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Marketing Concepts Price MKTG 3110-004 Spring 2014 Mrs. Tamara L. Cohen Classes #18-19.

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Presentation on theme: "Marketing Concepts Price MKTG 3110-004 Spring 2014 Mrs. Tamara L. Cohen Classes #18-19."— Presentation transcript:

1 Marketing Concepts Price MKTG Spring 2014 Mrs. Tamara L. Cohen Classes #18-19

2 KEY TERMS price barter value total revenue average revenue marginal revenue total cost fixed cost variable cost marginal cost price fixing price discrimination predatory pricing

3 KEY CONCEPTS demand curve price elasticity of demand break-even analysis discounts allowances FOB pricing uniform delivered pricing

4 PRICING STRATEGIES Skimming pricing Penetration pricing Prestige pricing Price lining Odd-even pricing Target pricing Bundle pricing Yield-management pricing Standard mark-up pricing Cost-plus pricing Experience curve pricing Target profit pricing Target return-on-sales pricing Target return-on- investment pricing Customary pricing Above-, at-, or below- market pricing Loss-leader pricing One-price policy Flexible-price policy

5 = amount of money charged for a product or service = sum of all values the consumer exchanges for the benefits of owning or using a product or service cost PRICE is the only element in the marketing mix that produces revenue; all other elements represent costs one of the most flexible elements of marketing mix: price can be changed quickly the biggest problem for many marketing executives historically the major factor affecting buyer choice (but this has waned in recent years) What is PRICE?

6 PRICE has many names Tuition Rent Interest Premium Fee Dues Fare Salary Wage Commission $1 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

7 The PRICE you see is not the PRICE you pay PRICE = LIST PRICE – DISCOUNTS + FEES What about TAXES? $ ?

8 PRICE as an indicator of VALUE value = consumers perceived benefit from product/service Give people something of value, and theyll happily pay for it.

9 Value Pricing McDonalds began its Supersize program in the 1990s. Other fast foods followed. All were discontinued by concentrated soap powder

10 Profit equation PROFIT = TOTAL REVENUE – TOTAL COST unit price fixed cost x + quantity sold variable cost

11 6 steps in setting price

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17 Step 1: Identify pricing objectives & constraints Objectives: Profit - long-run and/or short-run or not at all Sales Market share Unit volume Survival Social responsibility

18 Step 1: Identify pricing objectives & constraints Constraints: Market size / demand Newness / life cycle Strength / status versus competition Cover costs of production & marketing Lag time Type of competitive market

19 Pricing, product, & advertising strategies available to firms in 4 types of competitive markets

20 Step 2: Estimate demand & revenue The demand curve shows us that for most products and services: When prices are high, few consumers are willing to buy. When prices drop, more consumers are willing to buy. When prices are low, many consumers are willing to buy.

21 Step 2: Estimate demand & revenue Total Revenue (TR) = total money received from sale of product TR = P x Q where P = unit price of product and Q = quantity of product sold Average Revenue (AR) = average amount of money received for selling one unit of a product = PRICE of that unit AR = TR ÷ Q = P Marginal Revenue (MR) = change in total revenue from producing & marketing one additional unit of product MR = change in TR ÷ 1 unit increase in Q = ΔTR ÷ ΔQ = slope of TR curve

22 Price Elasticity of Demand measures sensitivity of consumer demand to changes in products price Price elasticity of demand = E = % change in quantity demanded % change in price I NELASTIC demand: A slight change in price has very little effect on demand. E LASTIC demand: A slight change in price has a big effect on demand.

23 Elasticity examples I NELASTIC Necessities e.g. toothpaste; open-heart surgery Gasoline price strategy e.g. Gas prices tend to rise in summer, but this doesnt stop many people from driving extensively E LASTIC Luxuries e.g. yacht; skiing vacation Public policy implications e.g. Increase price of cigarettes in NY via higher excise tax causes less smoking by teens, who often have limited spending money, i.e. price elastic re cigarettes

24 Step 3: Determine cost, volume & profit relationships Total Cost (TC) = total expense to produce & market a product Fixed Cost (FC) = companys expenses that are stable, and do not change with quantities of product produced & sold Variable Cost (VC) = companys expenses that change directly with the quantity of product produced & sold TC = FC + VC Marginal Cost (MC) = change in total cost from producing one more unit of product MC = change in TC ÷ 1 unit increase in Q = ΔTC ÷ ΔQ = slope of TC curve

25 Break-Even Analysis = analysis of relationship between total cost and total revenue to determine profitability at various levels of production Break-Even Point = quantity where TC = TR (i.e. Total Cost = Total Revenue) Profit will come from units sold AFTER Break-Even Point. Profit is maximized where MC = MR (i.e. Marginal Cost = Marginal Revenue)

26 Break-even analysis chart for a picture frame store shows the break-even point at 400 pictures

27 4 approaches for selecting approximate price level

28 Step 4: Select an approximate price level Demand-oriented approaches to pricing: 1.Skimming 2.Penetration 3.Prestige 4.Price lining 5.Odd-even 6.Target 7.Bundle 8.Yield management

29 4.1 DEMAND-oriented pricing approach 1.Skimming 2.Penetration 3.Prestige pricing 4.Price lining

30 4.1 DEMAND-oriented pricing approach (cont.) 5.Odd-even pricing 6.Target pricing 7.Bundle pricing 8.Yield-management pricing

31 4.2 COST-oriented pricing approach 1.Standard mark-up pricing 2.Cost-plus pricing 3.Experience curve pricing

32 4.3 PROFIT-oriented pricing approach 1.Target profit pricing 2.Target return-on- sales pricing 3.Target return-on- investment pricing

33 4.4 COMPETITION-oriented pricing approach 1.Customary pricing 2.Above-, at-, or below- market pricing 3.Loss-leader pricing

34 Step 5: Set the List or Quoted Price One-price policy = fixed pricing Flexible-price policy = dynamic pricing

35 Effects on Pricing Company effects product substitutes & complementary products product line pricing Customer effects beware of setting different kinds of middlemen against one another Competitive effects price war (successive price cutting by competitors)

36 Step 6: Adjust the List or Quoted Price Discount = straight reduction in price on purchases during stated period of time Allowance = promotional money paid by manufacturers to retailers in return for featuring manufacturers products FOB pricing = geographical pricing strategy where goods are placed Free On Board (FOB) a carrier; customer pays freight from factory to destination Delivered pricing = geographical pricing strategy where company charges same price plus freight to all customers, regardless of location CIF pricing = geographical pricing strategy where price includes Cost + Insurance + Freight (CIF)

37 3 special adjustments to list or quoted price include discounts, allowances, & geographical adjustments

38 Several pricing practices are affected by legal & regulatory restrictions, which benefit both consumers & firms

39 Laws & Regulations in Pricing price fixing = conspiracy among companies to set prices for a product; illegal in the US (Sherman Act & Consumer Goods Pricing Act) price discrimination = charging different prices to different buyers for the same products; illegal in the US (Robinson-Patman Act) predatory pricing = charging a very low price in order to drive competitors out of business; illegal in the US (Sherman Act & Federal Trade Commission Act)

40 5 most common deceptive pricing practices

41 Next class March 26 & 31 : Place Preparation: Read ch.15 pp.378-9; pp.392-3; p.395 ch.16 pp.404-5; pp.423 Homework #7: Retailer Comparison


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