chapter 13 basic
TRANSCRIPT
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McGraw-Hill/Irwin Copy right 2008 by the McGraw-Hil l Com panies, Inc. All r igh ts reserved.
Marketing
Dhruv Grewal
Michael Levy
Chapter 13
Pricing Concepts forEstablishing Value
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2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Panera Bread
Patrons spend on average$4 more
Offers upscale food andambiance
Consumers willing to paymore will choose Panera,
others will choose otheroptions
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Price
Benefits vs. Sacrifice
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Price is a Signal
Prices can be both toohigh and too low
Price too lowmay signalpoor quality
Price set too high mightsignal low value
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Prices Role in the Marketing Mix
Price is the only marketing mix element thatgenerates revenue
Price is usually ranked as one of the most
important factors in purchase decisions
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Test YourKnowledge
The key to successful pricing is to match the product or servicewith the consumers _______________.
A) income levelB) value perceptions
C) shopping habitsD) brand consciousness
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The 5 Cs of Pricing
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1st C: Company Objectives
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Profit Orientation
Maximizing
profits
Target
profitpricing
Targetreturnpricing
ProfitOrientation
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Sales Orientation
Focus on increasingsales
More concerned withoverall market share
Does not always implylow setting low prices
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Competitor Orientation
Competitive parity
Status quo pricing
Value is not part of
this pricing strategy
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Customer Orientation
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Focus on customer expectations by matching pricesto customer expectations
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Test YourKnowledge
Which of the following is NOT an example of how a firm mightinvoke the concept of value?
A) Set a no-haggle priceB) Set prices to match consumer expectations
C) Change prices to meet those of the competitionD) Offer very high-priced, state-of-the-art products
or services
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Implementing Pricing Strategies toAchieve Objectives
How can a consumers perception of value affect a
firms pricing strategy?
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Case in Point: Ursinus College
Challenge
Answer
Results
Raise tuition. A consultant hadfound that the tuition was too lowcompared to other schools of similarquality and thus signaling lowerquality.
Tuition was raised by 17.6 percentand within 4 years the size of thefreshman class had increased 35%.
College was losing applicants.
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2nd C: Customers
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Demand Curves and Pricing
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Demand curves
Knowing demand curve enables to
see relationship between price anddemand.
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Demand Curves
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Not all are downward sloping
Prestige product or services have upwardsloping curves.
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Price Elasticity of Demand
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Elastic (price sensitive)
Inelastic (price insensitive)
Consumers less sensitiveto price increases fornecessities
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Price Elasticity of Demand
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Entrepreneurial Marketing 13.1:JetBlue Provides Value
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Founder David Neelamdecided to focus oncreating value
Emphasize those servicesthat mattered most
New model = low prices +high customer service
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Factors Influencing Price Elasticity ofDemand
Income
effect
Substitutioneffect
Cross-
priceelasticity
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Test YourKnowledge
Consumers are generally less sensitive to price increases forwhich of the following items?
A) milkB) steak
C) carsD) clothing
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Substitution Effect
Consider Pete, collegestudent on a budget
Old Spice SportDeodorant user
At the store he noticesthat Old Spice is moreexpensive
Pete decides to giveanother brand a try andsave money
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Substitution Effect
How can a firm win market share in the highlycompetitive technology arena?
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Case in Point: HD DVD Players
Challenge
Answer
Results
Toshiba introduces a $500 HDDVD player to compete with SonysBlu-ray technology DVD playersretailing for $1000 - $1800.
Toshiba has undercut the market onprice and has convinced somecompanies to produce HD DVDsrather than Blu-ray versions. Thewinner is not yet determined.
To win the market for this newtechnology.
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Cross-Price Elasticity
Consider Kendra, self-supporting college student
Buys a new printer on sale
for a great price Learns it requires special ink
cartridges* that cost morethan the printer
*complementary products
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3rd C: Costs
Variable Costs
Vary with productionvolume
Fixed Costs Unaffected by
production volume
Total Cost
Sum of variable andfixed costs
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Test YourKnowledge
In general, prices should not be based on cost becauseconsumers make purchase decisions based on their_______________.
A) cross-price elasticity
B) Internet researchC) substitution effectD) perceived value
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Break Even Analysis and DecisionMaking
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Break Even Analysis
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Break Even to Achieve Target Profit
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Test YourKnowledge
When a firms profits hits the break-even point, their profits are_____________.
A) less than expectedB) more than expected
C) zeroD) undetermined
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4th C: Competition
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Ethical Dilemma 13.1: Do ProtectionistLaws Hurt or Help Consumers
Keep some companies from conducting business in a particular region The Wright Amendment
Prohibits Southwest from flying directly from Dallas Love Field tocertain places
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5th C: Channel Members
Manufacturers, wholesalers andretailers can have differentperspectives on pricing strategies
Manufactures must protect againstgray market transactions
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Macro Influences on Pricing
The Internet
Increased price sensitivity
Growth of online auctions
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Economic Factors
Economic factors
Localeconomic
conditions
Increasingdisposable
income
Increasingstatus
consciousness
Cross-shopping
Increasingglobalization
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Economic Factors
How can a large retailer gain market share in anenvironment where even status-consciousshoppers want to shop cheap?
Case in Point: Wal Mart Answers the
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Case in Point: Wal-Mart Answers theNeed for Lower Priced Drugs
Challenge
Answer
Results
Stem the rising cost ofprescription drugs for consumers.
Wal-Mart announced that it hadlowered the cost on 291 genericdrugs to $4/prescription.
Initially launched in Florida, Wal-Martplans to expand the programthroughout the US. Target matchedthe program and KMart has launcheda competing program that may in factbe cheaper.
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Chapter 13 Glossary
2007 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
Competitive parity:A firms strategy of setting prices that are similarto those of major competitors.
Complementary products: Products whose demand curves arepositively related, such that they rise or fall together.
Cross-price elasticity: The percentage change in demand for productA that occurs in response to a percentage change in price of productB.
Cross-shopping: The pattern of buying both premium and low-pricedmerchandise or patronizing both expensive, status-oriented retailersand price-oriented retailers.
Demand curves:Shows how many units of a product or serviceconsumers will demand during a specific period at different prices.
Gray market: Employs irregular but not necessarily illegal methods;generally, it legally circumvents authorized channels of distribution tosell goods at prices lower than those intended by the manufacturer.
Income effect:Refers to the change in the quantity of a productdemanded by consumers due to a change in their income.
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Chapter 13 Glossary (continued)
Maximizing profit:A pricing strategy that relies primarily on economic theory;identifies the price at which profits are maximized by using a specificmathematical model that captures all the factors required to explain andpredict sales and profits.
Prestige products or services:Those that consumers purchase for statusrather than functionality.
Status quo pricing:A competitor-oriented strategy in which a firm changesprices only to meet those of competition.
Substitution effect:Refers to consumers ability to substitute other productsfor the focal brand, thus increasing the price elasticity of demand for the focalbrand.
Target profit pricing:A pricing strategy implemented by firms when theyhave a particular profit goal as their overriding concern; uses price to stimulate
a certain level of sales at a certain profit per unit. Target return pricing:A pricing strategy implemented by firms less
concerned with the absolute level of profits and more interested in the rate atwhich their profits are generated relative to their investments; designed toproduce a specific return on investment, usually expressed as a percentage ofsales.