CASE 3.2 A Shift for Lieutenant Colonel AdamsEAM 751 Chapter.docx
- 1. CASE 3.2 A Shift for Lieutenant Colonel Adams EAM 751 Chapter 3 Working with a partner complete CASE 3.2 Answer the 3 questions at the end of the chapter and submit. Marketing Management Fifteenth Edition Chapter 16 Developing Pricing Strategies and Programs Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved
- 2. Learning Objectives 16.1 How do consumers process and evaluate prices? 16.2 How should a company set prices initially for products or services? 16.3 How should a company adapt prices to meet varying circumstances and opportunities? 16.4 When and how should a company initiate a price change? 16.5 How should a company respond to a competitor’s price change? Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved Setting the Price Table 16.2 Steps in Setting a Pricing Policy 1. Selecting the Pricing Objective 2. Determining Demand
- 3. 3. Estimating Costs 4. Analyzing Competitors’ Costs, Prices, and Offers 5. Selecting a Pricing Method 6. Selecting the Final Price Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved Step 1: Selecting the Pricing Objective • Survival • Maximum current profit • Other objectives • Maximum market share • Product-quality leadership • Maximum market skimming Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved Step 2: Determining Demand • Price sensitivity
- 4. • Estimating demand curves – Surveys, price experiments, & statistical analysis • Price elasticity of demand Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved Figure 16.1 Inelastic And Elastic Demand Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved Price Sensitivity Table 16.3 Factors That Reduce Price Sensitivity • The product is more distinctive. • Buyers are less aware of substitutes. • Buyers cannot easily compare the quality of substitutes. • The expenditure is a smaller part of the buyer’s total income. • The expenditure is small compared to the total cost of the end
- 5. product. • Part of the cost is borne by another party. • The product is used in conjunction with assets previously bought. • The product is assumed to have more quality, prestige, or exclusiveness. • Buyers cannot store the product. Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved Step 3: Estimating Costs (1 of 3) • Types of costs and levels of production – Fixed vs. variable costs – Total costs – Average cost Figure 16.2 Cost per Unit at Different Levels of Production per Period Copyright © 2016, 2012, 2009 Pearson Education, Inc. All
- 6. Rights Reserved Step 3: Estimating Costs (2 of 3) • Accumulated production – Experience/learning curve Figure 16.3 Cost per Unit as a Function of Accumulated Production: The Experience Curve Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved Step 3: Estimating Costs (3 of 3) • Target costing – Price less desired profit margin – Costs change with production scale and experience. They can also change as a result of a concentrated effort by designers, engineers, and purchasing agents to reduce them through target costing. Market research establishes a new product’s desired functions and the price at which it will sell, given its appeal and
- 7. competitors’ prices. This price less desired profit margin leaves the target cost the marketer must achieve. Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved Step 4: Analyzing Competitors’ Prices • Firm must take competitors’ costs, prices, & reactions into account – Value-priced competitors Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved Step 5: Selecting a Pricing Method (1 of 6) • Three major considerations in price – Costs = price floor – Competitors’ prices = orienting point – Customers’ assessment of unique features = price ceiling
- 8. Figure 16.4 The Three Cs Model for Price Setting Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved Step 5: Selecting a Pricing Method (2 of 6) • Markup pricing – Add a standard markup to the product’s cost unit cost Markup price 1 desired return on sales Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved Step 5: Selecting a Pricing Method (3 of 6) • Target-return pricing – Price that yields its target rate of return on investment desired return invested capital
- 9. Target-return price unit cost unit sales Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved Figure 16.5 Break-Even for Target-Return Price Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved Step 5: Selecting a Pricing Method (4 of 6) • Perceived-value pricing – Based on buyer’s image of product, channel deliverables, warranty quality, customer support, and softer attributes (e.g., reputation) Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved
- 10. Step 5: Selecting a Pricing Method (5 of 6) • Value pricing • EDLP – High-low pricing • Going-rate pricing – the firm bases its price largely on competitors’ prices Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved Step 5: Selecting a Pricing Method (6 of 6) • Auction-type pricing – English (ascending) Amazon.com, the seller puts up an item and bidders raise their offer prices until the top price is reached. – Dutch (descending)
- 11. sellers. In the first kind, an auctioneer announces a high price for a product and then slowly decreases the price until a bidder accepts. In the other, the buyer announces something he or she wants to buy, and potential sellers compete to offer the lowest price. – Sealed-bid sellers. In the first kind, an auctioneer announces a high price for a product and then slowly decreases the price until a bidder accepts. In the other, the buyer announces something he or she wants to buy, and potential sellers compete to offer the lowest price. Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved Step 6: Selecting the Final Price
- 12. • Additional factors to select final price: ‒ Impact of other marketing activities ‒ Company pricing policies ‒ Gain-and-risk-sharing pricing ‒ Impact of price on other parties Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved Adapting the Price (1 of 5) • Geographical pricing – Barter – Compensation deal – Buyback arrangement – Offset Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved Adapting the Price (2 of 5) • Price discounts and allowances
- 13. Table 16.4 Price Discounts and Allowances Discount: A price reduction to buyers who pay bills promptly. A typical example is “2/10, net 30,” which means payment is due within 30 days and the buyer can deduct 2 percent by paying within 10 days. Quantity Discount: A price reduction to those who buy large volumes. A typical example is “$10 per unit for fewer than 100 units; $9 per unit for 100 or more units.” Quantity discounts must be offered equally to all customers and must not exceed the cost savings to the seller. They can be offered on each order placed or on the number of units ordered over a given period. Functional Discount: Discount (also called trade discount ) offered by a manufacturer to trade-channel Members if they perform certain functions, such as selling, storing, and record keeping. Manufacturers must offer the same functional discounts within each channel. Seasonal Discount: A price reduction to those who buy merchandise or services out of season. Hotels,
- 14. motels, and airlines offer seasonal discounts in slow selling periods. Allowance: An extra payment designed to gain reseller participation in special programs. Trade-in allowances are granted for turning in an old item when buying a new one. Promotional allowances reward dealers for participating in advertising and sales support programs. Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved Adapting the Price (3 of 5) • Loss-leader pricing • Special event pricing • Special customer pricing • Cash rebates • Low-interest financing • Longer payment terms • Warranties/service contracts • Psychological
- 15. discounting Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved Adapting the Price (4 of 5) • Price discrimination – occurs when a company sells a product or service at two or more prices that do not reflect a proportional difference in costs. In first- degree price discrimination, the seller charges a separate price to each customer depending on the intensity of his or her demand. In second- degree price discrimination, the seller charges less to buyers of larger volumes. In third-degree price discrimination, the seller charges different amounts to different classes of buyers, as in the following cases – Customer-segment pricing – Product-form pricing
- 16. – Time pricing – Image pricing – Location pricing – Channel pricing Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved Adapting the Price (5 of 5) • Price discrimination – Yield pricing management systems and yield pricing, by which they offer discounted but limited early purchases, higher-priced late purchases, and the lowest rates on unsold inventory just before it expires. Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved Initiating and Responding to Price
- 17. Changes (1 of 2) • Initiating price cuts – Domination of market competitors, or it initiates price cuts in the hope of gaining market share and lower costs. • Price-cutting traps – Low-quality: Consumers assume quality is low – Fragile market share: Consumers assume quality is low – Shallow pockets: Higher-priced competitors match the lower prices but have longer staying power because of deeper cash reserves – Price war:Competitors respond by lowering their prices even more, triggering a price war Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved Initiating and Responding to Price
- 18. Changes (2 of 2) • Initiating price increases ‒ Delayed quotation pricing ‒ The company does not set a final price until the product is finished or delivered. This pricing is prevalent in industries with long production lead times, such as industrial construction and heavy equipment. ‒ Escalator clauses ‒ The company requires the customer to pay today’s price plus all or part of any inflation increase that takes place before delivery. Escalator clauses base price increases on some specified price index. They are found in contracts for major industrial projects, such as aircraft construction and bridge building. ‒ Unbundling The company maintains its price but removes or prices separately one or more elements that were formerly part of the offer, such as delivery or installation. Car companies sometimes add higher-end audio entertainment systems or GPS navigation
- 19. systems to their vehicles as separately priced extras. Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved Initiating Price Increases Table 16.5 Profits before and after a Price Increase Blank Before After Blank Price $10 $10.10 (a 1% price increase) Units sold 100 100 Blank Revenue $1,000 $1,010 Blank Costs −970 −970 Blank Profit $30 $40 (a 33 ⅓% profit increase) Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved Initiating and Responding to Price Changes • Anticipating competitive responses
- 20. • Responding to competitors’ price changes Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved Copyright