Transcript Pricing!!
Pricing!! Pricing in line with a Firm’s Objectives 1 Price Amount a buyer pays to a seller in exchange for products and services the economic sacrifice Non-monetary price Barters, donations, and time (Easier / Harder) to change than other elements in the marketing mix? 2 Pricing Objectives Market survival end of season sales charge for services (Long / Short) term objective Sales / Market Share growth Market Share is ______________ penetration pricing productivity effects 3 More Pricing Objectives Profitability--optimal price a trade off between margins and number of sales to maximize profitability price skimming ROI requirements: Income before taxes Total operating assets associated with the product (e.g., plant, equipment, inventory ) 4 Final Objectives Competitive Effect price wars usually occur when ___________ Quality and Image prestige/premium pricing 5 Discussion: How do managers make pricing decisions? What did you find out??? 6 The Five C’s in Setting Prices Customer Costs Competition Government Controls Channels of Distribution 7 CONSUMER FACTORS --DEMAND Each price that the company charges will lead to different levels of demand Traditional demand curve? P1 P2 Q1 Q2 IS the Demand Curve Always Downward Sloping? 9 Elasticity of Demand Definition: How sensitive consumers are to changes in price Elasticity = Q P Is elasticity always negative? Elasticity Cont’d INELASTIC DEMAND ELASTIC DEMAND P P Q Q What would you do if you knew demand was elastic/inelastic? 11 Determining Price Sensitivity Price Sensitivity Measures from consumers Oral-B’s Cross Action toothbrush has three types of bristles that are set at different angles. It has a dense tip that cleans behind back teeth and an ergonomic rubberized handle. Circle what is too cheap Square what is too expensive 0.25 0.75 1.25 1.75 2.25 2.75 3.25 3.75 4.25 4.75 5.25 5.75 6.25 6.75 7.25 7.75 8.25 Price Sensitivity Continued 100% 80% 60% 40% 20% 0% 0.25 0.75 1.25 1.75 2.25 2.75 3.25 3.75 4.25 4.75 5.25 5.75 6.25 6.75 7.25 7.75 8.25 Too cheap Too expensive 13 Influences on Elasticity Substitute products Income effect Other Products (cross-elasticity) 14 Customer Oriented Strategies Demand-Backward Pricing Perceived Value Pricing Price Skimming Price Penetration Trial Pricing 15 Cost Factors Types of Costs: Fixed Variable TOTAL COST COST AND PROFIT BREAK-EVEN: TR = TC P*Q = FC + (VC*Q) Q= FC P - VC Break Even Analysis (Been there, done that!) Fixed costs Sales price - Variable Cost Per Unit Fixed Variable Saws Varnish Managers Wood Warehouse Lease WHY DO THIS? 18 COST ORIENTED STRATEGIES Target Return: P = AVC + TFC + r(INV) Q Q AVC = average variable cost TFC = total fixed cost Q = projected quantity sold r = targeted ROI INV = initial investment PROBLEMS? 19 Other Cost Strategies Mark-Up on Cost (manufacturer) P = UTC + (UTC * MU%) Mark-Up on Selling Price (retailer) P = cost (1.00- MU%) Price-Floor Pricing 20 COMPETITION FACTORS PRODUCT DIFFERENTIATION MARKET STRUCTURE Oligopoly – status quo Monopolistic – non-price competition COMPETITIVE PRICING POLICIES Competition-Oriented Strategies PRICE-LEADER PRICE-CHALLENGER PRICE-FOLLOWER NICHE-MARKETER Government Controls Pricing law objectives: ensure competition among companies within markets protect consumer rights 23 Important Pricing Acts Sherman Act 1890 No price fixing Federal Trade Commission Act 1914 limits unfair and anti-competitive activities Robison-Patman Act 1936 Limits price discrimination Wheeler-Lea Act 1938 No deceptive pricing Consumer Goods Pricing Act 1975 Limits wholesaler & manufacturer ability to set retail prices 24 Discussion: What is Price Discrimination? Definition:Selling the same product to different consumers at different prices Is it legal? Yes: No: 25 Other Legal Issues Price gouging Price comparisons with a “fake” price Bait and Switch Predatory Pricing Price Fixing Horizontal Vertical 26 INTERESTING ISSUES IN PRICING PSYCHOLOGICAL PRICING COMPARISON PRICING DUMPING BUNDLING 27 Consumer’s and Pricing--A Test Item Estimated Price Most you would pay Actual Price High Medium or low? 28 3. Psychological Internal Reference Price What you expect to pay How is this formed? Past prices Competitions prices Reservation Price Highest price willing to pay Perceived Price Consumer’s reaction to a price– high/low; fair/unfair 29 Comparison Pricing COMPARE T0: PROBLEMS: Dumping Pharmaceutical Firm Selling Brand Name Product Sales 100,000 units @ &10/unit Fixed Costs $500,000 for a capacity of 200,000 units Variable Costs $1 Assume you are entering the Generic Market and there is no cannibalization between the branded and generic market What is the minimum profitable price you can charge? Movies Movie studio sells to 2 cinema chains: Supreme Cinema Fractured Flicks We have two block-busters we are about to release: Macbeth Naked Gun XII To be continued….. Cinema Chains’ Reservation Prices Supreme Cinemas Fractured Flicks Macbeth $2,600 $1,000 Naked Gun XII $1,200 $1,800 Each cinema chain will only buy one copy of each film. How should your price the films in order to maximize revenue while at the same time not price discriminating. 33 PRICE DISCOUNTING TRADE FUNCTIONAL DISCOUNT QUANTITY DISCOUNTS NONCUMULATIVE CUMULATIVE 34 TEMPORAL DISCOUNTING 10 Consumers willing to pay $50 10 Consumers willing to pay $30 Cost $20/dress to make How should you price the dress? 35 Things to consider when changing your price Basic Price mix Price Promotion mix Components Example Objective Long-term effect 36 Price change concepts Price Thresholds JND Traps for price decreases low-quality--buyers question quality fragile market share trap--consumers switch to any lower priced good shallow pockets trap--competitor can maintain price cut longer than you 37