Marketing Chapter 14 – Price

Price
– The overall sacrifice a consumer is willing to make — money, time, energy — to acquire a specific product or service
– For seller, price is revenue
– For buyer, price is cost
– Price allocates resources in a free-market economy
5 C’s of Pricing
– Competition
– Cost
– Company Objectives
– Customers
– Channel Members
Company Objectives
– Profit orientation: focuses on target profit pricing, maximizing profits
– Sales orientation: Objective based on the belief that increasing sales will help firm more than increasing profits
– Competitor orientation: Firm measure itself primarily against its competition, status quo
– Customer orientation: Match price to customer expectation, price based on perception of value
Demand Curve
– Shows how many units of a product or service customers will demand during a specific period at different prices
– Not all demand curves are downward sloping
– Prestigious products or services have upward sloping curves
Price Elasticity of Demand
– Measures how changes in a price affect the quantity of the product demanded; specifically, the ratio of the percentage change in the quantity demanded to the change in percentage of price
Price Elasticity of demand = % change in quantity demanded / % change in price
Elastic demand
– Product or service is price sensitive
Inelastic demand
– Price or service is not price sensitive (common for necessities)
Income effect
– Refers to the change in the quantity of a product demanded by consumers due to a change in their income
Substitution effect
– Consumers’ ability to substitute other products for the focal brand, thus increasing the price elasticity of demand for the focal brand
Cross-price elasticity
– The percentage change in demand for product A that occurs in response to a percentage change in price of product B
Complementary products
– Products whose demand curves are positively related, such that they rise or fall together; a percentage increase in demand for one results in a percentage increase in demand for the other
Substitute products
– Products for which changes in demand are negatively correlated
Breakeven in Units
Fixed Costs / Contribution per unit

Contribution per unit = price – VC

Profit
(Contribution per unit * Quantity) – FC
Monopoly
– One firm provides the product or service in a particular industry
Oligopoly
– Occurs when only a few firms dominate the market
Price wars
– Occurs when two or more firms compete primarily by lowering the prices
Predatory Pricing
– A firm’s practice of setting a very low price for one or more of its products with the intent to drive its competition out of business; illegal under both the Sherman Antitrust Act and the Federal Trade Commissions Act
Monopolistic Competition
– Occurs when there are many firms that sell closely related but not homogenous products; these products may be viewed as substitutes but are not perfect substitutes
Pure Competition
– Occurs when different companies sell commodity products that consumers perceive as substitutable; price usually is set according to the laws of supply and demand
Gray Market
– Employs irregular but not necessarily illegal methods; generally, it legally circumvents authorized channels of distribution to sell goods at prices lower than those intended by the manufacturer
Everyday Low Pricing (EDLP)
– A strategy companies use to emphasize the continuity of their retail prices at a level somewhere between the regular, non-sale price and the deep-discount sale prices their competitors may offer
– Example: Walmart
High/low Pricing
– Provides the thrill of the chase for the lowest price
– A pricing strategy that relies on the promotion of sales, during which prices are temporarily reduced to encourage purchases
Reference Price
– The price against which buyers compare the actual selling price of the product and that facilitates their evaluation process
Market Penetration Strategy
Start with low price –> change to higher price after penetrating market
Price Skimming
-Start with a high price –> change to lower price after sales begin to slow
Experience Curve Effect
– Refers to the drop in unit cost as the accumulated volume sold increases; as sales continue to grow, the costs continue to drop, allowing even further reductions to the price
Loss Leader Pricing
– Takes the tactic of the leader pricing one step further by lowering the price below he store’s costs
Bait-and-switch
– A deceptive practice of luring customers into the store with a very low advertised price on an item (the bait), only to aggressively pressure them into purchasing a higher priced model (the switch) by disparaging the low-priced item, comparing it unfavorably with the higher priced model
Price discrimination
– The practice of selling the same product to different resellers or to the ultimate consumer at different prices; some, but not all, forms of price discrimination are illegal
Price fixing
– Colluding with other firms to control prices
Horizontal price fixing
– Occurs when competitiors that produce and sell competing products collude to control prices, effectively taking price out of the decision process for consumers
Vertical price fixing
– Occurs when parties at different levels of the same marketing channel collude to control the prices passed on to consumers
Manufacturer’s Suggested Retail Price (MSRP)
– The price that manufacturers suggest retailers use to sell their merchandise
Contribution Margin
Contribution / selling price
Revenue Breakeven
Fixed Cost / Contribution margin
Target Profit Breakeven
(Fixed cost + Target profit) / Contribution %
Target Volume (units)
(FC + Profit objective) / Contribution