Chapter 9:

Price is a VARIABLE

Price is part of the marketing mix

• It needs to be consistent with other elements of the mix

Narrowly defined, price is the amount of money charged for a product or service

Broadly defined, price is the sum of all of the values that consumers give up in order to gain the benefits of having or using the product or service

Revenue = Price x Quantity

Revenue at A = Price A x quantity at Price A

As price increases more are willing to sell

The price is determined by equilibrium

Price Elasticity - Measures how sensitive consumers are to changes in the price of a product

• Is the percent that unit sales volume changes with a percentage change in price

• Price Elasticity = Percentage change in quantity demanded/percentage change in price

Price Elastic:

• A product is price elastic if a large volume change is associated with a small price change

• Price elastic > 1

• With price elastic products, total revenue is increased if price is decreased

Price Inelastic:

• A product is price inelastic if a large change in price has a very little impact on volume

• Price Inelastic: Elasticity < 1

• With a price inelastic products, total revenue is increased if the price is increased

• More than 1 elastic, less than 1 inelastic, = 1 doesn’t matter (unitary elasticity)

Factors to Consider When Setting Price:

1. Marketing strategy, objectives, mix

2. Competitors’ strategies and prices

3. Customers perceptions of value

• What is it worth to the customer?

4. Product Costs

• Variable Cost Pricing

5. Macro Environmental factors

6. Consumer Factors

7. Product Factors

3. Customer perceptions of value

Price Parameters: Potential Prices

       ←  Potential Prices  →

Absolute Lower Limit: Absolute Upper Limit:

Variable Cost Consumer Value

4. Product Costs

Pricing Formulas:

Price - What somebody pays

Cost - Is the expensive to produce or acquire something

Markup = Selling Price - Cost

Margin (also called Markup Percentage)

• Markup/Selling Price

• By substitution: Selling Price-Cost/Selling Price

• To determine the price: Selling Price = Cost/(1-Margin)

• Cost = (1 - Margin) x Selling Price

Fixed Costs: Costs that stay constant across all production volumes

Variable Costs: Costs that change

Break even analysis is used to evaluate different price levels

Break even point is the level of sales for a firm where all costs covered

• At any level above the break even point, the firm makes profit

• At any level below the break-even point, the firm loses money

To determine the unit sales volume needed to break even, use the following formula:

Break Even Point = Total Fixed Costs /  Selling Price - Variable Cost

To determine the dollar sales volume needed to break even, first compute break-even in units and then use this formula:

(Selling Price)x(Break Even) 

PROFIT equation: Q(P-VC) - (FC)

Variable Cost Pricing: Some fixed costs must be paid whether anything is produced or not, only variable costs should be considered when  determining short-run pricing decisions

Prices must exceed variable costs (but not total costs) in the short run

In the short run..

• If you can charge more than your variable costs, produce

• If you cannot charge more than your variable costs, shut down

5.

Macro Environmental Factors: Consider PESTEL

Political - current political issues and public policy (see text)

Economic Conditions - big impact on pricing decisions

Social Concerns - big impact on pricing in some categories

Technological - consider adoption curve and product lifecycle

Environmental - consider competitive environment, international environment, and natural environment

Legal - Pricing decisions may be regulated

Legal Considerations When Pricing:

• Pricing is one of the most legislated areas in American Business

• Most pricing is covered under the Sherman Act, Clayton Act and Robinson-Patman Act

  • Objectives are to stop pricing actions that unfairly restrain trade

In general, the following are illegal:

1. Price fixing - agreeing with your competitors as to what prices to offer

2. Deceptive pricing - advertising or promoting one price, but that price does not cover the entire purchase

3. Price discrimination that is injurious to competition

4. Granting non-proportionate promotional pricing

6.

What does the price communicate about the quality of the product?

Do consumers have pricing expectations?

• Some prices have psychological “price ceilings”

Odd/Even pricing

• In general, even prices communicate more prestige than odd prices

7.

Perishability:

• If a product is perishable, price it lower so it will move before it is no longer in demand

• This includes fashion-oriented and seasonal products as well as products that will physically perish

Repurchase Cycle:

• Put lower margins on products purchased frequently

• Put higher margins on products purchased less frequently to account for the lower consumption rate

Distinctiveness:

• The more distinctive a product is, the higher price it can command

Stage in the Product Life Cycle:

• In general, new product categories will be priced higher than existing categories

Skimming Pricing:

• Is offering a high price early in the life cycle and lowering it as the product matures

• Because unit demand is low and there is no competition when a product is first launched, producers can charge higher prices

• When to use: Products quality and image must support its higher price

• Cost of low volume cannot be so high they cancel the advantage of charging more

• Competitors should not be able to enter the market easily

Penetration Pricing:

• Is offering a low price early in the life cycle and increasing the price as consumers get used to the product

• Penetration pricing is often used to discourage competition because prices will be lower than those the competitors can profitably offer

• When to use: When market is price sensitive, costs must fall as volume increases, competition must be kept out

Logistics and Supply Chain Mgmt

Logistics Management

• Manufacturers effort

• Focused on Efficiency, Cost Minimization

• Engineering driven

Supply Chain Mgmt

• Collaborative effort led by Manufacturer

• Focused on Competitive advantage

• Marketing driven

Supply Chain Management:

Materials Management

Procurement activities —> Transportation (Inbound) —> Materials handling, production scheduling —> Inventory —> Goods in Process Inventory

Physical Distribution Management

Finished Goods Inventory —> Field Inventory —> Transportation

Marketing logistics (physical distribution):

• Planning, implementing and controlling the physical flow of goods, services, and related information from points of origin to points of consumption to meet customer requirements at a profit.

• Involves entire supply chain

  • Outbound distribution

  • Inbound distribution

  • Reverse distribution

Goals of the logistics system:

• Deliver a targeted level of customer service at the least cost

  • It is not just keeping costs low

Major logistics functions:

• Warehousing

• Inventory management

• Inventory

• Logistics information management

Intermediaries:

• Organizations that specialize in distribution (middlemen)

  • Merchant intermediaries take title to the product

  • They make money by adding a markup and reselling a product

  • Ex. Retailer, stock broker

Channel of Distribution:

• Sequence of marketing organizations involved in bringing a product from the producer to the consumer

• Your channel should:

  • Be designed to facilitate change process

  • Reinforce your overall marketing strategy

Conventional Distribution Channel:

• Loosely aligned

• Autonomous organizations

  • This means they are independent companies

• Carry out a trade relationship

  • The orgs will do business with one another as long as there is a mutually beneficial relationship

  • Conventional distribution channels are not governed by contracts, ownership, or formal agreement 

There is a trade between speed and cost.

• Minimum cost, minimum satisfaction

• Maximum cost, maximum satisfaction

Channel Design Decisions

• Analyzing consumer needs:

  • Requires answering key questions to help determine customer needs:

    • Do consumers want to buy from nearby locations or are they willing to travel?

    • Do they value breadth of assortment or do they prefer specialization

    • Do consumers want many add-on services?

  • Firms must balance needs against costs and consumer price preferences

Channel Design Decisions:

• Setting channel objectives:

  • Objectives are stated in terms of targeted levels of customer service

• Channel objectives are influenced by:

• Cost

• Nature of company

• The firm's products

• Marketing intermediaries

• Competitors

• Environment

• Identifying major alternatives:

• Types of intermediaries

• Number of marketing intermediaries

  • Intensive, selective, or exclusive distribution

• Evaluating the major alternatives involves comparing the alternative to:

  • Economic criteria:

    • A company compares the likely sales, costs, and profitability of different channel alternatives

  • Control issues:

    • How and to whom should control be given?

  • Adaptive criteria:

    • Consideration of long term flexibility
      
      

Channel Management Decisions

• Selecting channel members

  Managing and motivating channel members

  • Partner relationship management

• Evaluating channel members

Intermediaries are used because they create greater efficiency in making goods available to target markets

Cut the middleman?

• Things are less expensive for consumers when there ARE middlemen involved

• Often these marketing systems are more efficient because of specialization by intermediaries

• Intermediaries have economies of scale and system efficiencies. They lead to LOWER costs for the final consumers

• Cutting the middleman does not eliminate the costs associated with the functions

  • Someone else in the channel must perform the intermediaries’ functions, but often they do it less effectively

An illustration of how things improve with a wholesaler

• Wholesalers are involved in bulk-breaking and assortment building

• By using wholesalers, the number of transactions decreases exponentially verses what it would be if each individual retailer did business with each manufacturer

• The reduction in transactions means the administrative and handling costs for all the companies drop exponentially.

Distribution Channel Functions:

• Functions should be assigned to the channel member who can perform them most efficiently and effectively

• Efficiency - Doing things right

• Effectively - Doing the right things

Distribution channels are classified depending on how many intermediaries

1. Direct channel

2. Indirect channel

Managing the Distribution Channel

Warehousing:

• How many, what types, and where?

• Storage warehouses

• Distribution centers

• Automated warehouses

Inventory Management:

• Must balance between too much and too little inventory

• Just-in-time logistics systems

• RFID or smart tag technology

Warehousing Decisions:

• Centralized warehouse vs. Local warehouses

  • Cost vs. Rapid customer service consideration

  • Centralized warehouses enjoy economies of scale, so overhead is lower

  • Local warehouses allow faster delivery

Intermodal Transportation:

• Piggyback: Semi-truck trailers on railroad cars

• Birdyback: Planes loaded with containers

• Fishyback: Truck-beds on barges or ships

• Train-ship

Legal Issues:

1. Exclusive Dealing: Supplier prohibited intermediaries handling its products from selling products of competing suppliers

• Illegal if it restricts competition

2. Exclusive Territory: Contractual relationship where only one intermediary in the area is allowed to sell a manufacturers product

• Justified if..

  • High investments is required of dealers

  • The image is critical for success

• Illegal if competition is restricted 

3. Tying Contracts: Require a channel intermediary or buyer to purchase lines of merchandise supplementary to the product the purchaser wishes to buy

• Usually illegal

• Retailing: All the activities involved in selling goods or selling directly to final consumers for their personal, non-business use.

  • Includes activities done by retailers, as well as non store retailing

  
  

  The different types of retailers can be classified based on:

  1. The amount of service they offer

  2. The breadth and depth of product lines

  3. How they are organized

  4. The relative prices charged

  
  

  Types of Retailers:

  1. Classification by the amount of service

     1. Self service retailers

     2. Limited service retailers

     3. Full service retailers

  2. Retail classifications by product line:

     1. Specialty stores

     2. Department stores

     3. Supermarkets

     4. Convenience stores

     5. Discount store

     6. Off price retailers

     7. Superstores

     8. Service retailers

        > Category killers

  3. Relative prices classification:

  • Discount stores

  • Off-price retailers:

    • Independent off-price retailers

    • Factory outlets

    • Warehouse clubs

  
  

  Retailer Marketing Decisions:

  • Retailer Strategy

    • Segmentation and targeting

    • Store differentiation and positioning

    • Retail marketing mix

      • Retailers cannot make meaningful decisions related to the retail marketing mix until they first define and profile their target market

      • Product assortment should differentiate the retailer while matching target shoppers’ expectations

      • Services mix can help differentiate one retailer from another

      • Store atmosphere is important as: 

        • The physical layout can help or hinder shopping

        • Experiential retailing can help sell goods

  Price decision:

  • Price policy must fit the retailers:

    • Target market and positioning

    • Product service and assortment

    • Competition

    • Economic factors

  • Retailers practice either

    • Everyday low pricing (EDLP)

    • High-low pricing

  
  

  Promotion Decision:

  • Retailers use various combinations of the five promotion tools:

    • Advertising

    • Personal selling

    • Sales promotion

    • Public relations

    • Public relations (PR)

  Place Decision:

  • Locations should be accessible to the target market in areas that are consistent with the retailers positioning

  • Location is the key marketing mix factor for success

    • Inconvenient locations must have compensating factors or people will not visit them

    • Shopping Center: Group of retail businesses built on a site that is planned, developed, owned, and managed as a unit

  
  
  
  

  Retail Trends and Developments:

  1. New retail forms, shortening retail life cycles, and retail convergence

  • Rise of megaretailers

  • Offer better merchandise selections, good service, and strong price savings to consumers

  • Have shifted the balance of power between retailers and producers

  • Growth of direct online, mobile, and social media retailing

    • Availability of a variety of non store alternatives

  3. Showrooming is now a common practice in stores but buying them online

  4. Growing importance of retail technology

  • Produce better forecasts

  • Control inventory costs

  • Interact electronically with suppliers

  • Send information between stores

  • Sell to customers within stores

  • Green retailing

  • Promoting more environmentally responsible products

  • Launching programs to help customers be more responsible

  • Working with channel partners to reduce their environmental impact

  • Global expansion of major retailers

    • Escaping saturated home markets

  
  

  Wholesaling:

  Functions performed by wholesalers:

  • Selling and promoting

  • Buying and assortment building

  • Bulk-breaking

  • Warehousing

  • Transportation

  • Financing

  • Risk bearing

  • Market information

  • Management services and advice

  
  

  Types of Wholesalers:

  1. Merchant Wholesaler:

  • Largest group of wholesalers (account for 50% of wholesaling)

  • Two broad categories:

    • Full-service wholesalers

    • Limited-service wholesaler

  • Sell primarily to retailers

  • Provide a full range of services

  • Types:

    • General merchandise

    • Specialty wholesalers

  Industrial Distributors

  • Sell industrial products to manufacturers

  • Carry stock

  • Offer credit

  • Provide delivery

  • May carry a broad range of merchandise, a general line, or a specialty line

  2. Brokers and agents

  • Do not take title to goods

  • Perform only a few functions

  • Specialize by product line or customer type

  • Brokers bring buyers and sellers together

  • Agents represent buyers on a more permanent basis

    • Manufacturers agents are the most common type of agent wholesaler

  1. Manufacturers sales branches and offices:

  • Involves wholesaling by seller or buyers themselves rather than through independent wholesalers

  Cash and carry wholesalers

  • Carry a limited line of fast-moving goods

  • Sell to small retailers for cash

  
  

  Truck wholesalers:

  • Perform primarily a selling and delivery function

  
  

  Drop shippers:

  • Do not carry inventory or handle the product

  
  

  Rack jobbers:

  • Price the goods

  • Keep goods fresh

  • Set up point-of-purchase displays

  • Keep inventory records

  
  

  Producers’ cooperatives:

  • Farmer-owned members

  • Assemble farm produce for sale in local markets

  
  

  Mail-order:

  
  
  

  Wholesaler Strategy:

  • Segmentation, targeting, differentiation, and positioning

  
  

  Wholesaler Marketing Mix:

  • Product assortment and services

  • Price

  • Promotion

  • Distribution (location)

  
  

  Channel Behavior and Organization:

  • Each channel will be most effective when:

  • Each member is assigned tasks it can do best

  • All members cooperate to attain overall channel goals

  
  

  • If this does not happen conflict occurs:

    • Horizontal conflict occurs among firms at the same level of the channel

      • Can be healthy competition

    • Vertical conflict occurs between different levels of the same channel

  • Conventional distribution channel

    • Consists of one or more independent producers, wholesalers, and retailers, each a separate business seeking to maximize its own profits even at the expense of profits for the system as a whole

  • Vertical marketing system (VMS)

    • A distribution channel structure in which producers, wholesalers, and retailers act as a unified system

      • One channel owns the other, has contracts with them, or has so much power that they all cooperate

    • Types of VMS:

      • Corporate VMS: A vertical marketing system that combines successive stage of production and distribution under single ownership. Channel leadership is established via common ownership

      • Contractual VMS: A vertical marketing system in which independent levels of production/distribution join together through contracts to obtain more economies of scale than they could alone

      • Franchises:

        • Franchise organizations are a common form of contractual vertical marketing system

        • Types of franchise organizations:

          • Manufacturer-sponsored retailer franchise:

            • Ford and its independent franchised dealers

          • Manufacturer-sponsored wholesaler franchise

            • Coca-Cola licensed bottlers

          • Service-firm sponsored retailer franchise

            • McDonalds, Avis, Holiday Inn

  
  
  
  
  
  

  Marketing's Impact on Society:

  • False Wants

  • Too much consumerism

  • Cultural pollution

  • Too few social goods 

  
  

  Marketing's Impact on Other Businesses:

  • Big budgets disadvantage smaller competitors

  • Marketing practices that create barriers to entry

  • Unfair competitive marketing practices

  
  

  Marketings Impacts on Individual Consumers:

  • High prices 

  • Deceptive practices

  • High-pressure selling

  • Shoddy, harmful, or unsafe products

  • Planned and perceived obsolescence

  • Poor service to disadvantaged consumers

  
  

  

  
  

  Citizen and Public Action to Regulate Marketing:

  • Traditional buyers’ rights to include the right to…(Kennedy)

  1. Not buy a product that is offered for sale

  2. Expect the product to be safe

  3. Expect the product to perform as claimed

  4. The right to be well informed about important aspects of the product

  5. The right to be protected against questionable products and marketing practices

  6. The right to influence products and marketing practices in ways that will improve “quality of life”

  7. To consume in a way to preserve the world for future generations of consumers

  
  

  Additional Consumer Rights

  • To be well informed

  
  

  Sellers Bill of Rights:

  • To introduce any product in any size and style–with proper warnings and controls, if necessary

  • To charge any price for the product without any discrimination

  • To spend any amount to promote the product if competing fairly

  • To use any product message that is not misleading or dishonest

  • To use buying incentive programs that are not unfair or misleading

  
  
  

  Marketing Ethics:

  • Corporate marketing ethics policies should be developed by firms as guidelines for handling various issues and dilemmas

    • Distributor relations

    • Advertising standards

    • Customer service

    • Pricing

    • Product development

    • General ethical standards

  
  
  

  Chapters 9-16

  Pricing, know formulas

  
  
  

  Thoughts from Ethics Discussion

  
  

  Christian Ethics

  1. Lead by example - whether you know it or not, people are watching you

  2. There is a correlation between how you deal with ethical dilemmas and how effective you are as a leader and a witness for Christ

  3. Faith is essential for holding to Biblical convictions regardless of the consequences

  4. Stay involved in the disciplines of the faith…as your practice of Christianity sways, so will your morality

  5. An ethical decision is not a last-minute decision

  6. Your convictions will be tested when you are detached from the Christ-centered subculture

  7. Friendships are a key part of shaping and maintaining Biblical convictions

  • Stay accountable to Godly people

  8. Ethical standards must be applied consistently to ALL areas of life

  9. Organizational ethics may not align with Biblical ethics

  10. At times God may ask you to “walk”

  • Trust Him - it will work out

  
  

  Templates to consider when faced with ethical dilemmas

  • The Golden Rule: “Do unto others as you would have them do unto you”

  • The Utilitarian Principle: Do the greatest good for the greatest number of people

  • Kant’s Categorical Imperative: Act in such a way that the action taken under the circumstances could be a universal law or rule of behavior

  • The Professional Ethic: Act in such a way that your actions would be viewed as proper by a panel of professional colleagues

  • Press Test: Would you feel comfortable if your actions were in the news

    • Ex. TV/Web/Newspaper

  • The Mom/Kid Test: Ask yourself if you would be proud to explain your actions to your children or your mother

  • The Jesus Test: Ask yourself, if Jesus were in the room to explain what you were doing, how would you feel? Would you still do it?

    • 2 Corinthians 5:10

  
  
  

  Regarding issues of ethics and social responsibility: The free market and the legal system should decide such issues