The want satisfying ability of a Product
A statement or measure of utility and the amount of money or other consideration given in exchange for the utility delivered by the product.
Ratio of perceived utility to price & other
Other costs include
Time, travel expenses, emotional costs.
Value = Benefits Received / Cost Incurred
Means marketers elect to compete
on a price basis. They influence consumer demand by changing prices, and has less reliance on other components of the marketing mix
Competitive ramifications of Price competition
Price wars, lead to lower industry
profits. Government monitoring & intervention to avoid price collusion/fixing.
Non price competition
Means firms emphasize other elements of the marketing mix. They Avoid price wars, emphasize differential attributes in products, and build brand image/equity.
Competitive ramifications of Non price competition
Prices can be raised and theres a risk that consumers may not perceive differential status as significant
The pricing decision areas are:
What we want price to do as part of the marketing mix
The fundamental approaches to setting &
managing price. How we intend to price to reach identified objectives
Various techniques are used to set the list or base price of the product. This price is the beginning point. Adjusted via discounts, allowances, markdowns, etc.
Discounts subtract from base price. Used strategically & tactically to manage demand & cash flow
Similar to discounts. Generally a form of “help” to distributors to offset marketing costs
Examines the relationships between price, costs, sales volume & profitability. Break even analysis the major tool.
Geographic Price Adjustments
Build in considerations for the effects of shipping & handling on demand.
Prices, after being initially set, must be managed in response to changing market
& competitive conditions.
Effective price range.
Maximum pricing we can charge for a product is always dictated by consumer and price for, setting price below costs
Why concern cost?
Costs act as a “price floor” meaning it cannot price below costs in long run. The relevant costs are variable & fixed costs.
How are prices set in relation to cost?
Prices often are set specifically to cover costs or provide some level of profit above & beyond estimated costs.
What are the firm’s options when costs
Reduce costs in other business areas
Reducing the size of a product
is reducing the number of sheets of toilet paper or tissues in each package while holding retail prices constant.
Predicts how much a stimulus must change before the change is noticed.
Common Applications of Weber’s Law
includes the FTC regulation of the size of warning labels, de-sheeting, price changes, and changes in product taste, quality, and size.
Ongoing costs that are unrelated to production volume. Constant over wide range of output and sales
Fixed Costs Examples
Plant & equipment
Sales support expenses
Costs that change with increases or decrease in output.
Variable Costs Examples
Parts & materials
Equals Total Variable cost plus Total Fixed costs. TC = TVC + TFC
Average Fixed Costs
Total Fixed Costs divided by units of output. As output increases, fixed costs are spread over larger numbers of units.
Average Fixed Costs Equation
AFC = TFC / Q
Average Variable Costs
Average Variable Costs divided by units of
output. Slightly U-shaped curve and has a initial declines due to experience curve effects & scale economies. Eventually increase due to diseconomies of scale
Average Variable Costs Equation
AVC = TVC / Q
Average Total Costs Equation
Demand will vary with price charged. Must be able to predict the nature of the demand curve faced
The Law of Demand
All else being equal, as the price of a product increases, quantity demanded falls; c.p.
Shows how the demand for service/goods varies. Not all prices on a demand curve will be profitable
Demand curves forms
Downward sloping (traditional “law of demand”)
Upward sloping (prestige pricing)
Elasticity of demand
Demand initially increases as price increases, At some point (P1), further increases in price
result in decreased demand. Common for prestige goods & situations in which quality is inferred from price .
Consumers are “price sensitive.”
When Price & total revenue are inversely related?
Total revenue will increase as price decreases; TR decreases as price increases
Demand Elasticity Equation
e = Q2 – Q1 / .5(Q2 + Q1) / P2 – P1 / .5(P2 + P1)
e = price elasticity
P1 is the initial price
P2 is the changed price
Q1 and Q2 are the respective quantities
demand at each price
Percent Change in relation to Elastic Demand
Percent (absolute value) change in demand is greater than the percent (absolute value) change in price.
What is “e” in relation to Elastic Demand
“e” is the % change in demand for every 1%
change in price. For each 1% change in price,
demand changes by -1.8%.
Factors Contributing to Elastic Demand
Goods/service s are very similar
No urgency in purchase
Low brand loyalty
Consumers are price insensitive. Price & total
revenue are positively related meaning, total revenue will increase as price increases
Percent Change in relation to Inlastic Demand
Percent (absolute value) change in demand is less than the percent (absolute value) change
What is “e” in relation to Inlastic Demand
“e” is the % change in demand for every 1%
change in price. Demand changes by -.61% for each 1% change in price.
Factors That Contribute to Inelastic Demand
Products are highly differentiated
Brand loyalty exists
Brand connotes prestige image
Emergency nature of purchase
Why aren’t all prices profitable?
Loss occurs at high prices due to
inadequate demand — cannot cover fixed
costs, even though margins per unit are
Loss occurs at lower prices because
it cannot cover either variable or fixed
costs. Margins per unit are very low or
Techniques for Estimating Demand Curves
Past data showing how price changes with demand. It projects demand at given price using linear regression
Limitations of Ratios
Requires extensive historical data (company & Indusrty), assumes no changes in other marketing mix variables, and assume no changes in key environmental variables
Buy Response Data
Product shown or described at a specific price and customers are asked if they would buy at that price. Process is repeated with different groups of customers at series of prices
Using Buy-Response Data
Identify prices at which at which consumers become highly price sensitive and estimate demand curve
Controlled & simulated test markets in which price is manipulated. Can be time consuming, expensive, and difficult
Controlled Test Markets
Retail prices manipulated; all other
factors held constant
Ways to manipulate test markets
Vary prices across test cities, across stores in same city, and in same store over time
The Price Plan
The goal is to produce a pricing plan that
contains a price schedule (i.e. actual price
lists, adjustments for discounts & allowances, adjustments for shipping & handling), and contingencies for managing price given changes in market conditions
The Pricing Process
Set Pricing Objectives
-The Pricing Environment
Set Pricing Strategies
Set the Base Price
Examine Cost-Volume Profit Relationships
Identify Pricing Adjustments
Basic Pricing Strategies
Demand Generation Pricing
Product Line Pricing
Demand Generation Pricing
When pricing objectives center around
generating sales volume, demand generation strategies that focus on low prices are appropriate. Demand is price elastic. Strategies include: Penetration pricing, periodic, random and deep discounting, odd pricing, and value pricing
Price is set high to target inelastic markets or market segments. Also used as a cue or signal meant to produce a specific image or convey some meaning about the product. Strategies include: Skimming pricing, quality pricing, prestige pricing.
Product Line Pricing Definition
Pricing strategies that specifically focus on the product line, rather than single products. Objective is to maximize profits for the entire line. Strategies include: Captive, leader, and bait pricing, price lining, and price bundling
Used by firms with specific competition-based pricing objectivesStrategies include: Meet the competition, undercut competitors, price leadership, predatory pricing, reference pricing
The Experience Curve
In relation to AVC with co. Ulithi e product volume.
Second Market Discounting
Higher price in core target markets; second (lower) price in secondary market. Danger exists that ‘secondary’ and ‘primary’ markets may communicate about prices.
Price initially high. Discount after set time
Discount periods are predictable
Systematic Discounting Pro
Pro may entice price sensitive customers ho would have purchased elsewhere, they will have to wait for the sale.
Systematic Discounting Con
Con: Regular customers can predict & postpone purchases until sale.
Also known as random is designed so regular customers cannot predict timing & postpone purchases.
Lower price at random times
Prices set at even dollar values (i.e. $49). Impression. Exists that seller sets price will the care and as low as possible.
High price to attract customers desiring quality, uniqueness, status. Often most appropriate during early stages of PLC. Price systematically reduced over time as.
Skimming is effective when
The effects of competition can be minimized
Belief that higher prices mean higher quality. Firms may set price high to induce perceptions of quality
Price-Quality Pricing is used to infer quality when …
Difficult to judge product on tangible
Buyers think there are large differences in
quality between brands
Buyers have little experience with the
product (e.g.. new product)
Prestige pricing is closely related to price/quality. Inverse demand may exist & higher prices stimulate added demand
Product Line Pricing
Low price for the basic product; high markup on related supplies. Works when few alternative sources of supply exist
Advertise and sell key items at less than usual profit margins. For middlemen, the goal is to increase traffic in store. For manufacturers, obj. Is to gain greater consumer interest in its overall product line.
Advertise low price version of product to create draw, trade customer up to higher priced version in store. Bait & Switch
Basic product, options, customer service
offered at one total “package” price. Individual items total to more if sold
Reference price listed on pricing tags, catalogs. Used to induce perception of bargain, shows manufacturers’ suggested prices with own price, and can easily be accused of deceptive pricing
Moderately priced product displayed next to high priced version. Reference can be a competitor or other items in same seller’s line, moderate priced version looks more attractive.
Low price strategy can prevent competitive
entry. Possible to obtain very low unit cost structure via scale economies, experience. Price very low to buy market share in anticipation of obtaining economies. Signals potential entrants that low margins exist. If entry is delayed, may have developed significant cost, price advantage
Meet the competition
Price set at the “going rate.” Avoids price cutting & wars. Shifts competition to other areas like product differentiation & promotion
Dominated by few large firms, assume role as leader due to market share, capacity. Leader has market knowledge, control over distribution system, determines price level, other firms follow. Firms in weaker competitive positions have little incentive to deviate
Undercutting the Competition
Desire to be lowest priced alternative, price is focal point of strategy through Discount retailers & Global businesses. Feasible when scale economies exist
Firms wishing to establish a monopoly or market presence. Set prices very low — below cost, drive smaller, less efficient competitors out, buy market share and market awareness, raise prices after competitors eliminated or presence established