Pricing Strategy: Building Price Foundation - MGT 103 Product Marketing PDF

MGT 103 Product Marketing and Management Ch. 13: Building Price Foundation Ch. 14: Arriving at Final Price Professor: Kristine Ehrich, Ph.D. 1 © Kristine R. Ehrich, PhD - Do not post or copy  Importance of Price to Marketers Price is...

MGT 103 Product Marketing and Management Ch. 13: Building Price Foundation Ch. 14: Arriving at Final Price Professor: Kristine Ehrich, Ph.D. 1 © Kristine R. Ehrich, PhD - Do not post or copy  Importance of Price to Marketers Price is the only marketing mix variable that can be changed quickly Price is related to total revenue and profit ○ Profit = Total Revenue – Total Costs ○ Profit = (Price x Quantity Sold) – Total Costs Price has a psychological impact on customers. Throughout this discussion, think of the many ways this is true. © Kristine R. Ehrich, PhD - Do not post or copy You Want Me to Pay How Much? Price – The assignment of value, or the amount the consumer must exchange to receive the offering Includes money, effort, time, favors, votes, or anything else that has value to the other party Opportunity costs must also be considered - what are you giving up in order to get that product? © Kristine R. Ehrich, Ph.D. Understanding Demand For most products, there is an inverse relationship between price and demand How would you get the increase in demand without changing price? © Kristine R. Ehrich, Ph.D.  Understanding Demand Elasticity MOVIE TICKETS Inelastic Demand: A change in price results in a little or no change in quantity demanded Elastic Demand: A change in price causes a great (opposite) change in quantity demanded © Kristine R. Ehrich, Ph.D. Let’s Talk How would you classify the following in terms of price elasticity? Think about your own behavior, does your likelihood of buying any of these increase or decrease as a result of a dramatic change in price? – Gasoline – Movie Tickets – Air Travel – Coffee © Kristine R. Ehrich, Ph.D. Understanding Break Even Types of Costs Fixed Costs Fixed costs don’t change with the number of units produced, whether it’s 100 or 10,000. Thus the average fixed cost per unit will always decrease as the number of units produced increases. Variable Costs Variable costs are those production costs that are tied to the number of units produced and thus vary depending on volume. © Kristine R. Ehrich, Ph.D. Variable vs. Fixed Costs Variable costs = expenses that fluctuate in direct proportion to the output volume of units produced – Cost of raw materials, credit card fees, piece rate labor, sales commissions, delivery expenses Fixed Costs = expenses that do not vary as a function of output volume (even if no production activity, these remain) – Rent, mortgage payment, insurance, computers, salary of full-time workers, advertising Generally higher proportion of variable costs to fixed costs is looked at more favorably by investors because a profit can be generated at a low sales level (there are few fixed costs that must be paid each accounting period) © Kristine R. Ehrich, Ph.D. Break Even Analysis Breakeven = Fixed Costs Point Per-Unit Contribution to Fixed Costs (Quantity) (Price – Variable Costs) Break-Even Point ▪ The point at which the costs of producing a product equal the revenue made from selling the product. © Kristine R. Ehrich, Ph.D. Break Even Analysis of Fixed Cost Investment BEP quantity= Fixed-cost investment/Unit Margin Calculate BEP quantity for a pair of shoes: – Shoes sales price = $120; – Variable cost = $50; – Fixed cost = $40million – Contribution Unit Margin = Price – Variable Costs – Contribution Margin = difference between total revenue and total variable costs How many pair of shoes must you sell in order to break even? © Kristine R. Ehrich, Ph.D. Break Even Analysis of Fixed Cost Investment BEP quantity= Fixed-cost investment/Unit Margin Calculate BEP quantity for a pair of jeans: Jeans sales price = $85; Variable cost = $75; Fixed cost = $150,000 Contribution Unit Margin = Price – Variable Costs How many pair of jeans must you sell in order to break even? How many must you sell in order to make a profit of $10? How many must you sell in order to make a profit of $2500? © Kristine R. Ehrich, Ph.D. Assessing Price vs. Value ▪ Importance of price depends on: ✔ Type of product ✔ Type of target market ✔ Purchase situation ▪ Value combines a product’s price and quality attributes ✔ Customers use value to differentiate between competing brands © Kristine R. Ehrich, Ph.D. Pricing Strategies Cost Based Pricing – Calculate price based on company’s costs. Markup can be stated as a percentage of cost of making the product or a percentage of selling price Competitive Based Pricing – benchmarking on competitor’s prices Demand Based Pricing – setting a price based on what consumers are willing to pay © Kristine R. Ehrich, Ph.D. Demand-Based Pricing Customers pay a higher price when demand for the product is strong and a lower price when demand is weak Marketers must be able to calculate how much customers will buy at different price points Used frequently in perishable product areas – Lyft, hotels, airlines, rental cars, produce, seasonal goods How does it apply in restaurants? © Kristine R. Ehrich, Ph.D. So, what do you want to do? What is the objective of your price? There are many objectives. None of them are “right.” You must determine what your objective is and then set your price accordingly – Sales in $ – Market share – Short term Profit maximization – Short term Revenue maximization (long term profit focus, increase market share and lower costs through economies of scale) – Customer Satisfaction – Image Enhancement – Social Responsibility © Kristine R. Ehrich, Ph.D. Pricing Strategies What is a basis for setting your price? – Cost Cost Plus – Demand Captive Pricing (products that must be used with main product) – Competition Predatory Pricing is an illegal type of competitive pricing – Dynamic Pricing – New Product Strategies Skimming Pricing Penetration Pricing Trial Pricing © Kristine R. Ehrich, Ph.D. Psychological Pricing Buyers’ Expectations Internal Reference Prices Odd-Even Pricing Price Lining Strategy Prestige Pricing Loss-Leader Pricing Predatory Pricing (illegal) Bait and Switch Pricing (illegal pricing) False former price comparisons (illegal pricing) Restaurant info design © Kristine R. Ehrich, Ph.D. Price Lining © Kristine R. Ehrich, Ph.D. © Kristine R. Ehrich, Ph.D. High end © Kristine R. Ehrich, Ph.D. Anchor and Adjustment 22 © Kristine R. Ehrich, Ph.D. Marketing Application of anchor and adjustment – Purchase Quantity Limits Regular price 89c – Sale 79c (12%) Purchase Quantity Limit: Actual # of cans purchased: No Limit per person 3.3 per customer Limit 4 per person 3.5 per customer (60 % bought 4) Limit 12 per person 7 per customer Source: Wansink, Kent, and Hoch (1998), “An Anchoring and Adjustment Model of Purchase Quantity Decisions,” Journal of Marketing Research, 35, 71-81. 23 © Kristine R. Ehrich, Ph.D. Marketing Application – Suggestive Advertising Anchors Anchor 1: Anchor 2: Snickers Bars – Buy them Snickers Bars – Buy 18 for for your freezer! your freezer! Purchased 1.4 (on average) Purchased 2.6 (on average) Source: Wansink, Kent, and Hoch (1998), “An Anchoring and Adjustment Model of Purchase Quantity Decisions,” Journal of Marketing Research, 35, 71-81. 24 © Kristine R. Ehrich, Ph.D. 9 ending Effect of Advertised Odd-Price Endings on Sales of Margarine Unit Parkay Price/lb. Sales Regular Price 0.83 2,817 Discount Price 0.63 8,283 194% “9” Discount Price.059 14,567 417% Imperial Regular Price 0.89 5,521 Discount Price 0.71 9,120 65% “9” Discount Price 0.69 17,814 223% 25 Source: Kenneth Wisniewski and Robert Blattburg, Center for Research in Marketing, University of Chicago Gathering references from the world around us… Endowment effect – Money Back Guarantee – Free Trial Period – Creating Ownership Which product is shown first, test drives, overnight stays – We studied this in Consumer Behavior lecture, so it should be familiar! 26 © Kristine R. Ehrich, Ph.D.