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Chapter 11

Chapter 11 - Pricing Concepts & Strategies Establishing Value

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Department
Business
Course
BU352
Professor
Dave Ashberry
Semester
Fall

Description
Chapter 11: Pricing Concepts & Strategies: Establishing Value  Price – the overall sacrifice a consumer is willing to make – money, time, energy – to acquire a specific P/S  Consumers judge benef  its of product against sacrifices to obtain it  Key to successful pricing is matching the P/S with consumer’s value perceptions  A low price may trigger thoughts of low quality, poor performance, or other negative attributes  Consumers rank price as one of the most important factors in their purchase decisions The 5 Cs of Pricing  Successful pricing strategies are built through five critical components: Company Objectives  Each firm has different objectives & so has to choose a price that fits to be successful  Profit Orientation o Target Profit Pricing  when they have a particular profit goal as overriding concern; uses price to stimulate a certain level of sales at a certain profit per unit o Maximizing Profits Strategy  mathematical model to determine price at which profits are maximized o Target Return Pricing  more interested in rates at which profits are generated relative to investments  Sales Orientation o Belief that increasing sales will help the firm more than will increasing profits; taking or holding onto larger market share is the perspective  Competitor Orientation o Measure themselves mainly against their competition o Competitive Parity  setting prices that are similar to those of major competitors  Customer Orientation o Invokes concept of customer value & setting prices to match consumer expectations o No-haggle price structure to make purchase process easier and add value o High-priced, state-of-the-art products in anticipation of limited sales and makes a statement that the company is capable of producing high end products Customers  Understanding consumers’ reactions to different prices  Demand Curves & Pricing o Shows how many units of a P/S consumers will demand during period at specific prices o Usual demand curve illustrates that as price increases, demand decreases o Prestige P/S  consumers purchase for status rather than functionality  Higher price means more sold  Price Elasticity of Demand o Marketers determine how consumers respond to actual changes in price so they can know whether changing the price makes sense o Price elasticity of demand  measures how changes in price affect quantity demanded  Necessities = less sensitive to price  Substitutes = more sensitive to price o Elastic = Price sensitive = < -1 = relatively small changes in price generate fairly large changes in Q demanded o Inelastic = price insensitive = > -1 = relatively small changes in price will not generate large changes in Q demanded o Consumers more sensitive to price increases than to price decrease o Unless a straight line, price elasticity of demand changes at different points of the demand curve o Factors influencing P.E. of D.  Income Effect = change in Q of product demanded due to change in income  Substitution Effect = ability to sub other products for the focal brand; price elasticity increases for focal brand  Cross-Price Elasticity = % change in demand for PA that occurs in response to a % change in price of PB  Complimentary products – positive relationship  Substitute products – negative relationship Costs  Consumers use only the price they must pay & benefits they receive to judge value  Consumers don’t care how much costs the firm faces to produce P/S  Variable costs  primarily labour & materials that vary with production volume; complex in service industry  Fixed costs  remain essentially at the same level regardless of any changes in production volume  Total cost  sum of variable and fixed costs  Break-even Analysis & Decision Making o Break-even point  point where # of units sold generates enough revenue so that profits equal 0 o ( ) o Contribution per unit  price/unit – VC/unit o Has limitations:  Price used might represent an average price to account for variances  Prices often get reduced as quantity increases  Cannot indicate for sure how many products will sell at a given price Competition  Four levels of competition: monopoly, oligopolistic, monopolistic, and pure  Monopoly = only one firms provides the product or service in a particular industry o E.g. in the utility industry  Hydro One supplies most of Ontario  Oligopolistic = only a few firms dominate (e.g. banking, gasoline) o Price War  firms compete by lowering their prices (e.g. airline industry)  Monopolistic = many firms selling closely related (but not homogeneous) items o Most common form of competition o Substitutes but not perfect substitutes  Pure = different companies sell commodity products that consumers perceive are substitutable (e.g. wheat) o Price is set according to the laws of supply and demand Channel Members  Manufacturers, retailers, wholesalers have different perspectives on price strategies so it is important to choose channel members with the same position of moving products as you  Grey Market  employs irregular (not necessarily illegal) methods to sell goods at lower prices than intended by the manufacturer. o To discourage grey market distribution, some manufacturers have posted large disclaimers on their websites, packaging, and other communications to warn consumers that the manufacturer’s warranty becomes null and void unless the item has been purchased from an authorized dealer Other Influences on Pricing The Internet  People buy more online and this has made them more price sensitive and opened new categories of products  Stores now attempt to focus consumers’ attention on prepurchase advice, consulting, & after-sales help  Search engines allow consumers to find best prices quickly  Consumers know more about P/S, the firm, its competitors, etc  eBay allows consumers to bid for products and make deals with others  Recent trend affecting price includes the growth of online daily coupon promotions from companies such as Groupon or WagJag Economic Factors  Increase in consumers’ disposable income & status consciousness  High-priced items aimed at the elite are being bought by more & more consumers  Other consumers are still conscious about the way they spend their money  Cross-shopping  pattern of buying both premium & low-priced merchandise or patronizing both expensive, status-oriented & price-oriented retailers  Economic environment at local, regional, national, & global levels influences prices o By thinking globally, firms can offer most cost-efficient methods of providing P/S to customers Pricing Strategies  The choice of pricing strategy is specific to the P/S and target market Cost-Based Methods  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  Requires that all costs can be indentified and calculated on a per-unit basis  Prices are usually set on the basis of estimates of average costs Competitor-Based Methods  Competitor-based methods: Set prices to reflect way they want consumers to interpret their own prices relative to competitor’s offerings  Premium pricing: price product deliberately above price set for competing products to capture consumers who shop for the best or for who price doesn’t matter
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