MKTG 504 - PRICE

Of what value is this to me?

Dr. Dennis PittaUniversity of Baltimore

Pricing

Pricing = the art of translating into quantity terms the value of the product to consumers.

How should firms set prices?

STRATEGICALLY!!!

The STRATEGIC PRICING PROCESS

I. SELECT A TARGET MARKET

(Fundamental = the chosen target market responds in particular way)

How about this target market?

What level of quality would he expect?

What price would he be willing to pay?

The STRATEGIC PRICING PROCESS (continued.)

II. STUDY CONSUMER BEHAVIOR(What are the customer’s buying motives? PRESTIGE? UTILITY?)(What is the customer’s PRICE ELASTICITY?)

Price elasticity can be the basis for: PRICE DISCRIMINATION!!

PRICE DISCRIMINATION

The practice under which goods are sold at price differences which do not reflect the proportional difference in marginal costs

PRICE DISCRIMINATION

FOUR forms of Price discrimination.Can be based on:

CUSTOMER (Can be based on knowledge of intensity of demand)

(e.g. INNOVATORS, Lawyers,...)

PRICE DISCRIMINATION(continued)

PRODUCT VERSION (Different versions, higher price reflecting psychological demand)(e.g., “Standard”, “Deluxe”)

PRICE DISCRIMINATION(continued)

PLACE (A form of utility) (e.g., a baseball stadium, at resorts, theatre seats, neighborhood,...)

If you can wait, when are the best times to buy auto tires?

Memorial Day weekend (week)Labor Day weekend (week)

When does Pitta buy winter clothes?

When does Pitta go to Bethany Beach?

PRICE DISCRIMINATION(continued)

TIME (Season - clothing; business cycle - many items; day - )

The STRATEGIC PRICING PROCESS (continued.)

III. IDENTIFY COMPETITION(Look at their marketing policies - for each of the 4 P’s;

What is the structure of their industry?

What are their price inputs?)

The STRATEGIC PRICING PROCESS (continued.)

IV. ASSIGN PRICE A ROLE IN THE MARKETING MIX

Objectives (6):(1) Market Penetration - low initial price

(2) Market Skimming - high initial price (gain a premium from initial buyers)

Market Penetration - low initial price

Useful if:

Market appears price sensitive,

Economies of scale available,

Low price discourages competition.

Market SKIMMING - HIGH initial price

Useful if:

Demand is relatively price INELASTIC,

No scale economies exist,

Rival firms are not likely to enter,

High price encourages prestige perception.

Objectives (continued.)

(3) Early Cash Recovery (need for funds - high or low price) Depends on: price elasticity and economies of scale

(4) Satisficing Objective (typically a fear of a government reaction - aims at a satisfactory ROI - no need to maximize ROI since this can keep competition out)

Objectives (continued.)(5) Product Line Promotion Pricing

(Consider the entire line, may underprice one item, to improve the overall line’s profitability)(e.g., LOSS LEADER - or Sear’s GOOD, BETTER, BEST)

(6) Develop the distribution system

Let us consider two competing brands..

Unicaps are advertised heavily and are well known vitamins from a respected company.

Unidose vitamins by Schultz - Schultz makes cosmetics and perfumes (with names like Evening in Bayonne) and decided to mix the ingredients to make vitamins.

Example of Developing the Distribution System (All prices per bottle of 100)

Unicap vitamins by Upjohn

AdvertisedRetail price =

$4.95Wholesale price =

$3.95Resulting margin

to retailer = $1.00

Unidose vitamins by Schultz

Not advertisedRetail price = $4.25Wholesale price =

$2.25Resulting margin to

retailer = $2.00

Example of Developing the Distribution System - Why Stock Schultz’s Vitamins?

If a customer asks for advice, the pharmacist can say - the two brands are equivalent - but Schultz will cost you less.

He does NOT say - and I make and extra $1.00 per bottle on Schultz.

The STRATEGIC PRICING PROCESS (continued.)

V. RELATE COSTS AND DEMAND

(Estimate the costs for producing at several levels of output)

(Perhaps graph the functional relationships)

The STRATEGIC PRICING PROCESS (continued.)

VI. SET THE STRATEGIC PRICE

How do firms actually set prices??

PRICE SETTING IN PRACTICE

Cost Based Pricing MARKUP-PRICING - adding some fixed % to unit

costs: Why use this???

SimpleLeads to price similaritySocial Fairness

Benefits: Seller does not take advantage of a buyer with an acute demand problem - seller earns a fair return.

PRICE SETTING IN PRACTICE (continued.)

TARGET PRICING - Determine the price given a specified target rate of return

Limitation: Demand may be influenced by price.

PRICE SETTING IN PRACTICE (continued.)

Competition-oriented Pricing GOING RATE PRICING - Set price

about the average level in the industry

(May depend on the market structure - Perfect competition: No decision

Oligopoly - it is wise to check industry prices.)Other Pricing alternatives: Sealed bid pricing

Initiating Price Changes

Must consider

Buyer reactions, e.g., elasticity and perceptions.

Competitive reactions.

Meeting price changes of competitors ?? Sometimes no decision.

Darn competitors….

Tylenol owned the acetominaphen market

Tylenol kept a high price

Datril entered - competing on price

Tylenol cut their price immediately

When a new competitor uses price to gain a foothold in the marketplace, established companies should react quickly with their own reductions. AT&T and Kodak DIDN'T; thus Fuji and MCI became marketplace fixtures. Tylenol DID, and the upstart Datril never got more than a 1-percent

market share.

The Game No One Wins: Price CompetitionPrice Competition

Datril is just like Tylenol - only cheaper

After McNeil laboratories cut price

Few people switchedBristol Myers lost

millions..

Product Line Pricing Objective: A set of prices that maximizes demand from

the entire line.(e.g., Good, Better, Best)

Must consider:Interrelationship of demand (substitutes, complements, unrelated factors).

Interrelationship of costs (production, scheduling).

Effect of competition.

Two types of pricing decisions

BASE PRICE

PRICE ADJUSTMENTS (6 types)

Types of PRICE ADJUSTMENTS - 6 TYPES

1. FUNCTIONAL DISCOUNT (to other channel members - offer price which allows retailers and wholesalers traditional markups)

2. QUANTITY DISCOUNT - price reduction based on amount of purchase.

3. GEOGRAPHICAL DIFFERENCES - Based on location of the buyer

4. SEASONAL DISCOUNTS 5. BUYER’S PERSONAL SITUATION - Often

a reason for an adjustment - e.g., to keep a buyer in business.

Types of PRICE ADJUSTMENTS CONT

6. CASH DISCOUNT (reflects the savings -avoiding finance and interest costs)

Four IntroductoryMarketing Strategies

Rapid-Rapid-skimmingskimmingstrategystrategy

Rapid-Rapid-penetrationpenetrationstrategystrategy

Slow-Slow-penetrationpenetrationstrategystrategy

Slow-Slow-skimmingskimmingstrategystrategy

PricePrice

LowLow

HighHigh

PromotionPromotionHighHigh LowLow

Upcoming Topic

Promotion