summary

Price is the amount of money charged for a product or service. It is the sum of all the values that consumers give up in order to gain the benefits of having or using a product or service. Price is the only element in the marketing mix that produces revenue; all other elements represent costs. Factors that reduce price sensitivity: income, fewer perceived substitutes (disney theme park, concerts, patented tech), unique value/strong brand (lv, bentley), storability of product. Cost-based pricing: involves setting prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for its effort and risk (product driven) Markup price = unit cost/ (1-desired rate of return) Value-based pricing uses the buyers" perceptions of value, not the sellers cost, as the key to pricing. Price is considered before the marketing program is set (customer driven)