INTRODUCTORY MARKETING Pricing M. Louise Ripley, MBA, PhD

PRICING LECTURE Questions We Will Answer u How is pricing part of Marketing Strategy? u How is pricing affected by Cost, Demand, Competition? u How do you set a price?

KEY FACTORS IN PRICING u Objectives u Strategies u Policies and Constraints u Tactics

PRICING OBJECTIVES u Cost u Demand u Competition

PRICING OBJECTIVES COST ORIENTED u Emphasis - Cost/Profit l Target Return l Satisfactory Return l Maximize Current Profit l Maximize Long Term Profit

COST CALCULATION: How real is this price? uEstimate demand function Q = P uEstimate cost function C = Q uCalculate total revenues R = P(1000-4P) uCalculate Profits l Z = (1000P - 4P 2 ) - ( Q) l Z = -56, ,000P - 4P 2 = $150

PRICING OBJECTIVES DEMAND ORIENTED u Emphasis - Demand/Sales u Growth in Market Share u Growth in Dollar or Unit Sales

PRICING OBJECTIVES DEMAND ORIENTED u How to Grow in Sales

Skimming the Cream u Conditions: m Demand Not Sensitive to Price m Different Price Segments m Consumers Unaware of Cost m Little Competition

Skimming the Cream - High Price u MAYORS FOUNTAIN PEN $500? Their Advertising Claim: For the average lifestyle, the average writing instrument is perfectly adequate. But while most pens are designed for signing postcards, ours are designed for signing peace treaties.

Skimming the Cream continuing the strategy... u High Price First u Lower Price Later l Dupont: Cellophane, Nylon l Polaroid: Camera

PRICING OBJECTIVES DEMAND ORIENTED u How to Grow in Sales l Skimming the Cream l Penetration Pricing

PRICING OBJECTIVES DEMAND ORIENTED u Penetration Pricing - Low Price u Conditions: m Demand is Price Sensitive m No Different Price Segments m Product Not A Status Item m Competition Likely

Penetration Pricing u Regular Penetration Pricing The Colt Car Sells at regular low price

Penetration Pricing Special Condition Nabiscos New Giggles Cookies 20 cents off coupon for a short time only

PRICING OBJECTIVES COMPETITION ORIENTED u Emphasis - Competition/Status Quo l Meeting the Competition l Non-Price Competition

BREAK EVEN ANALYSIS BEP = $30,000/($1.20-$0.80) = 75,000 units $Sells at $1.20 VC = $0.80 FC = $30,000 Units Break Even Point = 75,000 units

PRICING STRATEGIES u Mixing Price with the Other Variables uLiterally Thousands of Combinations

Marketing Mix Combinations Just One: Price and Quality P High MediumLow Q HighP remium Penetration Big Bargain Medium Overpriced AverageBargain Low Hit & Run ShoddyCheap

PRICING STRATEGIES u Cost u Demand u Competition

PRICING STRATEGIES COST ORIENTED u Target Profit Pricing uMark-Up Pricing

PRICING STRATEGIES COST ORIENTED u Problems l Difficulties Determining Cost

Mark- Up Pricing Problems: What is Mark-up? 13%? 53%?

PRICING STRATEGIES COST ORIENTED u Problems l Difficulties Determining Cost l Legal Problems

PRICE FIXING

PRICING STRATEGIES DEMAND ORIENTED u Perceived Value

PRICING STRATEGIES DEMAND ORIENTED u Perceived Value u Demand Differential

PRICING STRATEGIES DEMAND ORIENTED u Perceived Value u Demand Differential l Customer Form

PRICING STRATEGIES DEMAND ORIENTED u Perceived Value u Demand Differential l Customer Form

PRICING STRATEGIES DEMAND ORIENTED u Perceived Value u Demand Differential l Customer Form l Product Form

LEGAL PRODUCT FORM PRICE DISCRIMINATION u TV without stereo sells for $250 u TV with $5 worth of stereo parts sells for $350

PRICING STRATEGIES DEMAND ORIENTED u Perceived Value u Demand Differential l Customer Form l Product Form l Place

PRICING STRATEGIES DEMAND ORIENTED u Perceived Value u Demand Differential l Customer Form l Product Form l Place

PRICING STRATEGIES DEMAND ORIENTED u Perceived Value u Demand Differential l Customer Form l Product Form l Place l Time

PRICING STRATEGIES DEMAND ORIENTED u Perceived Value u Demand Differential l Customer Form l Product Form l Place l Time

PRICING STRATEGIES COMPETITION ORIENTED u Going Rate uSealed Bid

PRICING OBJECTIVES and STRATEGIES u Cost u Demand u Competition

PRICING POLICIES AND CONSTRAINTS u Management u Distributors u Competitors u Suppliers u Company Executives u Stockholders u Government regulations

PRICING TACTICS u Psychological Pricing m Odd - Even: $69.95 m Price Lining

PRICE LINING MENS SUITS u as seen by the wearer of a $500 suit: cheapGOODoverpriced $300 $500 $700 u as seen after a 10% price increase: cheapGOODoverpriced $330 $550 $770

PRICING TACTICS u Psychological Pricing l Odd - Even Pricing l Price Lining l Prestige Pricing

PRESTIGE PRICING BAYER

PRICING TACTICS u Psychological Pricing l Odd - Even Pricing l Price Lining l Prestige Pricing l Promotional Pricing

ILLEGAL PROMOTIONAL PRICING Original Price$250 Illegal Pricing: Was $350 Now Only $300!!

PRICING TACTICS u Discount Pricing l Quantity l Cash l Trade/Functional l Seasonal l Consumer - everything else?

KEY FACTORS IN PRICING u Objectives l Cost, Demand, Competition u Strategies l Cost, Demand, Competition u Policies and Constraints u Tactics

PRICING LECTURE SUMMARY u How is pricing part of Marketing Strategy? u How is pricing affected by Cost, Demand, Competition? u How do you set a price? u Real World Story - Earmuffs tape