Transcript The Nature of Price

The Nature of Price
• Price
–The value exchanged for products in a marketing
exchange
• Barter
–The trading of products; the oldest form of exchange
• Terms Used to Describe Price
–Tuition, premium, fine, fee, fare, toll, rent, commission,
dues, deposit, tips, interest, taxes
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20–1
The Nature of Price (cont’d)
• The Importance of Price to Marketers
– It is the most readily changeable characteristic (under favorable
circumstances) of a product.
• Have a sale! Lower priced (“value”) menu.
– It is a key element in the marketing mix because it relates directly
to generation of revenues and quantities sold.
– It is a key component of the profit equation, having strong effect on
the firm’s profitability.
– It has symbolic value to customers—prestige pricing.
Profit = Total Revenues - Total Costs
Profits = (Price x Quantity Sold) - Total Costs
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20–2
Price and Nonprice Competition
• Price Competition
– Emphasizing price and matching or beating competitors’ prices
• Circuit City – “we’ll pay the difference if competitors have a lower
price”
• Priceline.com
• http://www.adcritic.com/content/priceline-uncanny.html
– An effective strategy in markets with standardized products
• Airfare wars
– Lowest-cost competitor (seller) will be most profitable.
• Southwest Airlines, Walmart
• http://www.adcritic.com/content/southwest-recess.html
– Allows marketers to respond quickly to competitors
• If one airline cuts prices, competition will match.
– Price wars can weaken competing organizations.
• Low profit margins…SWA vs. Continental Express
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20–3
Price and Nonprice Competition (cont’d)
• Nonprice Competition
–Emphasizing factors other than price to distinguish a
product from competing brands
• Distinctive product features
• Service
• Product quality • Promotion • Packaging
• http://www.adcritic.com/content/delta-the_seat.html
–Is effective when a product or service’s features are
difficult to imitate by competitors and customers
perceive their value
• Can image/product of Nike be imitated?
–Builds customer loyalty by focusing on nonprice
features
• Performance
• http://www.adcritic.com/content/honda-cog.html
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20–4
Analysis of Demand
• The Demand Curve
–A graph of the quantity of products expected to be sold
at various prices
–Decreases in price create increases in quantities
demanded.
–Increased demand means larger quantities sold at the
same price.
–Must monitor other elements of marketing mix!
• Price is not the only influencer of demand.
• Quality, promotion, distribution, etc.
–Prestige items sell best in higher price ranges.
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20–5
Elasticity of Demand
• Price Elasticity
–A measure of the sensitivity of demand to changes in
price—the greater the change in demand for a specific
change in price, the more elastic demand is
–In other words:
• Heating oil vs. sports cars
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20–6
Elasticity of Demand
FIGURE 20.3
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20–7
Analysis of Demand (cont’d)
• Reasons for Demand Fluctuations
–Changes in buyers’ needs
–Variations in the effectiveness of the marketing mix
–The presence of substitutes
–Dynamic environmental/market factors
Price Elasticity of Demand
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=
% Change in Quantity Demanded
% Change in Price
20–8
Important Terms
• Marginal Revenue
– The change in total revenue resulting from the sale of an additional
unit of product
• Fixed Costs
– Costs that do not vary with changes in the units produced or sold
• Rental of retail space
• Average Fixed Cost
– The fixed cost per unit produced
• % of rental cost in each unit
• Variable Costs
– Costs that vary directly with changes in the number of units
produced or sold
• Hiring extra salespeople for xmas season
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20–9
Determining the Breakeven Point
FIGURE 20.7
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20–10
Factors That Affect Pricing Decisions
FIGURE 20.8
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20–11
Factors Affecting Pricing Decisions
• Organizational and Marketing Objectives
–Prices should be set that are consistent with the
organization’s goals and mission.
• E.g., service, quality, etc.
–Prices must be compatible with marketing objectives
• e.g., setting premium prices to enhance a product’s quality
image.
• Types of Pricing Objectives
–Setting prices low to increase market share
–Using temporary price reductions to gain market share
–Lowering prices to raise cash quickly
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20–12
Factors Affecting Pricing Decisions
(cont’d)
• Costs
–Set a floor price—products must be sold above their
costs if the firm is to remain in business.
• Dealer cost?
–Reducing costs increases productivity and profitability.
• Using labor-saving technologies
• Focusing on quality
• Establishing efficient manufacturing processes
• Other Marketing Mix Variables
–Price/quality image of the product or brand
–Selective or intensive product distribution
–Product pricing used as a promotional tool
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20–13
Factors Affecting Pricing Decisions
(cont’d)
• Channel Member Expectations
–To make a profit at least equivalent to the potential
profit from handling a competitor’s brand
• Kraft vs. Wishbone vs. Kens
–To receive discounts for volume purchases and prompt
payment
• Drop shipments
–To be supported by the producer with training,
advertising, sales promotion, and return policies
• In-store displays
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20–14
Factors Affecting Pricing Decisions
(cont’d)
• Customers’ Interpretation and Response
–What meaning does the product’s price have to the
customer?
• Perceptual pricing: $3.99 = 4.00? 2 for $1.00?
–Does the customer respond to the price by moving
closer to or farther away from making a purchase?
–Internal reference price
• A price developed in the buyer’s mind through experience
with the product
–External reference price
• A comparison price provided by others
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20–15
Factors Affecting Pricing Decisions
(cont’d)
• Buyers’ responses to price
–Value consciousness
• Concern about price and quality
–Price consciousness
• Striving to pay low prices
–Prestige sensitivity
• Being drawn to products that signify prominence and
status
• Willing to pay higher price
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20–16
Factors Affecting Pricing Decisions
(cont’d)Price Discounting (cont’d)
• Competition
– Pricing to match competitors’ prices
• Then compete on nonprice
– Judging competitors’ responses to adjusting prices
• What will Verizon due if Sprint lowers prices?
– Changes in an industry’s market structure cause and create pricing
opportunities.
• Monopoly vs. perfect competition
• Cable vs. athletic shoes
• Legal and Regulatory Issues
– Price controls intended to curb inflation --- California? Arnold?
– Controls that set/regulate prices for specific products
– Regulations and laws to prohibit price fixing, and deceptive and
discriminatory pricing
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20–17
Extra credit assignment!
• 5 points! You NEED these!
• Go to blackboard for course (9:30 = section2,
1:00 = section 3)
• Take survey posted on “assignments”
• When finished, BEFOR clicking “submit”, print out
survey, bring to class 10/21.
• Print out “Thank you” acknowledgement
• Print out e-mail receipt.
• http://www.business.ecu.edu/users/venableb/surv
ey/
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20–18