MKT 2210 Chapter 9

Why do you believe The Barber’s Chair is using at-market pricing?

The Barber's Chair is using at-market pricing because it aims to provide a competitive and fair service to its customers while ensuring long-term customer loyalty. By using market-appropriate pricing, the business stays competitive with other barbershops in the area and can attract a broad customer base. At-market pricing also ensures that clients feel they are paying a fair price for the high-quality, personalized service they receive, without overcharging or underpricing. This strategy also aligns with the business's focus on offering value while maintaining consistency, which helps build trust and repeat business. Sano understands that pricing fairly plays a significant role in retaining clients and supporting the long-term success of his business.

What services do you believe clients will make extra efforts to receive service from a particular provider?

Clients are likely to make extra efforts to receive service from a provider who offers personalized, high-quality, and consistent results. In the case of The Barber's Chair, clients are willing to travel long distances to receive a haircut from Sano due to his skill, expertise, and ability to create tailored styles that suit individual features and preferences. Additionally, clients would value an experience where they feel understood and cared for, with attention to detail and professional guidance on which styles best suit their needs. The experience of receiving service from a provider who is knowledgeable, attentive, and able to deliver a consistent, high-quality result is often worth the extra effort for many clients, especially when it involves a service like hairstyling where personal appearance is key.

Why do you believe The Barber’s Chair is using at-market pricing?

The Barber's Chair is using at-market pricing because it aims to provide a competitive and fair service to its customers while ensuring long-term customer loyalty. By using market-appropriate pricing, the business stays competitive with other barbershops in the area and can attract a broad customer base. At-market pricing also ensures that clients feel they are paying a fair price for the high-quality, personalized service they receive, without overcharging or underpricing. This strategy also aligns with the business's focus on offering value while maintaining consistency, which helps build trust and repeat business. Sano understands that pricing fairly plays a significant role in retaining clients and supporting the long-term success of his business.

What services do you believe clients will make extra efforts to receive service from a particular provider?

Clients are likely to make extra efforts to receive service from a provider who offers personalized, high-quality, and consistent results. In the case of The Barber's Chair, clients are willing to travel long distances to receive a haircut from Sano due to his skill, expertise, and ability to create tailored styles that suit individual features and preferences. Additionally, clients would value an experience where they feel understood and cared for, with attention to detail and professional guidance on which styles best suit their needs. The experience of receiving service from a provider who is knowledgeable, attentive, and able to deliver a consistent, high-quality result is often worth the extra effort for many clients, especially when it involves a service like hairstyling where personal appearance is key.

What is loss-leader pricing?

For a special promotion, retail stores deliberately sell a product below its customary price to attract customers in hopes they will buy other products as well, particularly the discretionary items with large markups.

What are three demand factors other than price, that are used in estimating demand?

Price, consumer tastes, price and availability of similar products, and consumer income.

What is the difference between movement along a demand curve and a shift in a demand curve?

A movement along a demand curve occurs when the price is lowered and the quantity demanded increases (and vice versa), assuming that other factors remain unchanged. However, if these factors change, then the demand curve will shift.

What is the difference between fixed costs and variable costs?

Fixed cost is the sum of the expenses of the firm that are stable and do not change with the quantity of the product that is produced and sold.

Variable cost is the sum of the expenses of the firm that vary directly with the quantity of the product that is produced and sold.

What is a break-even point?

A break-even point (BEP) is the quantity at which total revenue and total cost are equal.

What is the difference between pricing objectives and pricing constraints?

Pricing objectives specify the role of price in an organization’s marketing and strategic plans.

Pricing constraints are factors that limit the range of price a firm may set.

Explain what bait and switch is and why it is an example of deceptive pricing.

This occurs when a firm offers a very low price on a product (the bait) to attract customers to a store, who then are persuaded to purchase a higher-priced item (the switch). Misleading consumers is both illegal and unethical.

Why would a seller choose a flexible-price policy over a one-price policy?

A flexible-price policy involves setting different prices for products and services depending on individual buyers and purchasing situations in light of demand, cost, and competitive factors instead of setting one price for all buyers.

What is the purpose of (a) quantity discounts and (b) promotional allowances?

(a) Quantity discounts encourage customers to buy larger quantities of a product.

(b) Promotional allowances are used to encourage sellers to undertake certain advertising or selling activities to promote a product.

Break-Even Point =

Fixed Costs / (Price for Service less Variable Costs)

What pricing strategies has H&R Block used in this advertisement?

• Odd-Even Pricing: The $29.95 student pricing is an example of odd pricing, where the price is set just below a round number (like $30). This pricing strategy is used to make the price seem lower than it actually is, as consumers tend to perceive prices ending in .95 or .99 as a better deal. The pricing of $29.95 appeals to the psychological factor that the price is closer to $29 than $30, even though it's only a small difference.

• Below-Market Pricing: The $29.95 student pricing could also be seen as an example of below-market pricing. By offering a price that is lower than competitors' standard rates (or their typical pricing for tax services), H&R Block is trying to attract customers who might otherwise not consider their services. It positions the brand as offering an affordable option for students, making it accessible to a broader audience.

Cutting Prices

• -  Laws and regulations are in place to protect consumers and promote fair pricing

• -  How a barber uses pricing strategies to stay competitive in the marketplace

Price

the money or other considerations, including other goods and services, exchanged for the ownership or use of a product.

Barter

– exchanging goods and services for other goods and services

- billions of dollars annually in domestic and international trade

Price as an Indicator of Value

Value – is the ratio of perceived benefits to price

Value = Perceived Benefits/Price

Value Pricing

Increasing product or service benefits while maintaining or decreasing price

Ex: supersizing at Fastfood restaurant

As perceived benefits increase, value increases

“Pricing decisions influence both total revenue (sales) and total cost, which makes pricing one of the most important decisions marketing executives face.”

Profit

= Total revenue – Total cost
= (Unit Price X Quantity sold) - Total Cost

Four approaches for selecting an approximate price level

Demand-oriented Skimming Penetration Odd-even Target Bundle Yield

Cost-oriented Approaches Stand-up markup Cost-plus

Profit-oriented approaches Target profit Target return on sales Target return on investment

Competition-oriented Approaches Customary Above, at, or below market Loss leader

Demand-Oriented Approaches

- emphasize factors underlying expected customer tastes and preferences more than such factors as cost, profit, and competition when selecting a price level.

Skimming Pricing

- firm introducing a new product can use this,

- setting the highest initial price that those customers really desiring the product are willing to pay.

ex: flat screen tv price used to be $5,000+ now its cheaper

Penetration Pricing

- setting a low, more affordable initial price on a new product to appeal immediately to the mass market.

- exact opposite of skimming pricing

- makes sense when consumers are price-sensitive

- discourages competitors to join because price is competitively low

- sometimes may follow skimming pricing -> price high on a product to earn back money from research

Prestige Pricing

- involves setting a high price so that quality or status-conscious consumers are attracted to the product and buy it.

ex: Rolls Royce, Cartier jewelry, Chanel perfume

Price Lining

- a firm that is selling not just a single product, but a line of products may price them at a number of different specific pricing points.

ex: discount department store may price a line of women’s dresses at $59, $79, and $99.

Odd-even pricing

- involves setting prices a few dollars or cents under an even number.

- psychological strategy: $399.99 feels significantly lower than $400

- overuse tends to mute its effect on demand

Target Pricing

- Manufacturers will sometimes estimate the price that the ultimate consumer would be willing to pay for a product. They then work backward through markups taken by retailers and wholesalers to determine what price they can charge for the product.

- This results in the manufacturer deliberately adjusting the composition and features of the product to achieve the target price to consumers.

Bundle Pricing

- Marketing of two or more products in a single “package” price.

- Based on the idea that consumers value the package more than the individual items.

- ex: Air Canada offers vacation packages that include airfare, car rental and hotel.

Yield Management Pricing

- charging of different prices to maximize revenue for a set amount of capacity at any given time.

- airlines, hotels, and car rentals firms engage in capacity management by varying prices based on time, day, week, or season to match demand and supply.

Cost-oriented Approaches

- price is more affected by the cost side of the pricing problem than the demand side.

- Price is set by looking at the production and marketing costs and then adding enough to cover direct expenses, overhead and profit.

Standard Markup Pricing

- adding a fixed percentage to the cost of items in a specific product class.

Markup = (Selling Price – Cost)/Cost

- Normally expressed as a percentage, also called gross margin Manufacturers commonly express markup as a percentage of cost.

Cost-Plus Pricing

- involves summing the total unit cost of providing a product or service and adding a specific amount to the cost to arrive at a price.

- Most commonly used method to set prices for business products.

Ex: Rising costs of legal fees has prompted some law firms to adopt A cost plus pricing approach. Rather than building business clients and an hourly basis, lawyers and their clients agree on a fixed fee based on the expected costs plus a profit for the law firm.

Marketing firms also uses this tactic

Profit Oriented Approaches

- A company may choose to balance both revenues and costs to set price using profit- oriented approaches. These might involve either setting a target of a specific dollar volume of profit or expressing this target profit as a percentage of sales or investment.

Target Profit Pricing

- when a firm sets an annual target of a specific dollar amount of profit. - depends on accurate estimate on demand

- best for firms offering new or unique products.

Target return on sales pricing

-  Used by supermarkets

-  set prices that will give them a profit that is a specified percentage—say, 1 percent—of the sales volume.

-  is often used because of the difficulty in establishing a benchmark of sales or investment to show how much of a firm’s effort is needed to achieve the target.

Target return on investment pricing

- used by General Motors and public utilities

- set prices to achieve a return-on-investment (ROI) target, such as a percentage that is mandated by its board of directors or regulators.

Competition-Oriented Approaches

- a company’s approach may be based on an analysis of what competitors are doing.

Customary Pricing

- used on a standardized channel of distribution, or other competitive factors dictate the price.

Ex: candy bars on a vending machine, Hershey typically has changed the amount of chocolate in its candy bars depending on the price of raw chocolate.

Above-, at-, or below-Market Pricing

- strategy used by marketing managers to have a subjective feel for the competitor’s price

or the market price.

Ex of above market pricing would be Rolex watch

Ex of below market pricing would be Walmart

Loss-leader Pricing

- purpose is not to increase sales of a particular item but to attract customers to buy items with large markups.

- ex: video game consoles may be sold at a loss to create the opportunity to profit from high-margin video games.

Cherry Picking

- consumers move from store to store, making purchases only on those products that are loss leaders.

The Importance of Accurate Forecasting

• Creating the correct price for a product begins the process of forecasting - Marketers try to determine the extent of customer demand

• Poor estimates can be detrimental.

• Both quantitative and qualitative analysis are used to make projections.

• Various forecasting methods: qualitative methods, regression methods, multiple

  equation methods, and time-series methods.

Profit and Loss

- help organizations measure financial performance over time.

- It is one of the best tools to gauge the success of a given marketing campaign or initiative.

Return on Investment (ROI)

Evaluates the dollar invested in the initiative.

Demand Curve

- graph relating quantity sold and price, which shows how many units will be sold at a given price

Three Key Factors:

-  Want:
1. Customer taste–demographics, culture, and technology

2. Price and availability of similar products

-  Need:
3. Consumer income

Movement along the demand curve

-  shows that as the price is lowered from $2.00 to $1.50, the quantity demanded increases from 3 million (Q1) to 4.5 million (Q2) units per year.

-  assumes that other factors (consumer tastes, price and availability of substitutes, and consumer income) remain unchanged.

Shift in the demand curve

other factors change along with the demand for example: consumer income rises.

Price Elasticity

- a key consideration related to the product’s demand curve.

Elastic Demand

- change in price results in change in demand

- major factor influencing the elasticity of demand is the availability of substitute products. If consumers can easily find close substitutes for a good or service, the product’s demand tends to be elastic.

Ex: Non-essential goods – Cola, coffee, and snack foods

Inelastic Demand

- slight change in price does not change demand

Ex: Necessities – Gas, hydro, dentist

Total Revenue

- Total money received from the sale of a product

TR = Unit Price X Quantity Sold

Fixed cost (FC)

- expenses that do not change with the quantity of product that is

produced or sold
Ex: rent on building, executive salaries, insurance

Variable cost (VC)

- expenses that vary directly with the quantity of product that is produced and sold.

Ex: direct labour, direct materials
Unit variable cost – variable cost expressed on a per unit basis

Total cost (TC)

total expense incurred by a firm in producing and marketing the product.

TC=FC+VC

Break-even Analysis

is a technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output.

Break-even point

the quantity at which total revenue and total cost are equal.

Break-even Point Quantity

= Fixed Cost/(Unit Price-Unit Variable Cost)

Pricing objectives

specify the role of price in an organization’s marketing and strategic

plans.

Profit

a. Managing for long term profit - gives up immediate profit in exchange for achieving a higher market share.

- Products are priced relatively low compared to their cost to develop, but the firm expects to make greater profits later because of its high market share.

b. Maximizing current profit – quarter or a year
- is common in many firms because the targets can be set and performance measured quickly. North American firms are sometimes criticized for this short-run orientation.

c. Target return - occurs when a firm sets its price to achieve a profit goal, usually determined by its board of directors.

Sales

increase in sales revenue will in turn lead to increases in market share and profit

Market Share

is the ratio of the firm’s sales to those of the industry (competitors plus the

firm itself).
- companies use this when industry sales are relatively flat or declining.

Ex: the cola market is declining, but Coke wants to keep its market share by retaining its piece of a dwindling pie. Tropicana orange juice, French’s mustard, and Heinz ketchup are market share leaders and are all premium-priced.

Volume

the quantity produced or sold, as a pricing objective.

- firms often sell the same product at several different prices, at different times, or in different places in an attempt to match customer demand with the company’s production capacity.

Survival

In some instances, profits, sales, and market share are less important objectives of the firm than mere survival.

Social Responsibility

Firm may forgo higher profit on sales and follow a pricing objective that recognizes its object obligations to customers and society in general.

Pricing Constraints

factors that limit the range of price a firm may set.

Factors that limit the range of price:

• Demand for the product class, product, and brand

• Newness of the Product: Stage in the Product Life Cycle (Newer product, higher cost)

• Cost of Producing and Marketing the Product

• Competitor’s Price

SET A HIGHER PRICE - signifies that a firm believes it’s offering represents a higher value in comparison to competing products.

CHARGE THE SAME PRICE - the firm is relying on some aspect other than price to position and differentiate its products in the minds of customers.

SET A LOWER PRICE - lower prices can mean lower profits on each sale, which may need to be offset by larger volume sales.

Market Leader

– being perceived as the “best brand -> can charge higher prices

- Winning marker share -> lower prices

Market Follower

- conscious choice of many smaller firms manufacturing and selling similar or often the same products.

Price Fixing

– competitors collaborate and conspire to set prices.
- occurs when price is the most important factor in the marketing mix.

Price Discrimination

different customers get different prices.

Deceptive Pricing

price offers that mislead

Types of Deceptive Pricing

Bait and switch	A firm offers a very low price for a product (the bait), and when consumers come to purchase it, they are persuaded to buy a more expensive product (the switch). Uses techniques such as downgrading the advertised item or not having it in stock.
Bargains conditional on other purchases	A firm advertises “buy one, get one free” or “get two for the price of one.” If the first items are sold at the regular price, this is legal. If the price for the first items is inflated for the offer, it is not.
Price Comparisons	Advertising “retail value $100—our price $85” is deceptive if a substantial number of stores in the area are not using the $100 price—in other words, if it is not the “going price.” Advertising “below manufacturer’s suggested list price” is deceptive if no sales occur at the manufacturer’s list price. Advertising that the price is reduced 50 percent is deceptive if the item was not offered for sale at the higher price for a substantial previous period of time
Double ticketing	When more than one price tag is placed on an item, it must be sold at the lower price; this practice is not illegal, but the law requires that the lower price be charged.

Predatory Pricing

low price set to drive competitors out of business

Global Pricing Strategy

Global companies face many challenges in determining a pricing strategy as part of their worldwide marketing effort.

Dumping

occurs when a firm sells a product in a foreign country below its domestic price or below its actual cost.

Grey market (Parallel Importing)

– situation where products are sold through unauthorized channels of distribution.

- individuals buy products in a lower price country from a manufacturers authorized retailer, shipped them to a higher priced countries and then sell them below the manufacturer suggested retail price through unauthorized retailers.

- Not strictly illegal in Canada or USA, Illegal in EU

One Price Policy

- involves setting one price for all buyers of a product or service.

- ex: Dollarama selling their items at $1 (before)

Setting a Final Price

Step 1: Select an Approximate Price Level

Step 2: Set the List or Quoted Price
Step 3: Make special adjustments to the list or quoted price
Step 4: Monitor and Adjust Prices

It must be high enough to cover the cost of providing the product and meet the objectives of the company. Yet it must be low enough that customers are willing to pay it. But not too low, or customers may think they’re purchasing an inferior product.

Flexible-price Policy

- involves setting different prices for products and services depending on individual buyers and purchase situations in light of demand, cost, and competitive factors.

Ex: Dell Computer adjusts prices in response to changes in its own costs, competitive pressures, and demand from its various personal computer segments. Car dealers

Discounts

– reductions from list price that a seller gives a buyer as a reward for

some favourable activity.

Four Kinds of Discounts:

1. Quantity Discounts - To encourage customers to buy larger quantities of a product, firms at all levels in the channel of distribution offer quantity discounts, which are reductions in unit costs for a larger order.

2. Seasonal Discounts - To encourage buyers to stock inventory earlier than their normal demand would require, manufacturers often use seasonal discounts.

3. Trade (Functional Discounts) - To reward wholesalers and retailers for the marketing functions they will perform in the future, a manufacturer often gives trade, or functional, discounts.

- These reductions off the list or base price are offered to resellers in the channel of distribution on the basis of where they are in the channel and the marketing activities they are expected to perform in the future.

4. Cash Discounts - encourage retailers to pay their bills quickly, manufacturers offer them cash discounts.

Allowances

are reductions from list or quoted prices to buyers for performing some activity.

Trade-in Allowances

a price reduction given when a used product is part of the payment on a new product.

Ex: trading in your old vehicle for a $500 off on a new one.

Promotional Allowances

actual cash payments or actual free goods sellers in the channel distribution can qualify for undertaking certain advertising or selling activities to promote a product. Ex: free case of pizzas to a retailer for every dozen cases purchased

Geographical Adjustments

- reflect the cost of transportation of the products from seller to buyer.

FOB Origin Pricing - “free on board”

- the seller pays the cost of loading the product onto the vehicle that is used (such as a barge, railroad car, or truck).

- The title and ownership to the goods passes to the buyer at the point of loading, so the buyer becomes responsible for picking the specific mode of transportation, for all the transportation costs, and for subsequent handling of the product.

Uniform Delivered Pricing

- The price the seller quotes include all transportation costs.

- Seller is responsible for any damage that may occur because the seller retains title to the goods until delivered to the buyer.