Transcript Price

Marketing: Real People, Real Decisions
Pricing the Product
Chapter 12
Lecture Slides
Solomon, Stuart,
Carson, & Smith
Your name here
Course title/number
Date
Marketing: Real People, Real Decisions
Chapter Learning Objectives
When you have completed your study of this chapter,
you should be able to:
• Explain the importance of pricing and
how prices can take both monetary and
non-monetary forms.
• Understand the pricing objectives that
marketers typically have in planning
pricing strategies.
• Explain how customer demand influences
pricing decisions.
• Describe how marketers use costs,
demands, and revenue to make pricing
decisions.
• Understand some of the environmental
factors that affect pricing strategies.
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Marketing: Real People, Real Decisions
Introduction to the Topic
• This is the first of two chapters on the topic of price, this chapter
covers some of the theory behind the topic, while the second covers
pricing strategy.
• Price is a difficult issue for marketers
because so much of what influences it is not
within their direct control.
• In the long run, it is the customer who
decides what a product is “worth” by their
willingness to purchase it. This is known as
fair market value and it determines the
most a company can charge.
• A company’s cost structure determines the
least that it can charge.
• These two ends provide the range in which
a company has to choose its price.
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Marketing: Real People, Real Decisions
What is Price?
• Price: the value that customers give up, or exchange, to obtain a
desired product or service.
• Price can also go by many different
names, such as: tuition, professional
fees, annual or membership dues, rent or
lease, service charge, or even member’s
contribution.
• Not all transactions require money.
• Bartering: the practice of exchanging
a good or service for another good or
service of like value.
• Very common between trades people but
the government frowns upon it due to its
tax avoidance.
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Marketing: Real People, Real Decisions
Non-Monetary/Economic Costs
• Marketers must also consider the impact of non-monetary, but still
economic costs, when consumers make purchase decisions.
• Operating costs: costs involved in a
using a product. Ink jet printers now
cost more to use than to actually buy!
• Switching costs: costs involved in
moving from one brand to another. This
can be a problem when compatibility
issues come into play.
• Opportunity costs: the value of
something that is given up to obtain
something else. You could be earning
money right now, instead of sitting here
listening (or not) to me!
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Marketing: Real People, Real Decisions
Importance of Pricing Decisions
• What determines total revenue for a company?
• Total revenue is equal to price charged multiplied by the number of
units sold.
• We know that the price charged has a direct
impact on the number of units sold.
• Price also has an impact on:
– distribution strategy and and the use of
marketing intermediaries
– consumers’ perception of quality
– promotional strategy
– customer relationship management
• Margin: the difference between the cost
of the product and the selling price of the
product.
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Marketing: Real People, Real Decisions
Developing Pricing Objectives
• Companies may set a number of different objectives for their pricing
strategy, however, they must support the broader objectives of the
organization.
• Sales (market share) objective:
pricing products to maximize sales or
to attain a desired level of sales or
market share. Example: setting prices
to achieve a 5% increase in sales.
• Profit objective: pricing products
with a focus on a target level of profit
growth or a desired net profit margin.
Example: setting prices to achieve a
10% profit margin on all goods sold.
©Copyright 2003 Pearson Education Canada Inc.
Figure 12.1
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Marketing: Real People, Real Decisions
Developing Pricing Objectives (continued)
• Competitive effect objective: pricing that is intended to have
an effect on the marketing efforts of the competition.
• Example: altering prices to discourage
market entry by competitors.
• Customer satisfaction objective:
pricing to offer the maximum value to the
customer. Example: setting price levels
to simplify consumer decision making.
• Image enhancement objective:
pricing to communicate product quality
and establish a desired image to
prospective customers. Example: setting
prices to reflect a desired image to
consumers.
©Copyright 2003 Pearson Education Canada Inc.
Figure 12.1
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Marketing: Real People, Real Decisions
How Demand Influences Pricing
• Demand curve: 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.
• The law of demand states that as
the price of a good decreases, the
quantity demanded increases.
• Example: open bar at a wedding!
• Demand curves for normal products
can also shift upwards (to the right)
or downwards (to the left) when
factors other than price influence
demand for the product, such as
increased advertising or improved
distribution. See Figure 12.3 (Page
328) for an illustration.
Figure 12.2a
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Marketing: Real People, Real Decisions
How Demand Influences Pricing (continued)
•
The demand curve for a prestige product is unusual because it reflects
the consumer’s perception of value for the product.
• As price decreases, demand
increases up to a point and then
decreases, as customers no longer
see the “prestige” value in the
product due to its lower price.
• Derived demand: demand for
a product that is influenced or
affected by environmental,
economic, socio-cultural, and other
factors outside of the control of
marketers.
• This affects the sensitivity (less) of
demand to price changes.
©Copyright 2003 Pearson Education Canada Inc.
Figure 12.2b
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Marketing: Real People, Real Decisions
Price Elasticity of Demand
• Price elasticity of demand: the percentage change in unit
sales that results from a percentage change in price.
• Marketers want to know this because it
will influence the decision to raise of
lower prices.
• Price elastic: when a percentage
change in unit sales results in a larger
percentage change in the quantity
demanded.
• Products that are considered
discretionary in nature tend to have
elastic demand curves.
• Example: the price of lobster goes down
to $6 per lb, and consumers decide to
have a treat for supper!
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Figure 12.4a
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Marketing: Real People, Real Decisions
Price Elasticity of Demand (continued)
• Price inelastic: when a percentage change in price results in a
smaller percentage change in the quantity demanded.
• The demand for staple products or those
that we have no choice in consuming,
such as prescription drugs tend to be
price inelastic.
• What do we do with this?
• Assuming the goal is to maximize
revenues (and profits), then for a price
elastic product, it would pay to lower
price to increase demand, while for a
price inelastic product, it would pay to
raise the price, because demand will
decrease relatively little in response to
that change.
©Copyright 2003 Pearson Education Canada Inc.
Figure 12.4b
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Marketing: Real People, Real Decisions
Determining Costs
• Variable costs: the costs of production (raw and processed
materials, parts, and labour) that are tied to, and vary depending on, the
number of units produced.
• Management has some control over
Sales revenue
these costs in the short run.
-
• Fixed costs: costs of production that
Variable costs
do not change with the number of units
produced. Example: costs related to the
building and property.
• Management has relatively little control
over these costs in the short run.
=
Gross profit
Fixed costs
=
Net profit
• Total costs: the total of the fixed
costs and the variable costs for a set
number of units produced.
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Marketing: Real People, Real Decisions
The Concept of Break-Even
• Break-even analysis: a method for determining the number of
units that a firm must produce and sell at a given price to cover all its
costs. The purpose is to evaluate the potential of the business.
• This concept’s relationship
to pricing is based on the
following logic:
– the price charged for
the product must cover
the variable costs of
producing it, and
– contribute to paying the
fixed costs of
maintaining the
operation.
• See next slide for formulae.
Figure 12.5
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Marketing: Real People, Real Decisions
The Concept of Break-Even (continued)
In Units:
Break-Even Point =
Total Fixed Cost
Contribution Per Unit to Fixed Cost
In Dollars:
Total Fixed Cost
1 - Variable Cost Per Unit
Price
Break-Even Point =
In Units with Profit:
Break-Even Point =
Total Fixed Cost + Target Profit
Contribution Per Unit to Fixed Cost
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Marketing: Real People, Real Decisions
Marginal Analysis
• Marginal analysis: a method that uses cost and demand to
identify the price that will maximize profits.
• Marginal cost: the
increase in total cost that
results from producing one
additional unit of a product.
• Marginal revenue: the
increase in total revenue
(income) that results from
producing and selling one
additional unit of a product.
• This method can be difficult
to use because of the
uncertainty of cost
information at different
levels of demand.
©Copyright 2003 Pearson Education Canada Inc.
Figure 12.6
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Marketing: Real People, Real Decisions
The Pricing Environment
• Companies must consider the influence of their external environment
when choosing the pricing strategy that will offer the best chance to
maximize profits.
• Factors within the external environment:
– The state of the economy
– The competition
– Consumer trends such as increased
attention to value for money spent
– Global influences such as currency
exchange rates, and trade restrictions
• Price subsidies: government payments
made to protect domestic businesses or to
reimburse them when they must price at or
below cost to make a sale. The subsidy can
be a cash payment or tax relief.
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Marketing: Real People, Real Decisions
Famous Last Words…
• “We lose money on every
one we sell, but we make it
up on volume.”
• If you can explain why that
statement does not make
any sense from a business
point of view, then proceed
to the next chapter.
• If you cannot, then you may
want to go back and read
this chapter again!
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