Principles of MarketingMKT3010

Chapter 14Pricing Concepts for Establishing Value

Patricia Knowles, Ph.D.

Associate ProfessorClemson University

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Pricing Concepts for Establishing ValueThese are the learning objectives guiding the chapter and will be explored in more detail in the following slides.

List the four pricing orientations.

Explain the relationship between price and quantity sold.

Explain price elasticity.

Describe how to calculate a product’s break-even point.

Indicate the four types of price competitive levels.

LO1

LO2

LO3

LO4

LO5

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PricePrice refers not just to money but also other costs such as time.

Principles of MarketingMKT3010

Benefits

Sacrifice

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The Role of Price in the Marketing Mix

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Price is the only marketing mix element that generates revenue

Price is usually ranked as one of the most important factors in purchase decisions

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The 5 Cs of Pricing

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These are the Cs of pricing.

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1st C: Company Objectives

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Each firm has a specific orientation in the marketplace that dominates its pricing strategy. Profit-oriented firms do not use value as a consideration but rather focus on generating a set level of profit from each sale.

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2nd C: Customers

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The following slides address different parts of this graph; this slide serves as an introduction to the topic of demand curves.

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Demand Curves

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Name a prestige product. Why do they think people are willing to pay a higher price. For example, why will someone pay a higher price for a BMW than a Saturn. They will mention product quality but also branding issues including the esteem offered to the owner from the BMW.

Not all are downward sloping

Prestigious products or services have upward

sloping curves

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Price Elasticity of DemandFor pricing, elasticity is a crucial concept.

Elastic (price sensitive)

Inelastic (price insensitive)

Consumers are less sensitive to price

increases for necessities©PhotoLink/Getty Images

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Factors Influencing Price Elasticity of DemandWal-Mart stresses good service in the holiday season, but as always, ends their ad with messaging related to their low price offerings and the importance of low price (live better).

Income effect

Substitutioneffect

Cross-price

elasticity

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3rd C: Costs

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No discussion of price would be complete without a discussion of cost. The price must at least cover the cost of the item. However, as you may have learned in your finance courses, understanding costs is rarely easy.

• Variable Costs• Vary with production volume

• Fixed Costs• Unaffected by production volume

• Total Costs• Sum of variable and fixed costs

Michael Rosenfeld/Stone/Getty Images

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Break Even Analysis and Decision Making

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Break Even AnalysisAlthough profit, which represents the difference between the total cost and the total revenue (total revenue or sales = selling price of each unit sold number of units sold), can indicate how much money the firm is making or losing at a single period of time, it cannot tell managers how many units a firm must produce and sell before it stops losing money and at least breaks even.

Total Variable Cost = Variable Cost per unit X QuantityTotal Cost = Fixed Cost + Total Variable Cost

Total Revenue = Price X Quantity

Fixed CostsContribution per unit

Break-Even Point (units) =

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4th C: Competition

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Less Price Competition More Price Competition

FewerFirms

ManyFirms

OligopolyA handful of firms control the market

Ingram Publishing/SuperStock.

MonopolyOne firm controls the market

©Brand X Pictures/PunchStock.

Monopolistic Comp.Many firms selling differentiated products at different prices

Steve Cole/Getty Images.

Pure CompetitionMany firms selling commodities for the same prices

©Corbis – All Rights Reserved.

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5th C: Channel Members

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Have you ever bought books marked “Instructor Copy: Not for Resale” or “International Student Edition”? Is the bookstore engaging in unethical behavior? Whom does this gray market benefit? Whom does it hurt? The purchase of gray market textbooks hurt the publisher and authors. These books do not help recover the costs of all the ancillary packages that are provided to instructors.

Courtesy Apple, Inc.

• Manufacturers, wholesalers and retailers can have different perspectives on pricing strategies

• Manufactures must protect against gray market transactions

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Check Yourself

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1. What are the five Cs of pricing?

2. Identify the four types of company objectives.

3. What is the difference between elastic versus inelastic demand?

4. How does one calculate the break-even point in units?

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Economic Factors

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Firms and consumers alike should constantly monitor the economic environment, because economic conditions have a direct impact on pricing. How many people cross-shop? Do you believe this practice has influenced the way some firms price their merchandise? It has made prestige products more expensive and more moderately priced merchandise even less expensive.

Local economic conditions

Increasing disposable income

Cross- shopping Increasing status consciousness

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Check Yourself

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1. How have the Internet and economic factors affected the way people react to prices?

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Glossary

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Break-even analysis enables managers to examine the relationships among cost, price, revenue, and profit over different levels of production and sales.

Cross-price elasticity is the percentage change in the quantity of Product A demanded compared with the percentage change in price in Product B.

Fixed costs are those costs that remain essentially at the same level, regardless of any changes in the volume of production.

Income effect is the change in the quantity of a product demanded by consumers due to a change in their income.

Maximizing profits strategy assumes that if a firm can accurately specify a mathematical model that captures all the factors required to explain and predict sales and profits, it should be able to identify the price at which its profits are maximized.

Price is the overall sacrifice a consumer is willing to make to acquire a specific product or service.

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Glossary

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Substitution effect refers to consumers’ ability to substitute other products for the focal brand.

Target profit pricing is implemented by firms to meet a targeted profit objective. The firms use price to stimulate a certain level of sales at a certain profit per unit.

Target return pricing occurs when firms employ pricing strategies designed to produce a specific return on their investment, usually expressed as a percentage of sales.

Total cost is the sum of the variable and fixed costs.

Variable costs are the costs that vary with production value.