Transcript PricingTheProduct

PRODUCTS – PRICING
MARKETING 360
Brian Gillespie
Price
The assignment of value, or the amount the consumer must
exchange to receive the offering
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Money
Goods
Services
Favors
Votes
Anything that has value to the other party
Price is a marketing tool and a key element in marketing promotions
(the easiest P to change). Most retailers
highlight product pricing in their advertising campaigns.
Pricing Views
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Customers view
 what must be given up to obtain the benefits. Customers buy based on
value and valued benefits, not price
Sellers view
 Price reflects the revenue generated for each product sold and, thus, is
an important factor in determining profit
Steps in Pricing
Develop Pricing Objectives
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Sales/market objective
 Reach a certain level of sales or market share
Profit objective
 Make as much money as possible
 Best strategy for fads
Competitive effect objective
 Have an impact on competition
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Cut into their market share
Release a competing product before they do
Customer satisfaction objective
 Price transparency
Image enhancement objective
 Prestige products priced higher
Estimate Demand
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Demand
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Demand curves
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Graphs that show impact of price on demand
Normal products
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Customer’s desire for a product
As price increases, demand decreases
Prestige products
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Curvalinear in design
 As price increases, demand increases to a maximum point
 Eventually demand decreases as price increases
Demand Curves
Shifts in Demand Curves
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Price remains
constant while
demand shifts (up
or down)
May be due to
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Advertising
Product introduction
Global event
Etc…
Estimating Pullman Thai Food Demand
# People in Market
25,000
Avg. # Thai Dinner/Year
5
Total Annual Demand
125,000 = (25,000 x 5)
Predicted Share of Market
4%
Estimated Annual Demand
5,000 = (125,000 x .04)
Estimated Monthly Demand
~ 417 = (5,000 / 12)
Estimated Weekly Demand
~ 104 = (417 / 4)
Crystal Pepsi
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Imagine it is 1993. You are interested in calculating
demand for cans of Crystal Pepsi in Spokane.
Spokane has 250,000 residents.
You expect the average person drinks 1 can of
soda a day.
Crystal Pepsi has a 5% share of the market.
What is the total annual demand for soda in
Spokane, and what are the annual, monthly and
daily demands for cans of Crystal Pepsi?
Price Elasticity
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The percentage change in unit sales that results
from a percentage change in price
% Change in Quantity Demand
Price Elasticity =
% Change in Price
Demand up by 30%
= 3.0
Elastic Demand =
Price down by 10%
Demand up by 10%
= 0.25
Inelastic Demand =
Price down by 40%
Price Elasticity
Cross-Elasticity of Demand
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When changes in price for one product affects
changes in demand for a different product
 Substitute
products
 Complementary products
Determining Costs
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Fixed costs
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Variable costs
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Costs that remain constant independent of number of units
produced
Rent, executive salaries, heating, etc…
Average fixed costs = fixed costs / number of units
Costs that vary with the number of units produced
Materials, labor, etc…
Total costs
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Sum of fixed and variable costs
Variable Costs Example
Break Even Analysis
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How many units must be produced and sold in order
to cover costs?
Break-even point
 When
total costs equals total revenues
 Positive
break-even point is profit
 Negative break-even point is loss
Computing the Break-Even Point in Units
Total Fixed Costs
BEP (units) =
Contribution Per Unit to Fixed Costs
Selling Price Per Unit – Variable Cost Per Unit
Computing the Break-Even Point in Units
$200,000
BEP (units) =
= 4000
$50
So, you need to produce
4,000 units to break even
Sell Bookshelf for $100
Costs you $50 to produce (variable cost per unit)
So, Contribution to Fixed Costs Per Unit
$100 - $50 = $50
Computing the Break-Even Point in
Revenue
Total Fixed Costs
BEP (in $) =
Variable
Cost Per Unit
1-
Price Per Unit
Computing the Break-Even Point in
Revenue
$200,000
BEP (in $) =
$50
1$100
$200,000
BEP (in $) =
1 - .50
So, you need to
= $400,000 Reach $400,000
In revenue to reach
Break-even point
Break-Even Point
Crystal Pepsi Break-Even Example
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Fixed cost = $10,000,000
Variable cost = $0.25 per can
Priced at $0.50 per can
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What is the break-even point in
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 Sales
 units
Evaluate the Pricing Environment
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In addition to internal factors such as manufacturing costs and capacity
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Marketers must assess external environmental factors (including competitors)
when setting pricing
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Broad economic trends, consumer trends, social trends, and intensity of
competition
When the economy is growing
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Inflation occurs and prices rise
When the economy is slow
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Prices stagnate or contract to keep sales stable
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Consumers may be less likely to buy luxury items
Choose Pricing Strategy
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Cost-plus pricing
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Demand-based pricing
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Set price based on predicted demand
Target costing
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Add a fixed amount to the total costs of producing the product
Figure out price and quality of product customers want
Figure out the cost to make the product
Determine if production is profitable
Yield management pricing
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Charge different customers different prices to manage demand
and maximize profits
Choose Pricing Strategy
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Value pricing
 Pricing
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to provide ultimate value to the customer
New product pricing
 Skimming
 High
price for highly desired product
 Penetration
 Very
low price to encourage quick sales
 Trial
 Initial
low price so consumers can try out product
Develop Pricing Tactics
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Pricing for individual products
 Two
part pricing
 Need
to pay twice
 Payment
 Break
pricing
overall price into smaller payments
Develop Pricing Tactics
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Pricing for multiple products
 Price
 Put
bundling
multiple products together in a bundle
 Captive
 Price
pricing
basic product low
 Complementary and necessary products at a high profit
margin
Psychological Issues in Pricing
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Internal reference price
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Price-quality inferences
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Greater price equals greater quality
Odd-even prices
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Set price or range of prices consumers think are reasonable
Odd prices sell more
For some products, this conveys low quality
Price lining
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Develop a variety of products at different price points
Pricing and Placebo
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MIT study on “Veladone”
 FDA
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approved drug used in dental surgery
Price conditions
 10
cents per pill
 $2.50 per pill
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Effectiveness
 In
low price point
 61%
 In
reported decrease in pain
high price point
 85%
reported decrease in pain