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Chapter 11

Chapter 11 BU352.docx

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Dave Ashberry

BU352 Chapter 11 – Pricing Concepts and Strategies: Establishing Value Week 7 The Five Cs of Pricing -Successful pricing strategies are built through the five critical components: company objectives, customers, costs, competition, and channel members Company Objectives -Each firm embraces an objective that seems to fit with where management thinks the firm needs to go to be successful -Company objectives often can be expressed in slightly different forms that mean different things Profit Orientation -Profit orientation – a company objective that can be implemented by focusing on target profit pricing, maximizing profits, or target return pricing -Target profit pricing – 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 – 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 its profits are maximized -Target return pricing – a pricing 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 -Sales orientation – a company objective based on the belief that increasing sales will help the firm more than will increasing profits -Some firms may be more concerned about their overall market share than about dollar sales per se because they believe that market share better reflects their success relative to the market conditions than do sales alone -A firm may set low prices to discourage new firms from entering the market encourage current firms to leave the market, take market share away from competitions – all to gain overall market share -Adopting a market share objective does not always imply setting low prices Competitor Orientation -Competitor orientation – a company objective based on the belief that increasing sales will help the firm more than will increasing profits -Competitive parity – a firm’s strategy of setting prices that are similar to those of major competitors Customer Orientation -Customer orientation – pricing orientation that explicitly invokes the concept of customer value and setting prices to match consumer expectations -A firm can use a “no-haggle” price structure to make the purchase process simpler and easier for consumers, thereby lowering the overall price and ultimately increasing value Customers -Most important -Customers want value Demand Curves and Pricing -Demand curve- shows how many units of a product or service consumers will demand during a specific period at different prices BU352 Chapter 11 – Pricing Concepts and Strategies: Establishing Value Week 7 -Any static demand curve assumes that everything else remains unchanged -The horizontal axis measures the quantity demanded -Knowing the demand curve for a product or service enables a firm to examine different prices in terms of the resulting demand and relative to its overall objective -Not all products or services follow the downward-sloping demand curve for all levels of price -Prestige products or services – those that consumers purchase for status rather than functionality -The higher the price, the greater the status associated with it and the greater the exclusivity, because fewer people can afford to purchase it Price Elasticity of Demand -Consumers are generally less sensitive to price increases for necessary items, such as milk, because they have to purchase these items even if the price climbs -Marketers need to know how consumers will respond to a price increase (or decrease) for a specific product or brand so that can determine whether it makes sense for them to raise or lower prices -Price elasticity of demand – measures how changes in a price affect the quantity of the product demanded; specifically, the ratio of the percentage change in quantity demanded to the percentage change in price Price elasticity of demand = % change in quantity demanded % change in price -Elasticity – refers to a market for a product or service that is price sensitive; that is, relatively small changes in price -Elastic is when the price elasticity is less than -1 -Inelastic – refers to a market for a product or service that is price insensitive; that is, relatively small changes in price will not generate large changes in the quantity demanded -Inelastic is when price elasticity is greater than -1 -Consumers are generally more sensitive to price increases than to price decreases Factors Influencing Price Elasticity of Demand -Income effect- refers to the change in the quantity of a product demanded by consumers because of a change in their income -Substitution effect – refers to consumers’ ability to substitute other products for the focal brand, thus increasing the price elasticity of demand for the focal brand -Cross-price elasticity – the percentage change in demand for Product A that occurs in response to a percentage change in price of Product B -Complementary products – products whose demand curves are positively related, such that they rise or fall together; a percentage increase in demand for one results in a percentage increase in demand for the other -Substitute products – products for which changes in demand are negatively related – that is, a percentage increase in the quantity demanded for Product A results in a percentage decrease in the quantity demanded for Product B Variable Costs -Variable costs – those costs, primarily labour and materials, which vary with production volume Fixed Costs -Fixed costs – those costs than remain essentially at the same level, regardless of any changes in the volume of production Total Cost -Total cost- the sum of the variable and fixed costs BU352 Chapter 11 – Pricing Concepts and Strategies: Establishing Value Week 7 Break-Even Analysis and Decision Making -Break-even point- the point at which the number of units sold generates just enough revenue to equal the total costs; at this point, profits are zero -Contribution per unit- equals the price less the variable cot per unit; variable used to determine the break-even point in units Break-even point (units) = Fixed cost____ Contribution per unit -Although a break-even analysis cannot actually help managers set prices, it does help them assess their pricing strategies because it clarifies the conditions in which different prices may make a product or service profitable -Prices often get reduces as quantity increases because the costs decrease, so firms must perform several break-even analyses at different quantities Competition -Four levels of competition: monopoly, oligopolistic, monopolistic, and pure -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 war – occurs when two or more firms 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 – manufacturers, wholesalers, and retailers – can have different perspectives when it comes to pricing strategies -Unless channel members carefully communicate their pricing goals and select channel partners that agree with them, conflict will surely arise -Channels can be difficult to manage, and distribution outside normal channels does occur -Grey market- employs 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 -To discourage grey markets, some manufacturers have resorted to large disclaimers on their websites, packaging, and other communications to warn consumers that the manufacturer’s product warranty becomes null and void unless the item has been purchased from an authorized dealer Other Influences on Pricing The Internet -The shift among customers 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 -Consumers’ ability to buy electronics at highly discounted prices online has pushed bricks-and-mortar stores to attempt to focus customers’ attention on pre-purchase advise and expertise, consulting services, and after-sales service – and away from price -The Internet also provides search engines and online auction sites, such as eBay and Kijiji, that enables consumers to find the best prices for any product, new or used, which again increases their price BU352 Chapter 11 – Pricing Concepts and Strategies: Establishing Value Week 7 sensitivity and reduces the costs associated with finding lower-price alternatives Economic Factors -Some consumers appear willing to spend money for products that can convey status in some way -Another trend finds consumers attempting to stop cheap -Cross shopping - 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 pri
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