mkt 10

Pricing Concept

• What Is Price?
  • Price is what is given up in exchange for a product or service (money, time, effort).
  • For Consumers: The cost of what they want.
  • For Firms: The source of revenue.
  • Price affects positioning, profit, and perception.
  • Non-monetary factors influencing price include time, effort, and inconvenience.

Psychological Pricing Insights (Neil Patel)

1. Comparative pricing isn’t always effective.
2. Time over money: Time savings perceived as more valuable.
3. Inclusion of “useless” options nudges customers to pricier choices.
4. The Power of 9: Prices ending in .99 seem cheaper (e.g., $2.99).
5. Context matters: Perceived value depends on presentation.

Factors Affecting Price

• Internal Factors:
  • Cost structure.
  • Pricing objectives.
  • Positioning.
• External Factors:
  • Competitors.
  • Market demand.
  • Legal constraints.
• Technology Factors:
  • Online auctions.
  • Dynamic pricing.
  • Price transparency.
• Business Models:
  • Tied pricing (e.g., razors & cartridges).
  • Freemium (e.g., Spotify).
  • Loss leader pricing (e.g., Xbox subsidized by game sales).

Value-Based Pricing

• Formula:
  $Price = \frac{Perceived~benefits}{Cost}$
• Deliver high value to justify premium prices.
• Example: Dyson vacuums are priced higher due to benefits such as no filter/bag, powerful suction, and low operating cost.

4-Step Pricing Process

Step 1: Establish Pricing Objectives

• Profit-oriented: Maximize margins.
• Sales-oriented: Increase volume or market share.
• Status quo: Match competitor pricing to maintain market stability.

Step 2: Estimate Demand, Costs, and Profits

• Fixed Costs: Do not vary with output (e.g., rent, salaries).
• Variable Costs: Vary with production (e.g., materials).

Elasticity of Demand:

• Elastic (>1): Price increase causes a larger decrease in demand (e.g., luxury goods).
• Inelastic (<1): Price increase causes a small decrease in demand (e.g., gas, insulin).
• Formula for elasticity:
  E_d = rac{ ext{% Change in Quantity Demanded}}{ ext{% Change in Price}}
• Factors Affecting Elasticity:
  • Availability of substitutes.
  • Percentage of income spent on the product.
  • Necessity vs. luxury.
  • Brand loyalty.
  • Who pays (e.g., business vs. personal purchase).

Break-Even Analysis:

• Formula:
  $BEP = \frac{Fixed~Costs}{Price~per~Unit - Variable~Cost~per~Unit}$

Step 3: Choose a Pricing Strategy

• Price Skimming: High initial price to recover R&D; lower over time. Uses inelastic demand.
• Penetration Pricing: Low initial price to build market share in elastic markets.
• Status Quo Pricing: Matching competitor prices but ignores cost/demand.

Step 4: Use a Price Tactic

• Discounting: Quantity, seasonal, cash.
• Allowances: Trade-in, promotional.
• Geographic Pricing: FOB origin, uniform delivery, zone pricing.
• Psychological Pricing: Odd pricing (e.g., $4.99), reference pricing.
• Dynamic Pricing: Based on demand (e.g., Uber, airlines).
• Bundling: Combine multiple products (e.g., Rogers bundle).

Legal & Ethical Pricing Issues

• Price Fixing: Competitors collude to set prices (illegal).
• Price Discrimination: Charging different prices to similar customers (regulated).
• Deceptive Pricing: Misleading discounts or comparisons.
• Price Steering: Showing different prices based on device/location.
• Predatory Pricing: Deliberately undercutting to drive out competition.

Metric 8: Return on Marketing Investment (ROMI)

Definition:

• ROMI measures the return (positive or negative) generated from a marketing initiative as a percentage of the initial investment.
• Widely used for understanding future cash flows and guiding investments in marketing that are expected to yield the greatest returns.

Why Conduct ROMI?

• Raw numbers can be misleading; understand the context of returns relative to the initial investment.
• Scenario Examples:
  • $3,000 return on a $100 investment is favorable.
  • $3,000 return on a $1 million investment is unfavorable.

ROMI Analysis Functionality:

1. Deciding on Investments: Determine if a marketing initiative's ROMI meets a specific benchmark to decide on investments.
2. Selecting Among Multiple Investments: Conduct comparative ROMI analyses to choose initiatives with higher returns.

ROMI Formula Break Down:

• Basic formula:
  ROMI( ext{%}) = rac{Return~received~from~campaign}{Investment~that~went~into~campaign} imes 100 ext{%}
• Incremental Revenue:
  ext{Incremental Revenue} ($) = ext{Revenue after Campaign} - ext{Revenue before Campaign}
• Total Margin Calculation:
  ext{Total Margin of the Campaign} = ext{Incremental Revenue} imes ext{Margin ( ext{%})}
• Determining Return:
  $Return = ext{Total Margin of the Campaign} - ext{Marketing Spending}$
• Final ROMI Calculation:
  ROMI( ext{%}) = rac{Return}{Marketing~Spending} imes 100 ext{%}

Sample ROMI Calculation Example

1. Direct mail campaign costing $3,000 expected to increase revenues from $65,000 to $73,000.
2. Baseline without marketing: $51,000.
3. ROMI calculation steps (providing complete breakdown is crucial):

• Without Direct Mail Campaign:

  • Incremental Revenue: $14,000$ (from $65,000 - $51,000).
  • ROMI: rac{(($14,000 imes 0.52) - 5,000)}{5,000} imes 100 ext{%} = 45.6 ext{%}

• Direct Mail Campaign Only:

  • Incremental Revenue: $8,000$ (from $73,000 - $65,000).
  • ROMI: rac{($8,000 imes 0.52) - 3,000}{3,000} imes 100 ext{%} = 38.67 ext{%}

• All Campaigns Combined:

  • Total Incremental Revenue: $22,000$ (from $73,000 - $51,000).
  • Total Marketing Spending: $8,000$ ($5,000 + $3,000).
  • ROMI Calculation:
    rac{(($22,000 imes 0.52) - 8,000)}{8,000} imes 100 ext{%} = 43 ext{%}