BU352 Chapter Notes - Chapter 11: Tiffany & Co., Pricing Strategies, Blu-Ray

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28 Jul 2016
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Chapter 11 - Pricing Concepts and Strategies: Establishing
Value
The importance of pricing
Marketers are responsible for setting price
Price = the overall sacrifice a consumer is willing to make to acquire a specific product or service
Usually money but can include the non-monetary such as the time needed to travel to the store
You must match the product/service with the customer's value perceptions
Don’t price it too high or too low
Customers want high value, not necessarily low price
Price is what generates revenue (must focus on this part of the marketing mix because if you mess it up,
even if the rest is perfect you will not get sales)
Price is not only a sacrifice but also an information cue - customers use price to judge the quality
The 5 Cs of Pricing:
Company objectives
Firms have different goals
Some examples of objectives are:
Profit oriented - focus on target profit pricing, maximizing profits, or target return pricing
Sales oriented - set prices low to maximize sales and take sales from competitors
You can also look at it from a different angle - i.e. Tiffany & Co. sets higher prices and focuses on dollar
sales. This maintains their image of prestige to generate sales
Another popular goal is to aim to have higher market share, so not necessarily having the lowest prices
to gain the most customers but you can set prices that give you the highest share of market when
compared to competitors
Competitor oriented - discourage competitors from entering market. Can also use market leadership
strategy or match prices to show similar value.
You measure yourself against the competition
Customer oriented
Aim to have the highest value in the eyes of your customers
Make the purchase process easy for consumers
Customers
Demand curves and pricing
Demand usually increases when price decreases but this isn’t the case for prestige products - where the
higher price leads to a higher quantity sold, up to a certain point
Price elasticity of demand
I.e. if price of milk rises there won’t be much change vs. if the price of steak rises many people will buy
cheaper cuts instead
Price elasticity of demand = % change in quantity demanded / % change in price
Factors influencing the price elasticity:
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Income effect
Substitution effect
Price elasticity
Cross-price elasticity - i.e. the price of blu-ray player drops, the demand for blu-ray discs increases
rapidly
Complementary products - demands rise and fall together
Substitute products - changes in demand are negatively related
Costs
Prices should not be based on costs → customers care about perceived value of the product and not the
firm’s costs to produce and sell the product
Variable costs - vary with production volume
Very complex for services
Fixed costs - remain at the same level regardless of production level
Total costs = VC + FC
Break-even analysis
Break-even point in units = fixed costs / contribution margin per unit
Competition
Four levels of competition:
Monopoly - one firm
Oligopoly - few firms
I.e. banking, retail gasoline industry
When there is a price war, that means firms are cutting their prices to gain market share but you don’t
necessarily have to match their price cuts because consumers value other things such as good service,
higher quality, and brand loyalty
Monopolistic competition - many firms selling differentiated products
Pure competition - many firms selling commodities for same price
Rather than engaging in a price war which erodes profits, you want to decommoditize your product.
I.e. all coffee used to just be coffee, but then it was decommoditized by being sold as “100% Colombian
Coffee” where people now know the difference
Channel members
Manufacturers, wholesalers, retailers
They might have different views on how to price things - i.e. the manufacturer wants to have a
prestigious product but the retailer just wants to sell a ton of them so they price it low
Other influences on pricing
The internet
Consumers are buying more and they are more price sensitive
Reduces the cost of finding lower-price alternatives
Showrooming - go to a physical store to touch the merchandise and then purchase it online at a lower
price
Economic factors
Two trends: increase in disposable income and status consciousness
It’s also popular to be saving money - more discount stores like Walmart and Giant Tiger are booming
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