Transcript Principles of MKTG - Auburn University

Principles of
Marketing
Chapter 9:
Pricing
Understanding
& Capturing Value
What’s a Price?
• Price:
 Narrow
•
sense:
The amount of money charged for a “product”
 Broader
•
sense:
Sum of all values given up to gain benefits of having or
using a product

Includes:
•
•
•
Opportunity costs
Travel costs
Search costs, etc.
Dr. James Carver – Auburn University
Organization Slide
• Part I:
 The
•
“process” of calculating
Focused on “Cost-Plus” method

Adding a standard markup to the cost of a product
• Part II:
 Conceptual
topics, etc.
Dr. James Carver – Auburn University
Part 1
Dr. James Carver – Auburn University
Using Markups
• Markup
 Selling
•
Equivalent to the good’s gross margin.
 The
•
price of the merchandise less its cost
basic markup equation: MU$ = SP - C
Where:
C = Dollar cost of merchandise (per unit)
 MU = Dollar markup (per unit)
 SP = Selling price (per unit)

Dr. James Carver – Auburn University
Markup Percentages
• Markup on Selling Price:
 MUSP
•
= MU$ / SP
Which is also equal to MUSP = (SP – C) / SP
 This
is always “markup” unless I explicitly ask
for markup on cost
• Markup on Cost:
 MUC
•
= MU$ / C
Which is also equal to MUC = (SP – C) / C
Dr. James Carver – Auburn University
Break-Even Analysis
• Breakeven point:
 The
point where the total revenue from the
quantity sold just equals the firm’s total costs
 Formula:
•
GM = FC + VC + Π

Where:
•
•
•
•
GM = gross margin
FC = fixed cost
VC = variable cost
Π = profit (which is equal to zero in break-even problems)
Dr. James Carver – Auburn University
Part 2
Dr. James Carver – Auburn University
Increasing Focus
on Non-Price Variables
• Price sensitivity has decreased
 Due
•
to increased desire for values like:
Convenience, personalization, etc.
• Yet remains one of most important elements
 Because:
•
•
It’s extremely flexible (i.e., easily changed)
It’s the only “mix” variable that produces revenue
Dr. James Carver – Auburn University
Controllable Factors in Pricing
• Many firms focus too much on price.
 Conditions
customers to only purchase on sale.
 Overlooks the relationship price has with the other
variables of the marketing mix.
 Two
1.
2.
controllable factors in pricing are:
Cost paid for (or to produce) goods
Desired gross margin
Dr. James Carver – Auburn University
“Law of Demand”
and Price Sensitivity
$
Q
Dr. James Carver – Auburn University
“Law of Demand”
and Price Sensitivity
$
Perfectly Elastic
Q
Dr. James Carver – Auburn University
“Law of Demand”
and Price Sensitivity
$
Perfectly Inelastic
Q
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Pricing Freedom as a
Function of Market Type
• Competition generally falls into one of four
categories:
1.
Pure Competition
2.
Pure Monopoly
3.
Monopolistic Competition
4.
Oligopolistic Competition
Dr. James Carver – Auburn University
Pure Competition
• Occurs when a market has:
•
•
•
•
 In
•
•
•
Homogenous products,
Many buyers and sellers,
Buyers and sellers have perfect knowledge, and
There’s ease of entry for both buyers and sellers.
such a situation:
Firms face horizontal demand curve
Must sell product at ‘‘market’’ or equilibrium price
Extremely rare
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Pure Monopoly
• Occurs when there is only one seller for a
product or service.
 Yet
this does not mean one can simply sell at
whatever price s/he wants…
•
Not perfectly inelastic for two reasons:
1.
Law of diminishing returns (i.e., declining marginal utility)
•
2.
Hot fudge sundae example
To sell more units, one must lower the selling price.
•
Not all consumers have same utility for any one good
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Monopolistic Competition
• Occurs when a market has:
•
•
•
Heterogeneous products,
Products are viewed as substitutes for each other, and
Sellers recognize that they compete with sellers of these
substitute products.
 Here,
firms attempt to differentiate themselves
with the products or services they offer
•
Most common form of competition in America

Particularly at the national-level
Dr. James Carver – Auburn University
Oligopolistic Competition
• Occurs when a market has:
•
•
Essentially homogeneous products (e.g., gas),
Relatively few sellers (top 4 firms account for 60-80%),

•
Or, many small firms who follow the lead of a few larger
firms,
Any action taken by is expected to be noticed and
reacted to by the other sellers.
 Likely
•
to lead to:
Similar prices as everybody knows what others are
doing.
Dr. James Carver – Auburn University
Pricing Objectives and Policies
• Should be made after careful consideration of
the firm’s…
1.
2.
3.
4.
Mission statement,
Goals/objectives,
Strategy, and
Marketing Mix
Dr. James Carver – Auburn University
Specific Pricing Strategies
•Customary pricing
•Multiple-unit pricing
•Variable pricing
•Bundle pricing
•Flexible pricing
•Bait-and-switch pricing
•One-price policy pricing •Private label pricing
•Odd pricing
•Hi-low pricing
•Price lining
•Leader pricing
Dr. James Carver – Auburn University
Specific Pricing Strategies
Customary
pricing
The retailer sets prices for goods and services and seeks to
maintain those prices over an extended period of time.
Variable pricing
Recognizes that differences in demand and cost necessitate
that the retailer change prices in a fairly predictable
manner.
Flexible pricing
Encourages offering the same products and quantities to
different customers at different prices (common for products
sold using personal selling).
One-price policy
Establishes that the retailer will charge all customers the
same price for an item. Not only does it speed up transactions,
but also it reduces the need for highly skilled salespeople.
Odd pricing
Practice of setting retail prices that end in the digits 5, 8, 9—
such as $29.95, $49.98, or $9.99.
Dr. James Carver – Auburn University
Specific Pricing Strategies
• Price Lining
•
Established to help customers make merchandise
comparisons and involves establishing a specified
number of price points for each merchandise
classification.

Trading up - Occurs when a firm uses price lining, and a
salesperson moves a customer from a lower priced line to a
higher one.

Trading down - Occurs when a firm uses price lining, and a
customer initially exposed to higher-priced lines expresses the
desire to purchase a lower-priced line.
Dr. James Carver – Auburn University
Specific Pricing Strategies
Multiple-unit
pricing
Price of each unit in a multiple-unit package is less than the
price of each unit if it were sold individually.
Bundle Pricing
Selling distinct multiple items offered together at a special price.
Bait-and-switch
pricing
Advertising or promoting a product at an unrealistically low price
to serve as ‘‘bait’’ and then trying to ‘‘switch’’ the customer to a
higher-priced product.
Private-label
brand pricing
A private-label brand can be purchased by a retailer at a
cheaper price, have a higher markup percentage, and still be
priced lower than a comparable national brand.
High-low pricing
Use of high every day prices and low leader ‘‘specials’’ on items
typically featured in weekly ads.
Dr. James Carver – Auburn University
Specific Pricing Strategies
• Leader pricing
 Used
when a high-demand item is priced low and
heavily advertised in order to attract customers
into the store.
 Loss
leader - Extreme form of leader pricing where
an item is sold below a firm’s cost.
•
Example: Turkeys at Thanksgiving time
Dr. James Carver – Auburn University