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York University (12,350)
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MKTG 2030 (84)
Ben Kelly (18)

ch 9_

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York University
MKTG 2030
Ben Kelly

Chapter 9: Price the Product 9.1 “Yes, But What Does It Cost?” What is Price? - Payment may be in the form of money, goods, services, favors, votes, or anything else that has value to the other party - Sometimes monetary value of a product is called something other than ‘price’, sometimes to hide the idea that you’re being charged, ‘tuition’ or ‘dues’ or ‘professional fee’ - Consumer sites like UsedEverywhere and Kijiji also allow people to offer items for barter- no money changes hands, but there’s still an exchange of value - Price is what customers give up to buy and use a product, so other nonmonetary costs are important to both marketers and consumers or customers Psychological costs are the stress, anxiety or mental difficulty of buying and using a product; cognitive dissonance Operating costs are the costs involved in using a product Switching costs are the costs involved in moving from one brand to another Opportunity cost is the value of something that’s given up to obtain something else - Risk is another nonmonetary cost and physical, social, financial and strategic risks - To assess physical risk- we read labels to figure out if products are safe to use - To assess social risk- we consider whether the haircut we’re about to get will make use look terrible - To assess whether an online vendor is really doing to deliver what we paid for, or to use PayPal or a credit card to reduce our financial exposure to nonperformance (financial risk) - B2B more commonly considers whether an investment in a process, system, technology will allow us to achieve our objectives (strategic risk) The Importance of Pricing Decisions - Good pricing decisions are critical to firm’s success - If customers aren’t willing to pay the price asked for a firm’s product, the firm won’t make a profit and will have failed its shareholders - Marketers have long known that even during the best economic times, most consumers rank ‘reasonable prices’ as the most important consideration when making a purchase and when deciding where to shop - Price is even more important during recessions (when consumers have less $ to spend) – that’s why internet price comparison sites are increasingly popular and why many other internet sites provide a price comparison functionality - When all else is equal, getting a low price keeps costs down and helps make their firm’s product competitive (that’s why smaller businesses form buying groups using online services like Mega) PriceObjectives→ Pricing Policy/Strategies→ PricePoints∧Tactics→→ Implementation:Terms∧Conditions, LegalConsiderations Process of Price Planning: Step 1: Set Pricing Objectives - Profit, Sales, Market Share, Competitive Effect, Customers Satisfaction, Image enhancement Step 2: Estimate Demand - Shifts in Demand, Price elasticity of demand Step 3: Determine Costs - Variable costs, Fixed costs, Break-even analysis, marginal analysis, markups and margins Step 4: Examine the Pricing Environment - The Economy, the competition, government regulation, consumer trends, the international environment Step 5: Choose a Pricing Strategy - Based on cost, demand, the competition, customers’ needs, or use a new-product pricing Step 6: Develop Price Tactics - For individual products, multiple products, distribution-based tactics, discounting for channel members Step 1: Develop Pricing Objectives Profit Objectives Profit objectives are when you’re pricing products with a focus on a target level of profit growth or a desired net profit margin - A profit objective is important to firms that believe profit is what motivates shareholders and bankers to invest in a company - Profit objectives may focus on pricing for the firm’s entire portfolio of products b/c firms usually produce an entire product line and/or product mix - Marketers develop pricing strategies that try to maximize the profits of the entire portfolio rather than focusing on the costs of profitability of each individual product SMART objectives are specific, measurable, attainable, relevant, time-bounded - A target level of profit is also a common objective in not-for-profit orgs or social enterprises - Cannibalism is also something to worry about - Profits are critical when the product is a fad- short market life, making a profit objective essential in order to allow the firm to recover its investment Pricing Objectives Sales or Market share: Develop bundle-pricing offers in order to increase market share Competitive Effect: Alter pricing strategy during first quarter of the year to increase the sales during competitor’s introduction of a new product Profit sets prices to allow for an 8% profit margin on all goods sold Customer Satisfaction alter price levels to match customer expectations Image Enhancement alter pricing policies to reflect the increased emphasis on the product’s quality image Sales or Market share objectives Sales or Market share objective means pricing products to maximize sales or to attain a desired level of sales or market share - Lowering prices is not always necessary to increase market share - If a company’s product has a competitive advantage, keeping the price at the same level as other firms may satisfy sales objectives - ‘Price wars’ can have a negative effect when consumers switch from one product to another simply b/c the price changes Competitive Effect Objectives - Design the pricing plan to dilute the competition’s marketing efforts - Firm may deliberately try to pre-empt or reduce the impact of rival’s price changes Customer Satisfaction Objectives - Quality- focused firms believe that profits result from making customer satisfaction the primary objective - Travelocity: Focusing solely on short-term profits will lead to losing sight of the objective to retain customers in the long run Image Enhancement Objectives - Price to make inferences about the quality of a product - Price is often an important means of communicating not only quality but also image to prospective customers Prestige Products (or luxury products) are products that have a high price and that appeal to status-conscious consumers - Image objectives don’t have to be upscale- I.e. East Side Mario’s has refocused on families, offering low prices, value and fun Flexibility of Price Objectives - It’s often necessary to develop pricing objectives (and strategies) tailored to different geographic areas and time periods; varying levels of competition in different parts of the country, so it’s necessary to lower prices in the areas with the most competition; some regions, greater sales potential, wise to develop pricing strategies aimed at obtaining a larger market share in those areas - Market conditionings can change during the year, requiring price adjustment for seasonal or other reasons 9.2 Costs, Demand, Revenue, and the Pricing Environment Step 2: Estimate Demand and Value - Need to know what range consumers or customers consider reasonable given the nature of the offer, the benefits received, the nonmonetary costs associated with buying and using the product, and the nature and positioning of competitive offers - Demand for the product at different price levels - Demand refers to customers’ desire for a product: how much they’re willing to buy as the price of the product goes up or down - Knowing what volume of sales might be expected at different prices levels helps marketers decide what prices is most appropriate Demand Curve is a plot of the quantity of a product that customers will buy in a market during a period of time at various prices if all other factors remain the same - Vertical axis for the demand curve represents the different prices that a firm might charge for a product (P) - Horizontal axis shows the number of units or quantity (Q) of the product demanded - The demand curve for most goods slopes downwards and to the right- as the price goes up the number of units that customers are willing to buy goes down (the law of demand) - Exceptions to this relationships occurs for prestige products – wherein people desire the product more if it costs more - For prestige products, a price hike might actually result in an increase in the quantity that consumers demand since they see it as more valuable and therefore more exclusive- as such the demand curve starts off upward sloping but if the firm increases the price too much the product will become unaffordable for all but a few buyers and demand will decrease Shifts in Demand - We’ve assumed that all factors besides price remain the same- what if they don’t? There’s a shift of the demand curve (see picture to the right) Estimate demand - It’s important for marketers to understand and accurately estimate demand - Once the marketer estimates total demand, they predict what the company’s market share will likely be - The company’s estimated demand is then it’s share of the whole (estimated pie) - Of course, such projections need to take into account other factors that might affect demand like new competitors entering the market, the state of the economy, and changing consumer tastes Price Elasticity of Demand - Marketers need to know how their customers are likely to react to a change- whether a change in price will have a large or small impact on demand Price Elasticity of Demand is a measure of the sensitivity of customers to changes in prices; percentage change in unit sales that results from a percentage change in price Elasticity indicates that changes in price usually cause demand to stretch or retract like a rubber band Percentagechange∈quantitydemanded PriceElasticityof Demand= Percentagechange∈price Elastic demand is demand in which changes in price have large effect on the amount demanded - Demand is elastic, changes in price and in total revenues (total sales) work in opposite directions- if the price increases, revenue decreases; with elastic demand, the demand curve is more horizontal and with inelastic demand, the curve is more vertical - Generally, demand for necessities, like food and water, is inelastic- if the price increases a lot you aren’t going to buy less/ give up hot water - Elasticity of demand for a product often differs for different price levels and with different percentages of change - Companies can determine the actual price elasticity only after they’ve tested pricing an item and calculated the resulting demand - To estimate what demand is likely to be at different prices for new or existing products, marketers often do research- could conduct a study in which consumers tell marketers how much of a product they would be willing to buy at different prices – could also conduct field studies in which they vary the price of a product in different stores and measure how much is actually purchased at the different price levels - Consider the availability of substitute g/s – if a product has a close substitute, demand will be elastic; marketers of products with close subs are less likely to compete on price, b/c they recognizers of products with close subs are less likely to compete on price, b/c they recognize that doing so could result in less profit as consumers switch from one brand to another Cross-elasticity of demand is when changes in the price of one product affect the demand for another item - When products are substitutes for each other, an increase in the price of one will increase the demand for the other - When products are complements- that is, when one product is essential to the use of a second- an increase in the price of one decreases the demand for the second - Consumer insights are critical to understanding demands Step 3: Determine Costs - Estimating demand helps marketers determine possible prices to charge for a product - It’s also important to make sure the product’s price covers the costs - Before determining price, you must understand the relationship of cost, demand and revenue for a product Variable and Fixed Costs Variable costs are the costs of production (raw and processed materials, parts, and labour) that are tied to vary, depending on the number of units produced - Don’t always go down with higher levels of production Fixed costs are the costs that don’t vary with the number of units produced Average fixed cost is the fixed cost per unit – the total fixed costs divided by the number of units produced; it will decrease as the number of units increases Total costs the total of the fixed costs and the variable costs for a set number of units produced Breakeven analysis Break-even analysis is a method for determining the number of units that a firm must produce and sell at a given price to cover all its cost Break-even point is the point at which the total revenue and total costs are equal and beyond which the company makes a profit; below that point, the firm will suffer a loss Contribution per unit (or the difference between the price the firm charges for a product (the revenue per unit) and the variable costs Total contribution perunit Breakeven point(¿units)=¿costs ¿costs¿ ¿ total ¿ Breakeven point (¿dollars)=¿costs variablecost perunit 1− price Profit=quantity abovebreakeven point∗contributionmargin - A profit goal is the dollar profit figure a firm wants to earn Total contributionperunit ¿ Breakeven point (¿units)withtarget profitincluded=¿costs+target profit ¿costs¿ ¿ - Sometimes we express the target return or profit goal as a percentage of sales Contribution perunitwithtarget profit included=selling price−(variablecosts+target profit) Marginal Analysis Marginal Analysis is a method that uses cost and demand to identify the price that will maximize profits Marginal cost is the increase in total costs from producing one additional unit of a product Marginal revenue is the increase in total income or revenue that results from selling one additional unit of a product - Average revenues is also the demand curve and thus reps the amount that customers will buy at different prices- people buy more only if price (and thus revenue) decrease - Both average revenue and marginal revenue decrease with each additional unit sold - After the first unit, the cost of producing each additional unit (marginal cost) and the average cost at first decrease - Eventually, however both marginal costs and average costs begin to increase- both average fixed costs and average variable costs may increase in the long term - Profit is maximized at the point at which MC=MB - Although in theory the procedure is straightforward, in the real world things seldom are - Production costs may vary unexpectedly because of shortages, inclement weather, unexpected equipment repairs and so on - Revenues may also unexpectedly move up and down b/c of the economy, what the competition is doing, or a host of other reasons - Predicting demand, an important factor in marginal analysis, is never an exact science Markups and Margins: Pricing through the Channel Markup is an amount added to the cost of a product to create the price at which a channel member will sell the product Gross margin is the markup amount added to the cost of a product to cover the fixed costs of the retailer or wholesaler and leave an amount for a profit Retailer margin is the margin added to the cost of a product by a retailer Wholesaler margin is the amount added to the cost of a product by the wholesaler List price or manufacturers suggested retail price (MSRP) is the price the end user is expected to pay as determined by the manufacturer; also referred to as the suggested retail price Step 4: Examine the Pricing Environment - Marketers set a price that not only covers costs but also provides a competitive advantage – a price that meets the needs of customers better than the competition The Economy - Inflation may give marketers causes to either increase or decrease prices - Inflation gets customers accustomed to price increases; customers might remain insensitive to price increases, even when inflation goes away; allowing marketers to make real price increases, not just those that adjust for the inflation - During periods of inflation, consumers might worry whether they’ll have enough money for basic purchases so they might cut back spending; Then, in periods of recession, inflation may cause marketers to lower prices and temporarily sacrifice profits to maintain sales The Competition - Marketers try to anticipate how competition will respond to their pricing actions since consumers’ expectations of what constitutes a fair price largely depends on what the competition charges - Most industries consist of a number of firms - Industry structure will influence pricing decisions - Industries can belong to one of 3 industry structures: 1. Oligopoly- in which the market has fewer sellers and many buyers- more likely to adopt a status quo pricing objective in which the pricing of all competitors is similar (avoiding price competition will allow all players to remain profitable) 2. Monopolistic Competition- like the restaurant industry- in which there are lots of sellers each offering a slightly different product- it is more possible for firms to differentiate products and to focus on non-price competition; each firm prices its product on the basis of its cost without too much concern for marching the exact price of competitors’ products; people don’t tend to comparison shop 3. Pure Competition- orgs like wheat farmers- little opportunity to raise or lower prices; supply and demand directly influence the price of the good; bad weather decreases the supply and prices go up - Elements of the pricing environment are interdependent - During a recession, firms might just lower their prices, sacrifice profits to drive sales; others need to decide whether to keep their prices or lower them; key to balance the two- maintain customer loyalty and the corresponding sales while ensuring an adequate level of profits Government Regulation - Lots of regulations increase the costs of production- like regulations for health care, environmental protection, occupational safety, highway safety, etc. - Other regulations increase the costs of developing and producing foods and pharmaceutical products (imposed by Health Canada and Canadian Food Inspection Agency) - Some regulations directly address prices- electricity and natural gas prices are regulated in Canada; legislation to regulate the Canadian credit card and debit card industry- positioned as a self-regulating code of conduct, unless there is nonconformance, the legislation promotes fair business practices and ensures that merchants and consumers understands the costs and benefits associated with credit and debit cards Consumer Behavior and Trends - Consumers often base purchase decisions on their internal reference price, or what they perceive to be the customary or fair price - If the price is above their expectations, they’ll perceive it as a ‘rip-off’ - If it’s below their expectations, consumers may think the product quality is unsatisfactory - Many older shoppers have outdated internal reference prices - A retailer might display product A next to product B (a higher-priced version of the same or a different brand) expecting one of two results: 1. If the characteristics are fairly close- it’s likely the customer will feel the product quality is similar (assimilation effect) and choose the lower priced item 2. If the prices are far apart (contrast effect) will result in the consumer perceiving there to be a huge quality difference and splurge - Consumers also make price-quality inferences about a product when they use price as a cue or indicator for quality- if the consumer doesn’t have the ability to judge the quality of a product (through examination or past experience) they’ll often assume the higher priced item is automatically better quality - In many cases this is true - Experiences lead rational decision makers to associate price with quality when quality can’t otherwise be determined (esp. when they have little prior experience in evaluating the item) - Consumer trends also can strongly influence prices- culture and demographics determine how consumers think and behave so these factors have a large impact on marketing decisions - Another important trend is that even well-off people no longer consider it shameful to bargain hunt; luxury customers are looking for prestigious brands at low prices, though they’re still willing to splurge for some high-ticket items- this new interest in hunting for sales is called ‘strategic shopping’ The International Environment - Some products (i.e. Jet airplanes) standardize because (1) because there are only two groups that are able to pay for them (2) companies building these products don’t have much (if any) leeway in cutting their costs w/o sacrificing safety - For other products (including most consumer goods) unique environmental factors in different countries mean marketers must adapt their pricing strategies; sometimes marketers offer their brands in different sized packages or use less expensive ingredients in their products to be able to offer products at the same price - Competitive environment also contributes to different pricing strategies- i.e. in China there are a bunch of established manufacturers who’ve been successful for decades by offering prices at affordable prices so new entrants must price their products more or less in line with these companies - Governmental regulation can dictate what the prices of products (i.e. pharmaceuticals) will be- the firm’s only choices are to use cheaper ingredients to produce the product or to not make their products available there
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