Chapter 13 MKT120 Pricing
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The document discusses pricing strategies and concepts. It introduces the five C's of pricing - company objectives, customers, costs, competition, and channel members. It explains concepts like demand curves, price elasticity, variable and fixed costs, and break-even analysis. The goal is to help firms set prices that maximize profits by understanding how price impacts sales and the factors that influence customers' price sensitivity.
Chapter 13 MKT120 Pricing
- 1. © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin
- 2. Learning Objectives LEARNING OBJECTIVES Why should firms pay more attention to setting prices? What is the relationship between price and quantity sold? Why is it important to know a product’s break-even point? Who wins in a price war? How has the Internet changed the way some people use price to make purchasing decisions? © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-2
- 3. Price and Value What’s the most you will pay for a pair of jeans? © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-3
- 4. Price © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-4
- 5. Price is a Signal PriceGrabber.com Website © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-5
- 6. The Role of Price in the Marketing Mix Price is usually ranked as one of the most Price is usually ranked as one of the most important factors in purchase decisions important factors in purchase decisions Price is the only marketing mix element that Price is the only marketing mix element that generates revenue generates revenue © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-6
- 7. The 5 C’s of Pricing © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-7
- 8. 1st C: Company Objectives © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-8
- 9. Profit Orientation © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-9
- 10. Sales Orientation © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-10
- 11. Competitor Orientation Competitive parity Status quo pricing Value is not part of this pricing strategy © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-11
- 12. Customer Orientation = Focus on customer expectations by matching Focus on customer expectations by matching prices to customer expectations prices to customer expectations automotive.com Website © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-12
- 13. 2nd C: Customers © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-13
- 14. Demand Curves and Pricing Knowing demand curve enables to see relationship between price and demand © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-14
- 15. Demand Curves © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-15
- 16. Price Elasticity of Demand Elastic (price sensitive) Inelastic (price insensitive) Consumers are less sensitive to price increases for necessities © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-16
- 17. 3rd C: Costs Variable Costs − Vary with production volume Fixed Costs − Unaffected by production volume Total Cost − Sum of variable and fixed costs © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-17
- 18. Break Even Analysis and Decision Making © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-18
- 19. 4th C: Competition Subway Commercial © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-19
- 20. 5th C: Channel Members Manufacturers, wholesalers and retailers can have different perspectives on pricing strategies Manufactures must protect against gray market transactions © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-20
- 21. Macro Influences on Pricing The Internet Increased price sensitivity Growth of online auctions © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-21
- 22. Review Only © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-22
- 23. Economic Factors © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-23
- 24. What are they trying to accomplish with this ad? © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-24
- 25. Price Elasticity of Demand © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-25
- 26. Factors Influencing Price Elasticity of Demand Wal-Mart Commercial © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-26
- 27. Substitution Effect Meet Pete, college student on a budget: Old Spice Sport Deodorant user At the store he notices that Old Spice is more expensive Pete decides to give another brand a try and save money © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-27
- 28. Cross-Price Elasticity Meet Kendra, self- supporting college student: Buys a new printer on sale for a great price Learns it requires special ink cartridges that cost more than the printer © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-28
- 29. Break Even Analysis Total Variable Cost = Variable Cost per unit X Quantity Total Cost = Fixed Cost + Total Variable Cost Total Revenue = Price X Quantity Fixed Costs Break-Even Point (units) = Contribution per unit © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-29
- 30. Check Yourself 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? © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-30
- 31. Check Yourself 1. How have the Internet and economic factors affected the way people react to prices? © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-31
- 32. Glossary Break-even analysis enables managers to examine the relationships among cost, price, revenue, and profit over different levels of production and sales. Return to slide © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-32
- 33. Glossary Cross-price elasticity is the percentage change in the quantity of Product A demanded compared with the percentage change in price in Product B. Return to slide © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-33
- 34. Glossary Fixed costs are those costs that remain essentially at the same level, regardless of any changes in the volume of production. Return to slide © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-34
- 35. Glossary Income effect is the change in the quantity of a product demanded by consumers due to a change in their income. Return to slide © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-35
- 36. Glossary The 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. Return to slide © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-36
- 37. Glossary Price is the overall sacrifice a consumer is willing to make to acquire a specific product or service. Return to slide © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-37
- 38. Glossary The substitution effect refers to consumers’ ability to substitute other products for the focal brand. Return to slide © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-38
- 39. Glossary 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. Return to slide © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-39
- 40. Glossary 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. Return to slide © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-40
- 41. Glossary The total cost is the sum of the variable and fixed costs. Return to slide © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-41
- 42. Glossary Variable costs are the costs that vary with production value. Return to slide © McGraw-Hill Companies, Inc., McGraw-Hill/Irwin 13-42
Editor's Notes
- #3: These are the learning objectives for this chapter.
- #4: Students will like this question – ask them to write the answer down in their notebook. Ask them why they will pay the prices they mention? It really comes down to the benefits and value they place on their jeans. Some see them as the pants they wear everyday, their most important item and will therefore pay more. Others won’t understand paying high prices for jeans since they are really nothing special. It would be interesting to see if there are differences across gender in the amounts they are willing to pay.
- #5: Remind students that price refers not just to money but also other costs such as time.
- #6: Consumers recognize price as a signal. If a marketer sets a price too high or too low, the wrong message gets sent to the market. This web link is for pricegrabber.com. There are many online comparison shopping sites for general goods as well as hotels and airlines. Ask students if they use these types of sites and why?
- #7: Ask students to provide an example of a purchase where they did not consider price. They will probably be hard-pressed to come up with anything, thus making the point.
- #8: The following slides discuss each C in detail; alternatively, you can use this graph as a basis for a shortened discussion.
- #9: 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.
- #10: Ask students : What are the issues with a profit orientation? Answer: The key issue is that it does not take into consideration the value customers have for the product. This may lead to prices being set below and optimal level.
- #11: Firms that want to attain market leadership set prices at less profitable levels to gain market share. Ask Students : Why would firms adopt this orientation? Many first adopt this orientation to establish a position in the market by getting the most price sensitive consumers to change brands .
- #12: This strategy is particularly common among smaller firms that lack knowledge or experience in setting prices. Non-market leader firms also use it to signal they are similar to the market leader. Ask students : What are the benefits of a competitor strategy? For example, can a new hotel chain indicate its level of service through price? The answer is yes. In many instances new brands will set price equal to the competitors they wish to be compared with knowing that consumers use reference prices to indicate quality
- #13: A recent study indicates that a variety of retailers sell one-carat diamonds, but consumers pay vastly different prices at Costco versus Tiffany’s. The diamonds are a commodity; they must meet the same standards and are rated the same. Ask students : Why would a consumer spend thousands more to buy a stone at Tiffany’s? This web link is to automotive.com website where consumer’s can shop for the lowest gas price around. With prices at over $3 a gallon at some times, many consumer’s are price sensitive enough to search for cheaper gas.
- #14: The following slides address different parts of this graph; this slide serves as an introduction to the topic of demand curves.
- #15: This information should be a review from students’ micro-economics coursework, so they should be familiar with the concept, but this discussion applies it in a slightly different way.
- #16: Ask students to 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.
- #17: For pricing, elasticity is a crucial concept.
- #18: 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 students may have learned in their finance courses, understanding costs is rarely easy.
- #19: Students might have discussed break-even in previous classes – ask them what it is. In many cases it is hard for students to define.
- #20: Group activity : List a product or service market that demonstrates each type of competition. Monopoly: Microsoft software products. Oligopolistic: Cable TV firms. Pure: Most frequently purchased consumer goods such as soft drinks. This you tube ad is for a $5 foot long commercial for Subway (always check link before class). Students will be familiar with this promotion. Ask students if this price promotion has motivated them to visit subway?
- #21: Ask students : 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? Answer: 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.
- #22: Ask students: How has online shopping affected firms’ pricing strategies? Answers: Internet shopping has provided people with more information so they have become more sensitive to prices, alternative product options and retailers
- #24: Firms and consumers alike should constantly monitor the economic environment, because economic conditions have a direct impact on pricing. Ask students: How many people cross-shop? Do you believe this practice has influenced the way some firms price their merchandise? Answer: it has made prestige products more expensive and more moderately priced merchandise even less expensive.
- #25: Consumer’s have an expectation of a rental car costing a lot of money. They don’t realize they can rent the car for under $10 an hour. Because Zipcar is a new product, they need to set customer’s expectations. To help consumer’s relate to the price, they compare it to a purchase very familiar to the consumer.
- #26: Ask students : In what circumstances will raising the price NOT result in an increase in revenue? In what circumstances will raising the price result in an increase in revenue? In elastic markets, depending on the level of elasticity, a price increase can increase revenues, but if the increase drives consumers out of the market, demand falls, and a loss of revenue may result. In contrast, in inelastic markets, a price increase almost always increases revenues, because the relationship between price and demand is weak. Pharmaceuticals provide a good example; even if the price of a cancer drug increases, consumers still demand it, so the firm generates more revenue.
- #27: In this YouTube ad (always check link before class) Wal-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).
- #28: Discuss the case of Pete and how the income and substitution effects alter his buying behavior. As a college student, he prefers a less expensive substitute deodorant, because it demands less of his total income. Ask students : When Pete graduates and gets a high-paying job, will he worry as much about the cost of deodorant? Do you expect him to switch back to Old Spice? Why or why not ?
- #29: Just like Kendra, many people buy products without considering the price of necessary peripherals. Kendra is caught in a cross-elasticity trap, because her demand for one product generated demand for the other. Group activity : Brainstorm a list of other products that exhibit cross-price elasticity.
- #30: Although 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.
- #31: 1. Company Objectives, customers, costs, competition, channel members Profit orientation, sales oriented, customer oriented, competitor oriented In general, the market for a product or service is price sensitive (or elastic ) when the price elasticity is less than –1, that is, when a 1 percent decrease in price produces more than a 1 percent increase in the quantity sold. In an elastic scenario, relatively small changes in price will generate fairly large changes in the quantity demanded. The market for a product is generally viewed as price insensitive (or inelastic ) when its price elasticity is greater than –1, that is, when a 1 percent decrease in price results in less than a 1 percent increase in quantity sold. Generally, if a firm must raise prices, it is helpful to do so with inelastic products or services because in such a market, fewer customers will stop buying or reduce their purchases. Divide the fixed costs by the contribution per unit (price per unit minus variable cost per unit)
- #32: Because it is so easy to get information on the Internet, people generally have become more aware of and sensitive to price. This trend has forced both manufacturers and retailers to become more price competitive. Some consumers even know more about the relative value of different products than the firms from which they are buying. Online auctions like eBay not only provide consumers with the relative value of millions of products but also enhance their value by establishing a global market for products that would have been geographically limited in the past.