Marketing: Real People, Real Decisions Pricing the Product Chapter 12 Lecture Slides Solomon, Stuart, Carson, & Smith Your name here Course title/number Date

Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc.12-2 Chapter Learning Objectives When you have completed your study of this chapter, you should be able to: Explain the importance of pricing and how prices can take both monetary and non-monetary forms. Understand the pricing objectives that marketers typically have in planning pricing strategies. Explain how customer demand influences pricing decisions. Describe how marketers use costs, demands, and revenue to make pricing decisions. Understand some of the environmental factors that affect pricing strategies.

Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc.12-3 Introduction to the Topic This is the first of two chapters on the topic of price, this chapter covers some of the theory behind the topic, while the second covers pricing strategy. Price is a difficult issue for marketers because so much of what influences it is not within their direct control. In the long run, it is the customer who decides what a product is “worth” by their willingness to purchase it. This is known as fair market value and it determines the most a company can charge. A company’s cost structure determines the least that it can charge. These two ends provide the range in which a company has to choose its price.

Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc.12-4 What is Price? Price: the value that customers give up, or exchange, to obtain a desired product or service. Price can also go by many different names, such as: tuition, professional fees, annual or membership dues, rent or lease, service charge, or even member’s contribution. Not all transactions require money. Bartering: the practice of exchanging a good or service for another good or service of like value. Very common between trades people but the government frowns upon it due to its tax avoidance.

Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc.12-5 Non-Monetary/Economic Costs Marketers must also consider the impact of non-monetary, but still economic costs, when consumers make purchase decisions. Operating costs: costs involved in a using a product. Ink jet printers now cost more to use than to actually buy! Switching costs: costs involved in moving from one brand to another. This can be a problem when compatibility issues come into play. Opportunity costs: the value of something that is given up to obtain something else. You could be earning money right now, instead of sitting here listening (or not) to me!

Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc.12-6 Importance of Pricing Decisions What determines total revenue for a company? Total revenue is equal to price charged multiplied by the number of units sold. We know that the price charged has a direct impact on the number of units sold. Price also has an impact on: –distribution strategy and and the use of marketing intermediaries –consumers’ perception of quality –promotional strategy –customer relationship management Margin: the difference between the cost of the product and the selling price of the product.

Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc.12-7 Developing Pricing Objectives Companies may set a number of different objectives for their pricing strategy, however, they must support the broader objectives of the organization. Sales (market share) objective: pricing products to maximize sales or to attain a desired level of sales or market share. Example: setting prices to achieve a 5% increase in sales. Profit objective: pricing products with a focus on a target level of profit growth or a desired net profit margin. Example: setting prices to achieve a 10% profit margin on all goods sold. Figure 12.1

Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc.12-8 Developing Pricing Objectives (continued) Competitive effect objective: pricing that is intended to have an effect on the marketing efforts of the competition. Example: altering prices to discourage market entry by competitors. Customer satisfaction objective: pricing to offer the maximum value to the customer. Example: setting price levels to simplify consumer decision making. Image enhancement objective: pricing to communicate product quality and establish a desired image to prospective customers. Example: setting prices to reflect a desired image to consumers. Figure 12.1

Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc.12-9 How Demand Influences Pricing Demand curve: a plot of the quantity of a product that customers will buy in a market during a period of time at various prices if all other factors remain the same. The law of demand states that as the price of a good decreases, the quantity demanded increases. Example: open bar at a wedding! Demand curves for normal products can also shift upwards (to the right) or downwards (to the left) when factors other than price influence demand for the product, such as increased advertising or improved distribution. See Figure 12.3 (Page 328) for an illustration. Figure 12.2a

Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc How Demand Influences Pricing (continued) The demand curve for a prestige product is unusual because it reflects the consumer’s perception of value for the product. As price decreases, demand increases up to a point and then decreases, as customers no longer see the “prestige” value in the product due to its lower price. Derived demand: demand for a product that is influenced or affected by environmental, economic, socio-cultural, and other factors outside of the control of marketers. This affects the sensitivity (less) of demand to price changes. Figure 12.2b

Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc Price Elasticity of Demand Price elasticity of demand: the percentage change in unit sales that results from a percentage change in price. Marketers want to know this because it will influence the decision to raise of lower prices. Price elastic: when a percentage change in unit sales results in a larger percentage change in the quantity demanded. Products that are considered discretionary in nature tend to have elastic demand curves. Example: the price of lobster goes down to $6 per lb, and consumers decide to have a treat for supper! Figure 12.4a

Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc Price Elasticity of Demand (continued) Price inelastic: when a percentage change in price results in a smaller percentage change in the quantity demanded. The demand for staple products or those that we have no choice in consuming, such as prescription drugs tend to be price inelastic. What do we do with this? Assuming the goal is to maximize revenues (and profits), then for a price elastic product, it would pay to lower price to increase demand, while for a price inelastic product, it would pay to raise the price, because demand will decrease relatively little in response to that change. Figure 12.4b

Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc Determining Costs Variable costs: the costs of production (raw and processed materials, parts, and labour) that are tied to, and vary depending on, the number of units produced. Management has some control over these costs in the short run. Fixed costs: costs of production that do not change with the number of units produced. Example: costs related to the building and property. Management has relatively little control over these costs in the short run. Total costs: the total of the fixed costs and the variable costs for a set number of units produced. Sales revenue Variable costs Gross profit Fixed costs Net profit - - = =

Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc The Concept of Break-Even Break-even analysis: a method for determining the number of units that a firm must produce and sell at a given price to cover all its costs. The purpose is to evaluate the potential of the business. This concept’s relationship to pricing is based on the following logic: –the price charged for the product must cover the variable costs of producing it, and –contribute to paying the fixed costs of maintaining the operation. See next slide for formulae. Figure 12.5

Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc The Concept of Break-Even (continued) Break-Even Point = Total Fixed Cost Contribution Per Unit to Fixed Cost In Units: In Dollars: Total Fixed Cost Variable Cost Per Unit Price 1 - In Units with Profit: Total Fixed Cost + Target Profit Contribution Per Unit to Fixed Cost

Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc Marginal Analysis Marginal analysis: a method that uses cost and demand to identify the price that will maximize profits. Marginal cost: the increase in total cost that results from producing one additional unit of a product. Marginal revenue: the increase in total revenue (income) that results from producing and selling one additional unit of a product. This method can be difficult to use because of the uncertainty of cost information at different levels of demand. Figure 12.6

Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc The Pricing Environment Companies must consider the influence of their external environment when choosing the pricing strategy that will offer the best chance to maximize profits. Factors within the external environment: –The state of the economy –The competition –Consumer trends such as increased attention to value for money spent –Global influences such as currency exchange rates, and trade restrictions Price subsidies: government payments made to protect domestic businesses or to reimburse them when they must price at or below cost to make a sale. The subsidy can be a cash payment or tax relief.

Marketing: Real People, Real Decisions ©Copyright 2003 Pearson Education Canada Inc Famous Last Words… “We lose money on every one we sell, but we make it up on volume.” If you can explain why that statement does not make any sense from a business point of view, then proceed to the next chapter. If you cannot, then you may want to go back and read this chapter again!