Marketing week 10 (Price,,,,,marketing step #3)

go back to slides and learn hoe to calculate

2 types of Prices

• firm-centric

• customer centric

Price,,,,Firm-centric explain

the amount of money charged for a product

price,,,,Customer- centric

The sum of the values that customers exchange for the benefits of having or using the product

price is the most…..

dynamic element of the marketing matrix

Price is harder to

change the product, produce an ad, and shift the placement

why is low price not always best?

• pricing needs to be consistent with the company's marketing strategy

• price plays a key role in a company’s value propoosition

what are the major considerations in setting price?

list 3

Product costs—price floor ( no profits below this set price)

competition and other external factors—Competitors' strategies and prices; Marketing strategy, objectives, and mix; Nature of the market and demand

Consumer perception of value —Price ceiling (no demand above this set price)

What is cost-based pricing?

Setting prices based on the costs of producing, distributing, and selling the product plus a fair rate of return for effort and risk.

what is the sequence for cost-based pricing?

1. Design a good product

2. Determine product costs

3. Set price based on cost

4. Convince buyers of product's value.

Types of Costs (4)

• fixed costs

• variable costs

• total costs

• unit cost

fixed costs are

costs that DONT vary with production or sales level

variable costs are

costs that vary directly with the level of production

Total costs is

the sum of the fixed and variable costs for any given level of production

how to calculate total cost?

fixed costs + variable costs

what is unit cost?

total costs divided by the level of production)

How to calculate Unit cost

=total cost / # production

What is cost-plus (or markup) pricing?

Adding a standard markup to the cost of the product.

Calaculating cost based pricing:

• the car costs us $1MM to develop (fixed costs) and $14K to make a car (var. costs/unit)

• we expect to sell 500 cars.

• we want to earn 20% markup on sales price.

what is break even pricing ( or target return pricing)

Setting price to break even on the costs of making and marketing a product (or setting price to make a target return)

break even point is when

rev= cost

you made enough revuenue to cover ur fixed costs

step 1- how to calculate break-even volume?

• this car costs us $1MM to develop (fixed cost) and $15K to make a car (var. cost/unit)

• if we set the price at $20K, how many cars would we need to sell at this price to cover

the total cost (i.e., break-even volume)?

step 2 - how to caculate target return volume?

•  this car costs us $1MM to develop (fixed cost) and $15K to make a car (var. cost/unit).

• if we set the price at $20K, how many units would we need to sell at this price to

make $200K in profit (i.e., target return of $200K)?

when price increases,,,, demand????

decreases

What is a demand curve?

A curve that shows the # of units the market will buy in a given time period (ie Demand ) at different prices that might be charged

What is price elasticity of demand? and how is it measured?

How responsive demand tis o changes in price;

measured as percent change in demand generated by a 1% change in price

highly elastic means

ppl are VERY sensitive to price so Demand changes drastically

An elasticity of -1.6% means….

that a 1% increase in price would result in a DECREASE of 1.6% sales

what does 1.6% elasticity mean?

that a 1% decrease in price would price sales up by 1.6%

when demand is inelastic? A product is what (6)

When a product is:

• unique or has few substitutes or competitors

• high in quality or prestige

• a necessity

• low in cost relative to the consumer's income

• when customers are brand loyal

• addictive

How can elasticity vary?

• By time frame

• by consumer

For Time frame,,,using Gas as an EX in the short term is the demand elastic or inelastic?

inelastic.,,,,because its a necesity so even if price changes you still need to go get gas

For Time frame,,,using Gas as an EX in the long term is the demand elastic or inelastic?

more Elastic

what do you mean by consumer? use cigarettes as ex

cigarettes to adult smokers (-0.32) vs. cigarettes to teens (-1.43)

What is customer value-based pricing?

Setting price based on buyers' perceptions of value rather than on the seller's or manufacturer's cost.

What is the sequence for Value-based pricing?

Assess customer needs and value perceptions

Set target price to match customer-perceived value

Determine costs that can be incurred

Design product to deliver desired value at target price

What are the advantages of customer value-based pricing?

• if assessment on consumer's value is correct, sales will be guaranteed;

• potentially can generate high profit if cost is much lower than price customers are willing to pay

What are the disadvantages of customer value-based pricing?

• difficult to measure (survey, experiment);

• might not be feasible to design product at desired price level

Define Everyday Low Pricing (EDLP)

: charging a constant, everyday low price with few or no temporary price discounts

define high-low pricing

harging higher prices on an everyday basis but running frequent promotions to temporarily lower prices below the fair value level (ex: regular price

What are the two new product pricing strategies?

1. market skimming pricing

2. market penetration pricing

What is market-skimming pricing (= price skimming) and how is the process?

• set high initial price to “skim the cream” off the top

• innovators and early adopters are normally less price sensitive

• eventually reduce price after innovators/early adopters pay more

What is market-skimming pricing (= price skimming) requirements?

• product's quality/image support higher price;

• enough innovators/early adopters want it at that price;

• unit costs cannot be so high in early stages;

• competitors cannot enter easily and undercut

What is market-penetration pricing & example

 low initial price in order to rapidly gain market share

• Amazon’s Kindle Fire – $199 introductory price was a $10

loss per unit

Market penetretation pricing requirements

• market must be highly price sensitive

• production and distribution costs must decrease as sales

volume increases

• the low price must help keep out the competition

market penetration advantages

rapidly builds market share and name recognition

market penetration disadvantages

• requires a large initial investment

• requires a high promotional budget

• high risk if demand is not as strong as anticipated

what is product mix pricing stratgeies?

firms attempt to maximize profit for the whole product line or full product mix

What are the 5 product mix pricing strategies?

1) product line pricing

2) optional product pricing

3) captive product pricing

4) by-product pricing

5) product bundle pricing

product line pricing is and ex

• setting prices across an entire product line;

• decide on price steps between products

ex= iPad, iPad mini, iPad Air, iPad Pro for different prices

optional product pricing is

pricing of optional or accessory products or features that go along with a main product

With optional product pricing you must ensure that + give example

customers only pay for the features and benefits

they want from a product

cars – have base model, then add-on moon roof, sport packages, etc.

captive product pricing + ex

• setting a price for products that must be used along with main product;

(e.g., blades for a razor, games for a video console)

in captive product pricing often the main product

is sold at low profit margin,,,,while “captive products” are sold at a high profit margin

By product pricing is + ex

something produced in the making of our main product

(e.g., coffee ground)

by-product pricing is FULLY explained

setting a price for by-products to help offset the costs of disposing of them and help make the main product's price more competitive

product bundle pricing is

combining several products (related or not) and offering the bundle at a single price (often at a reduced price relative to buying those items separately)

With Product bundling pricing it ,,,,,BUT

• sometimes offers greater value to consumer and marketers

• but doesn’t always increase customers’ willingness-to-pay

What are the findings on product bundling?

• Bundling affects not just purchase, but consumption;

like instead of buying 4day tickets you buy a 4day pass

• it is difficult to allocate a single payment across multiple benefits

meaning that even though u have a 4day pass you might not skii on the last day

What is cross price elasticity of demand?

The percentage change in the demand of a given product given one percent change in the price of another "related" product.

What is the price adjustment strategies?

Adjusting prices to account for customer differences and changing situations

pricing strategies are

▪ new product pricing strategies

▪ product mix pricing strategies

▪ price adjustment strategies

list the price adjustment strategies?

1) segmented pricing

2) dynamic pricing

3) promotional pricing

4) psychological pricing

segmented pricing

 selling a product or service at two or more prices, where the

difference in prices is NOT based on differences in cost to the seller

dynamic pricing:

adjusting prices continually to meet changing conditions and

situations in the marketplace

(e.g., changes in demand, costs, or

competitor pricing)

promotional pricing

emporarily pricing products below the list price, and sometimes even below cost, to increase short-run sales

What are the dangers of promotional pricing?

• Generally not a great way to differentiate business long-term;

• can erode brand value,

• doesn't build brand loyalty,

• and creates "deal-prone" customers who wait for sales

psychological pricing:

pricing that considers the psychology of prices, not simply the traditional economics

under Psychological pricing—-reference prices is

prices that buyers carry in their minds and

refer to when they look at a given product

what determines the reference price for a product?

• memories of past prices

• prices set by market leader

• price of related products and services

• nature of industry

• other products in the product line

What is the compromise effect? + ex

• People resolve uncertainty by buying the mid-range object.

• Companies can drive sales of higher-priced items by introducing an even more expensive extreme option.

Basically customer choose the medium size drink when in between options

 Williams-Sonoma had two bread makers at $275 and $400.

how do they get more people to purchase the $400 bread maker?

introduce one at $525