= 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?
The PRICE you see is not the PRICE you pay PRICE = LIST PRICE – DISCOUNTS + FEES What about TAXES? $ ?
PRICE as an indicator of VALUE value = consumers perceived benefit from product/service Give people something of value, and theyll happily pay for it.
Value Pricing McDonalds began its Supersize program in the 1990s. Other fast foods followed. All were discontinued by concentrated soap powder
Profit equation PROFIT = TOTAL REVENUE – TOTAL COST unit price fixed cost x + quantity sold variable cost
6 steps in setting price
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
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
Pricing, product, & advertising strategies available to firms in 4 types of competitive markets
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.
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
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.
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
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
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)
Break-even analysis chart for a picture frame store shows the break-even point at 400 pictures
4 approaches for selecting approximate price level
Step 5: Set the List or Quoted Price One-price policy = fixed pricing Flexible-price policy = dynamic pricing
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)
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)
3 special adjustments to list or quoted price include discounts, allowances, & geographical adjustments
Several pricing practices are affected by legal & regulatory restrictions, which benefit both consumers & firms
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)
5 most common deceptive pricing practices
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