Economics Chapter 5 Quiz

Course Information

• Course: COMM223 Marketing Management
• Lecture: 8 - Pricing, Demand Estimates and Channel
• Quiz 2: Next class, covering Chapters 7, 8, 9, and 10

Agenda

• Pricing
  • Factors influencing price decisions
  • External factors
  • New product pricing
  • Product mix pricing
  • Pricing calculations
• Demand estimates
• Place
  • Why marketing channels
  • Channel behavior
  • Channel decisions
  • Channel management

Pricing Considerations

• External Factors
  • Nature of market and demand
  • Economy
  • Other environmental elements
• Types of Markets
  • Pure competition
  • Monopolistic competition
  • Oligopolistic competition
  • Pure monopoly
• Price-demand relationship
  • Demand curve
  • Price elasticity of demand

Price-Demand Relationship

• Demand curve: Shows the number of units the market will buy at different prices in a given time period.
• Price elasticity of demand: The percentage change in quantity demanded divided by the percentage change in price. Values >1 are elastic, <1 are inelastic. Availability of substitutes influences elasticity.
• Elastic products: Lower price to maximize revenue.
• Inelastic products: Raise price to maximize revenue.
• Prestige goods behave in a contrary fashion due to consumer perception of value.

Factors Impacting Pricing Strategies

• External Factors
  • Nature of market and demand
  • Economy
  • Other environmental elements
• Factors impacting pricing strategies
  • Boom or recession
  • Inflation
  • Interest rates
• Post-recession consumer responses
  • Cut prices and offer discounts
  • Develop more affordable items
  • Redefine value propositions

Reseller Reactions and Government Restrictions

• Reseller reactions to prices must be considered.
• Government may restrict or limit pricing options.
• Social considerations should be taken into account.

New Product Pricing

• Market-skimming pricing: Setting a high price to skim maximum revenue from segments willing to pay the high price, making fewer but more profitable sales. (e.g., digital cameras, Sony HDTVs) Favorable conditions.
• Market-penetration pricing: Setting a low price to attract a large number of buyers and a large market share. However, low price usually means sacrificing profitability and potentially igniting a price war.

Product Mix Pricing Strategies

• Product line pricing: Setting prices across an entire product line.
• Optional-product pricing: Pricing optional or accessory products sold with the main product.
• Captive-product pricing: Pricing products that must be used with the main product.
• By-product pricing: Pricing low-value by-products to get rid of or make money on them.
• Product bundle pricing: Pricing bundles of products sold together.

Bundling

• Bundling: Marketing two or more products for a single package price. (e.g., McDonald's "Value Meal," lower car wash prices when purchasing gas).

Pricing Calculation

• Hypothetical manufacturer of consumer electronics products (HD).
• The product plays videos and TV programming streamed over the internet on devices like high-definition televisions, tablets, and mobile phones.

Price Setting Based on Costs

• Cost-based pricing (cost-plus pricing)
  • Fixed cost: $20 million
  • Variable cost: $125 per unit
  • Expected sales: 1 million units
  • Markup: 25%
  • Determining cost: Units cost = variable + fixed costs/unit sales.
  • Break-even price: $145
  • Mark-up price Calculation: unit cost/(1-desired return on sales)
  • Resulting in a price of $193.33.

Price Setting Based on External Factors

• Wholesalers and retailers need to be considered.
• Dollar markup = selling price - cost
• Markup percentage on cost = dollar markup/cost
• Markup percentage on selling price = dollar markup/selling price.

Example Calculation

• Example of external factor price setting: Retailers expect 30% margin, wholesalers expect 20% margin on their prices.
• HD sets MSRP at $299.99.
• Suggested retail price - $300
• Minus retail margin (30%) - $90
• Retailer's cost/wholesaler's price - $210
• Minus wholesaler's margin (20%) - $42
• Wholesaler's cost/HD's price - $168

Break-Even Analysis

• Break-even volume = fixed costs/(price – unit variable cost)
• Example: 20,000,000/(20,000,000/(20,000,000/(168-$125) = 465,116.2 units
• BE Sales = BE volume * price = 465,117 * 168=168 = 168=78,139,656

Break-Even for Profit Goals

• Assume HD wants $5 million profit.
• Unit volume = (fixed cost + profit goal)/(price – variable cost) = (20,000,000+20,000,000 + 20,000,000+5,000,000) / (168−168 - 168−125) = 581,395.3 units.
• Dollar sales = 581,396 units * 168=168= 168=97,674,528

Demand Estimates

• Total market demand: Total volume that would be bought.
• Market potential: Upper limit of market demand
• Q = n * q * p where
  • Q= total market demand
  • n= number of buyers
  • q= quantity purchased
  • p= price

Chain Ratio Method

• Estimating market demand by multiplying a base number by a chain of adjusting percentages.

Market Share

• Example: HD forecasts 3.66% market share in the first year. Unit sales = 20.34 million units * 0.0366 = 744,444 units.

Demand and Pricing summary

• Summarize demand and pricing. This section will be used to summarize the entire section.

Value Delivery Network

• A network composed of the company, suppliers, distributors, and customers who work together to improve system performance and deliver customer value.

Supply Chains

• Supply chains consist of upstream and downstream partners.
• Marketers traditionally focus on downstream side.
• Supply chains are often viewed as a make-and-sell approach
• Demand chains involve a sense-and-respond approach.

Nature and Importance of Distribution Channels

• Marketing channel: Set of interdependent organizations involved in making a product or service available for use and consumption.

Channel Decisions

• Channel choices affect the marketing mix (pricing, communications).
• A strong distribution system is a competitive advantage.
• Channel decisions often involve long-term commitments.

Channel Members Add Value

• Channels contribute to greater efficiency and matching product assortment with demand.
• They bridge time, place, and possession gaps between products and consumers.
• Channels facilitate transactions. These include: - Information - Promotion - Contact - Matching - Negotiation
• Channels also complete transactions through: - Physical distribution - Financing - Risk Taking

Channel Levels

• Channel level: Layer of intermediaries that performs work to bring product ownership closer to the final buyer.
• Number of channel levels indicates how long a marketing channel is. Includes direct and indirect channels.
  • Producers lose more control and face greater channel complexity.

Customer and Business Distribution Channels

• Direct channels: Company sells directly to consumers (e.g., GEICO, Quicken Loans)
• Indirect channels: Company uses intermediaries to reach consumers (e.g., most products)

Channel Members and Flows

• Channel members are connected through:
  • Physical flow
  • Payment flow
  • Information flow
  • Promotion flow
  • Flow of ownership

Channel Conflict

• Channel Conflict: Occurs from disagreements between channel members on roles, activities, or rewards.
• Types of Conflict:
  • Horizontal conflict: Between firms at the same channel level.
  • Vertical conflict: Between firms at different channel levels.

Conventional vs. Vertical Marketing Systems

• Conventional systems: Independent channel members seeking to maximize their own profits.
• Vertical systems: Unified systems where producers, wholesalers, and retailers cooperate through ownership, contracts, or dominant power.

Types of Vertical Marketing Systems

• Corporate: Single ownership
• Contractual: Contractual agreements
• Administered: Power of one channel member

Channel Organization

• Horizontal systems: Companies at the same level joining forces.

• Multichannel systems: Firms using several channels to reach diverse consumers.

• Changes in channel organization

  • Disintermediation: Producers cut out intermediaries to shorten paths and potentially reduce costs or increase control.

Multichannel Advantages and Disadvantages

• Advantages: Expanded sales, tailoring channels to consumer needs.
• Disadvantages: Harder to control, increased potential conflict.

Channel Design Decisions

• Step 1: Analyzing consumer needs, focusing on cost and feasibility.
• Step 2: Setting channel objectives in terms of desired customer service level.
  • Key factors for channel objectives:
    • Company nature (size and financial position)
    • Products
    • Competition
    • Marketing environment
• Step 3: Identifying major alternatives, including intensive, selective, and exclusive distribution strategies.
• Step 4: Evaluating major alternatives based on factors such as economics, control, and adaptability.

Designing International Channels

• Channel strategies must adapt to existing structures in each country.
• Distribution systems can have numerous intermediaries.
• International government regulations often impact distribution strategies.

Channel Management Decisions

• Selecting, managing, and motivating channel members.
• Evaluating channel members.

Public Policy & Distribution Decisions

• Exclusive distribution, exclusive dealing, and exclusive arrangements are legal as long as they don't lessen competition or create monopolies; agreements must be voluntary.

Further Study

• Read Chapter 12

Test your knowledge of key concepts in Economics Chapter 5. This quiz covers market demand curves, types of market structures, price elasticity of demand, and pricing factors. Challenge yourself to see how well you understand these fundamental economic principles.