PRODUCTS – PRICINGMARKETING 360Brian Gillespie

Price

The assignment of value, or the amount the consumer must exchange to receive the offering

Money Goods Services Favors Votes Anything that has value to the other party

Price is a marketing tool and a key element in marketing promotions (the easiest P to change). Most retailers highlight product pricing in their advertising campaigns.

Pricing Views

Customers view what must be given up to obtain the benefits.

Customers buy based on value and valued benefits, not price

Sellers view Price reflects the revenue generated for each product

sold and, thus, is an important factor in determining profit

Steps in Pricing

Develop Pricing Objectives

Sales/market objective Reach a certain level of sales or market share

Profit objective Make as much money as possible Best strategy for fads

Competitive effect objective Have an impact on competition

Cut into their market share Release a competing product before they do

Customer satisfaction objective Price transparency

Image enhancement objective Prestige products priced higher

Estimate Demand

Demand Customer’s desire for a product

Demand curves Graphs that show impact of price on demand

Normal products As price increases, demand decreases

Prestige products Curvalinear in design

As price increases, demand increases to a maximum point

Eventually demand decreases as price increases

Demand Curves

Shifts in Demand Curves

Price remains constant while demand shifts (up or down)

May be due to Advertising Product

introduction Global event Etc…

Estimating Pullman Thai Food Demand# People in Market 25,000

Avg. # Thai Dinner/Year 5

Total Annual Demand 125,000 = (25,000 x 5)

Predicted Share of Market 4%

Estimated Annual Demand 5,000 = (125,000 x .04)

Estimated Monthly Demand ~ 417 = (5,000 / 12)

Estimated Weekly Demand ~ 104 = (417 / 4)

Crystal Pepsi

Imagine it is 1993. You are interested in calculating demand for cans of Crystal Pepsi in Spokane.

Spokane has 250,000 residents. You expect the average person drinks 1 can

of soda a day. Crystal Pepsi has a 5% share of the market. What is the total annual demand for soda in

Spokane, and what are the annual, monthly and daily demands for cans of Crystal Pepsi?

Price Elasticity

The percentage change in unit sales that results from a percentage change in price

Price Elasticity =% Change in Price

% Change in Quantity Demand

Elastic Demand =

Price down by 10%

Demand up by 30%= 3.0

Inelastic Demand =

Price down by 40%

Demand up by 10%= 0.25

Price Elasticity

Cross-Elasticity of Demand

When changes in price for one product affects changes in demand for a different product Substitute products Complementary products

Determining Costs

Fixed costs Costs that remain constant independent of number

of units produced Rent, executive salaries, heating, etc… Average fixed costs = fixed costs / number of units

Variable costs Costs that vary with the number of units produced Materials, labor, etc…

Total costs Sum of fixed and variable costs

Variable Costs Example

Break Even Analysis

How many units must be produced and sold in order to cover costs?

Break-even point When total costs equals total revenues

Positive break-even point is profit Negative break-even point is loss

Computing the Break-Even Point in Units

BEP (units) =Contribution Per Unit to Fixed Costs

Total Fixed Costs

Selling Price Per Unit – Variable Cost Per Unit

Computing the Break-Even Point in Units

Sell Bookshelf for $100Costs you $50 to produce (variable cost per unit)

So, Contribution to Fixed Costs Per Unit

$100 - $50 = $50$50

BEP (units) =$50

$200,000= 4000

So, you need to produce4,000 units to break even

Computing the Break-Even Point in Revenue

BEP (in $) =Total Fixed Costs

VariableCost Per Unit

Price Per Unit

1 -

Computing the Break-Even Point in Revenue

BEP (in $) =$200,000

$50

$100

1 -

BEP (in $) = $200,000

1 - .50= $400,000

So, you need to Reach $400,000In revenue to reachBreak-even point

Break-Even Point

Crystal Pepsi Break-Even Example Fixed cost = $10,000,000 Variable cost = $0.25 per can Priced at $0.50 per can

What is the break-even point in Sales units

Evaluate the Pricing Environment In addition to internal factors such as manufacturing

costs and capacity Marketers must assess external environmental factors

(including competitors) when setting pricing Broad economic trends, consumer trends, social trends, and

intensity of competition When the economy is growing

Inflation occurs and prices rise When the economy is slow

Prices stagnate or contract to keep sales stable Consumers may be less likely to buy luxury items

Choose Pricing Strategy

Cost-plus pricing Add a fixed amount to the total costs of producing

the product Demand-based pricing

Set price based on predicted demand Target costing

Figure out price and quality of product customers want

Figure out the cost to make the product Determine if production is profitable

Yield management pricing Charge different customers different prices to

manage demand and maximize profits

Choose Pricing Strategy

Value pricing Pricing to provide ultimate value to the

customer New product pricing

Skimming High price for highly desired product

Penetration Very low price to encourage quick sales

Trial Initial low price so consumers can try out product

Develop Pricing Tactics

Pricing for individual products Two part pricing

Need to pay twice Payment pricing

Break overall price into smaller payments

Develop Pricing Tactics

Pricing for multiple products Price bundling

Put multiple products together in a bundle Captive pricing

Price basic product low Complementary and necessary products at a

high profit margin

Psychological Issues in Pricing Internal reference price

Set price or range of prices consumers think are reasonable

Price-quality inferences Greater price equals greater quality

Odd-even prices Odd prices sell more For some products, this conveys low quality

Price lining Develop a variety of products at different price

points

Pricing and Placebo

MIT study on “Veladone” FDA approved drug used in dental surgery

Price conditions 10 cents per pill $2.50 per pill

Effectiveness In low price point

61% reported decrease in pain In high price point

85% reported decrease in pain