Transcript marketing_ch_14_copy

Marketing
Chapter 14
Pricing Concepts for
Establishing Value
Dhruv Grewal
Michael Levy
McGraw-Hill/Irwin
Copyright © 2008 by the McGraw-Hill Companies, Inc. All rights reserved.
13-2
Price is a Signal
Prices can be both
too high or too low
 Price too low may
signal poor quality
 Price set too high
might signal low value

My consulting business
Classes of trade
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13-3
The 5 C’s of Pricing
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13-4
Angie’s at Costco…how would
you price an 18 oz introduction

Customers….priced at 2.99 at Cub and 3.99 at Lunds for 7 oz.

Company Objectives…important major account…would be critical in
national expansion.
–
–

Competition at Costco…Popcorn Indiana has a 24 oz for $6.50
–

Benefit of 2- 12 oz. duel pack
Channel… Costco only receives 15% margin compared to 40% at
Lunds (where the retail price is $3.99).
–

OK to sacrifice some profitability for volume
Manufacturing capacity exists to produce new pack size
Will there be channel conflict?
Cost….can the company make enough money?
–
–
New packaging
Shipping to the West…assume for this exercise that the company can
cover costs
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1st C: Company Objectives
-examples of each???
Or price skimming
Which are external and which are internal?
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13-6
2nd C: Customers
Are they usually a straight line?
Do they always go down?
Gopher volleyball game
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13-7
Demand Curves


Not all are downward sloping
Prestige product or services have upward
sloping curves.
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13-8
Price Elasticity of Demand



Elastic (price sensitive)
Inelastic (price insensitive)
Categories for each???
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13-9
Test Your Knowledge
Consumers are generally less sensitive to price increases for
which of the following items?
A)
milk
B)
steak
C)
cars
D)
clothing
Why?
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Price Elasticity of Demand
% Change of Demand
% Change of price
PERCENTAGES!!!!
So…if price goes up 50% and demand goes down 50% it’s
-1
If price goes down 50% and demand goes up 100% it’s
-2
If price goes up 100% and demand goes down 50%, it’s
-0.5
Range 0………..-0.99
Range -1………..-10
INELASTIC
ELASTIC
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Example

If tuition was reduced by 4% and demand
increased by 2%...elastic or inelastic???

Demand %
Price %
+2%
-4%
=
-.5 inelastic
Note…be sure you know how to calculate %
change.
(New # - Old #) / old #
(then x 100 for percentage)
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Factors Influencing Price Elasticity of
Demand
CrossChange in
price of
Income
price
effect
elasticity
Is the customer
Price sensitive
Complements or subs
based on
Substitution
discretionary
income
effect
Availability of replacements
Increases elasticity
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13-13
Test Your Knowledge
In general, prices should not be based on cost because
consumers make purchase decisions based on their
_______________.
A)
cross-price elasticity
B)
Internet research
C)
substitution effect
D)
perceived value
Iterate with costs…but don’t be cost focused
in the absence of customer value!
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3rd C: Costs

Variable Costs
–

Fixed Costs
–

Vary with production
volume
Unaffected by production
volume
Total Cost
–
Sum of variable and fixed
costs
Examples???
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Break Even Analysis
Contribution per unit = price less variable cost
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Break Even Analysis and Decision
Making
Assume you have decided to buy an advertisement in the local newspaper to
publicize your new pet grooming service. The cost of the ad is $1,000. You have
decided to charge $40 for a dog grooming, and your variable costs are $20 for
each dog. How many dogs do you have to groom to break even on the cost of the
ad? What is your break-even point if you charge $60 per dog?
A soft drink manufacturer opened a new manufacturing plant in the Midwest. The
total fixed costs are $100 million. It plans to sell soft drinks for $6.00 for a package
of 10 12-ounce cans to retailers. Its variable costs for the ingredients are $4.00 per
package. Calculate the break-even volume. What would happen to the break-even
point if the fixed costs decreased to $50 million, or the variable costs decreased to
$3 due to declines in commodity costs. What would the break-even be if the firm
wanted to make $20 million?
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4th C: Competition
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5th C: Channel Members

Manufacturers, wholesalers and retailers can
have different influence on pricing strategies
–
–

Pricing strategies of Costco vs. Byerly’s
Margin requirements of distributors
Manufactures must protect against gray market
transactions
Diversion
Distressed
Product
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13-19
For your projects…computation of
Mark-ups vs. % Margin Requirements
Mark-up %.
Take a % of cost and add it to the cost to establish a price
* 200% to $5 roses ($10 and add to $5 costs) = $15 retail
Margin %. Required contribution % based on price. Computed by
variable margin/ unit divided by price.
* could have said need 67% contribution margin.
make $10 CM on $15 roses = 67%
Example……If the Cost was $1.00 and the company had a 50% markup policy
and a 50% margin policy, what would the price be for each
methodology?
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Answer

50% Mark-up
50% of $1= 50 cents
Add 50 cents to $1
cost for price of
$1.50

50% Margin Requirement
Cost of $1.00 divided by
(1-mr) or 1/.5=
$2.00
Now the contribution of $1
is 50% of retail.