Pricing Lecture PDF

Pricing Wednesday, November 13, 2024 6:24 PM Pricing Lecture Chapter 10: What is the value proposition worth?...

Pricing Wednesday, November 13, 2024 6:24 PM Pricing Lecture Chapter 10: What is the value proposition worth? Costs, Demand, Revenue, and the Pricing Environment Might love the product… But what does it cost? Yes, but What Does It Cost?” 10.2 Describe how marketers use costs, demand, revenue, and the pricing environment to make pricing decisions. Identify Strategies and Tactics to Price the Product Pricing and Innovations Price: assignment of value or the amount the consumer must exchange to 10.3 Understand key pricing strategies and tactics. receive the offering 10.1 Explain the importance of pricing and how marketers set objectives for their pricing strategies. To set the right price, marketers must understand a variety of quantitative and qualitative factors that can mean success or failure Commerce ○ Includes: money, goods, services, favors, votes or anything else that for the pricing strategy. 10.4 Understand the opportunities for Intern has value to the other party What Is Price? payment. ○ Consider opportunity costs also price is the assignment of value, or the amount the consumer must exchange to receive the offering Factors in price setting or product Many experts suggest that technology is crea Elements of price planning pricing forever—and perhaps create the mos 1. Set pricing objectives Bartering: Payment may also be in the form of goods, services, favors, votes, or anything else that provides the most obvious example: Music lo 2. Estimate demand has value to the other party. download tens of billions of songs from num 3. Determine costs Nonmonetary costs important to marketers Google Play, Amazon Music, and Bandcamp. 4. Examine the pricing environment consider an opportunity cost, or the value of something we give up to obtain something else Sixty-eight percent of smartphone users who 5. Choose a pricing strategy every day. Price Planning Pricing objectives Sales or market shares? Pricing Advantages for Onl Profit margin The Internet also allows consumers to gain m Image enhancement creates unique pricing challenges for market Competitive effect access to sophisticated “shopbots” that prov Customer satisfaction products. Detailed information about what products ac Setting the price of a brand such as Consumerreports.org, can give consu Cost for new cars and other big-ticket items. Final Demand Revenue Step 2: Estimate Demand consumers’ costs because of the gasoline, tim Demand : quantity of a good or service that consumers and business customers are willing and able to buy at a given price a trip to the mall. Pricing environment in a given time period. Break-Even Analysis demand normally changes with changes in price, marketers must know how much consumers are willing to buy at different Dynamic Pricing Strategies How many units must be sold to cover all costs? prices. , marketers should know before they set prices. One of the most important opportunities the Cost v. price one of the earliest steps marketers take in price planning is to estimate demand for their products. in which the seller can quickly and easily adju Break- Even Calculation Demand Curves Pricing Strategies Based on Cost If a brick-and-mortar retail store wants to ch Break-Even Point (in units)= total fixed costs/ contribution per unit to fixed costs Economists use a graph of a demand curve to illustrate the effect of price on the quantity demanded of a product. The demand new price tags on items, create and display n Marketing planners often choose cost-based strategies because they are simple to calculate and are relatively curve, which can be a curved or straight line, shows the quantity of a product that customers will buy in a market during a period input new prices into the store’s computer sy risk free. They promise that the price will at least cover the costs the company incurs to produce and market the Pricing strategies Pricing tactics of time at various prices if all other factors remain the same. must print catalogs and price lists and distrib product. activities can be very costly to a firm, so they Based on cost Pricing for individual products Vertical axis- prices a firm charge for product p Internet also enables firms that sell to other Cost plus two part Cost-based pricing methods have drawbacks Horitzontal axis- number of units or quatity product demanded rapidly as they adapt to changing costs. Based on demand pricing payment pricing Successful price planning includes a series of six orderly steps beginning with setting pricing objectives. ○ do not consider factors such as the changing prices of inputs, the nature of the target market, demand, target costing Pricing for multiple products competition, the product life cycle, and the product’s image. yield management price bundling Step 1: Develop Pricing Objectives Slopes downward to right rise of the product goes up , the number of units that customers are willing to buy goes down. ○ although the calculations for setting the price may be simple and straightforward, estimating costs accurately Online Auctions Based on the competition captive pricing may prove difficult. For consumers who have lots of stuff in their The first crucial step in price planning is to develop pricing objectives. If prices decrease, customers will buy more. This is the law of demand. price leadership Distribution based pricing attic, the Internet means an opportunity for must support the broader objectives of the firm, such as maximizing shareholder value, as well as its For example, if the price of bananas goes up, customers will probably buy fewer of them. And if the price gets really high, Based on customers' needs Discounting for channel most common cost-based approach to pricing a product is cost-plus pricing: marketer totals all the costs for the to-consumer (C2C) sites. While most consum overall marketing objectives, such as increasing market shar customers will eat their cereal without bananas. Value (EDLP) pricing members product and then adds an amount (or marks up the cost of the item) to arrive at the selling price. Many never heard of other auction sites such as eC New product pricing, marketers, especially retailers and wholesalers who often must set the price for tens of thousands of products, are some of the many online auctions that a skimming pricing penetration Pricing objectives use cost-plus pricing because of its simplicity; users need only know or estimate the unit cost and add the bobbleheads to health-and-fitness equipmen pricing markup. are a powerful Internet pricing strategy. trial pricing You may wonder how a retailer or a wholesaler determines the markup percentage. Perhaps the most popular auctions are the C the markup percentage is a matter of tradition or rules of thumb. Many retailers mark up clothing, gifts, and auction is an open auction, meaning that all t Maximize the effectiveness of pricing plans other items by keystone pricing, point in time. On many Internet auction sites keystoning, a pricing strategy in which the retailer simply doubles the cost of the item (100 percent markup) to price below which the item will not be sold. determine the price. A reverse auction is a tool firms use to Psychological issues in pricing Psychological pricing strategies Restaurants typically triple the costs (200 percent markup) of the food that goes into a menu item and a typical auction, buyers compete to p Buyer's expectations Odd-Even pricing quadruple (300 percent markup) the cost of alcoholic beverages. compete for the right to provide a prod Internal reference prices Price lining To calculate cost-plus pricing, marketers usually calculate either a markup on cost or a markup on selling price. Price-quality interferences Prestige pricing With both methods, you calculate the price by adding a predetermined percentage to the cost, but as the names popular and profitable online auction site is S Legal and ethical issues in B2B pricing Legal and ethical issues in B2B pricing Pricing objectives: a firm’s overall objectives relate to a certain level of profit it hopes to realize. When of the methods imply, for one the calculation uses a percentage of the costs, and for the other, a percentage of athletic shoes and other clothing and promo pricing strategies are determined by profit objectives, the focus most often is on a target level of profit the selling price Like those on Wall Street and other stock ma Bait- and- Switch Price discrimination growth or a desired net profit margin. A profit objective is important to firms that believe profit is what sellers place asks. When the two meet, a tran Loss-Leader Pricing Price-fixing exceptions to this typical price–demand relationship. In fact, there are situations in which (otherwise sane) people desire a Pricing Strategies Based on Demand motivates shareholders and bankers to invest in a company. who sells on both StockX and the similar site Predatory pricing product more as it increases in price. For prestige products such as luxury cars or jewelry, a price hike may actually result in an Demand-based pricing: firm bases the selling price on an estimate of volume or quantity that it can sell in $20,000. increase in the quantity consumers demand because they see the product as more valuable. In such cases, the demand curve different markets at different prices. To use any of the pricing strategies based on demand, firms must firms usually produce an entire product line or a product mix, profit objectives may focus on pricing for the firm’s entire portfolio of products. In such cases, marketers develop pricing strategies that maximize the slopes upward. The right-hand side of Figure 10.4 shows the “backward-bending” demand curve we associate with prestige determine how much product they can sell in each market and at what price. In some cases, organizations such Freemium Pricing Strategie products. If the price increases, consumers perceive the product to be more desirable and demand is likely to increase. You can as local governments can actually regulate behavior by manipulating the prices people pay for services. For Perhaps the most exciting new pricing strate profits of the entire portfolio rather than focusing on the costs or profitability of each individual product. End lecture see that if the price increases from to the quantity demanded increases from to. On the other hand, if the price decreases, example, several major cities, including London and Shanghai, use a congestion pricing strategy to reduce their premium). Freemium is a business strategy in consumers think the product is less desirable. This is what happens if the price begins at and then goes up to quantity decreases horrendous traffic jams. They have succeeded by creating “congestion zones” where drivers must pay a high fee version of a product free of charge but then Store brand lower cost for us but relailers sell the product for what they paid for , markups Price as high as possible? Isnt this the best strategy from to. Still, the higher-price/higher-demand relationship has its limits. If the firm increases the price too much (say, from to ), for the privilege of operating their cars during peak time of the product with more features, greater fu making the product unaffordable for all but a few buyers, demand will begin to decrease. The direction the backward-bending freemium pricing strategy has been most pop Fads- products that are trending, It depends.. curve takes shows this. marketers often use customer surveys, in which consumers indicate whether they would buy a certain product media, games, or web services where the co very short market life like beanie babies, rollerblades, What is the brands strategy? Shifts in Demand and how much of it they would buy at various prices. They may obtain more accurate estimates by conducting negligible. Companies that have followed the Price aggressively to spread overhead? Any of these things could cause an upward shift of the demand curve. An upward shift in the demand curve means that at any an experiment SurveyMonkey, Spotify, and Skype. profit objective is essential to allow the firm to recover its investment in a short time. In such cases, the Price high to develop a premium image? firm must harvest profits before customers lose interest and move on to the next cool idea. given price, demand is greater than before the shift occurs. Like the must have product or a celeb is using it Just to cover the cost of the products Two specific demand-based pricing strategies are target costing and yield management pricing. While there are many advantages for consum , firms find that a new product can be more successful if they match price with demand using a target costing companies and individuals who stalk the We I would recommend to price the Goldies onions as high as possible since research Sales or Market Share Objectives process We’ll talk about one of these, Internet price Often the objective of a pricing strategy is to maximize sales (either in dollars or in units) or to increase testing shows consumers are willing to pay up to $3.99/lb. However, perhaps not market share, the percentage of a market in terms of sales units or revenue accounted for by a specific With target costing, firms first use marketing research to identify the quality and functionality needed to satisfy Internet Price Discriminatio too high for consumers since we want the consumers to see the onions and its attractive market segments and what price they are willing to pay before they design the product. firm, product line, or brand. Of course, the Internet allows firms to do mo price to be attainable for its value. The price measures the quality traits of the external factors such as changing costs or co onions leaving an odorless after taste and tear free. Considering its competitor, On the basis of this information, managers can calculate the target cost—the maximum it can cost the firm to Market share: % of a market (defined in terms of either sales units or revenue accounted for a specific is that it allows consumers to quickly compar we should have this price to be high to differentiate the product in the market for manufacture the product. If the firm can meet customer quality and functionality requirements and control costs firm, product lines, or brands) sitting in their pajamas at home. Many firms its better quality and durability. Customers will know the benefits when buying to meet the required price, it will manufacture the product. If not, it abandons the product. Internet price discrimination. goldies and will not be disappointed with the price or the onion. lowering prices is not always necessary to increase market share. If a company’s product has a competitive advantage, keeping the price at the same level as other firms may satisfy sales and/or market share Internet price discrimination is an Internet pr objectives. Lowering prices can lead to a “price war” when consumers switch from one producer to different buyers for the same product based another simply because the price changes. Marketers know that they will maximize prof person is willing to pay. Although this is not p Competitive Effect Objectives on where they live, how close they are to the Sometimes strategists design the pricing plan to dilute the competition’s marketing efforts. In these cases, business in the area, or their Internet browsi a firm may deliberately try to preempt or reduce the impact of a rival’s pricing changes. shows the upward shift of the demand curve as it moves from to. At , before the shift occurs, customers will be willing to purchase the quantity (or 80 units in Figure 10.5) at the given price, P (or $60 in Figure 10.5). For example, customers at a sites even offer customers a discount if they Competitive effect pricing or market based pricing: pricing a product based on (above, below, or same as) particular store may buy 80 barbecue grills at $60 a grill. But then the store runs a huge advertising campaign featuring Rihanna on her patio using the barbecue grill. The demand curve shifts from to. (The store keeps the price at $60.) Take a look at how the s Internet price discrimination illegal? As we competitions pricing) long as companies don’t charge different pric quantity demanded has changed to. In our example, the store is now selling 200 barbecue grills at $60 per grill. From a marketing standpoint, this shift is the best of all worlds. Without lowering prices, the company can sell more of its product. As a result, total such as gender or race, it is not. Sometimes, Customer Satisfaction Objectives revenues go up, and so do profits, unless, of course, the new promotion costs as much as those potential additional profits. makes these decisions. Many quality-focused firms believe that profits result from making customer satisfaction their primary objective. These firms believe that if they focus solely on short-term profits, they will lose sight of their Innovations in Payment Sy objective to retain customers for the long term Demand curves shift downward when a rumor spreads or causes harm, quantity demand falls The digital revolution has created a new wor with both business and other consumers. Th Image Enhancement Objectives Estimate Demand security, and convenience for both buyer and Consumers often use price to make inferences about the quality of a product. In fact, marketers know that It’s extremely important for marketers to understand and accurately estimate demand. Plans for production of the product as auctions and digital/mobile wallets. Others t price is often an important means of communicating not only quality but also image to prospective well as marketing activities and budgets must all be based on reasonably accurate estimates of potential sales. cryptocurrency, digital installment plans, buy customers. The image-enhancement function of pricing is particularly important with prestige products (or So how do marketers reasonably estimate potential sales? Marketers predict total demand first by identifying the number of collaborative savings and consumption, rent- luxury products): a high price and appeal to status-conscious consumers. buyers or potential buyers for their product, i.e., their target market, and then multiplying that estimate times the average lending. amount each member of the target market is likely to purchase Cryptocurrency The most recent addition to the value exchan Estimate demand predict companys market share type of digital currency that uses cryptograph thousand different cryptocurrencies, the five consideration other factors that might affect demand, such as new competitors entering the market, changing consumer tastes are Bitcoin, Ethereum, Ripple, Litecoin, and T These cryptocurrencies are digital tokens wit Price Elasticity of Demand Marketers also need to know how their customers are likely to react to a price change. In particular, it is critical to understand Yield management pricing is another type of demand-based pricing strategy that hospitality businesses, like ou can buy Bitcoin on several Bitcoin exchan whether a change in price will have a large or a small impact on demand. airlines, hotels, and cruise lines, use. These businesses charge different prices to different customers to manage each other using mobile apps that store thei capacity while they maximize revenues. Bitcoin transactions are by people who specu Price elasticity of demand: % change in unit sales that result from a percentage change in price Many service firms practice yield management pricing because they recognize that different customers have to earn enormous returns in the future. measure of sensitivity of customers to change in price: different sensitivities to price; some customers will pay top dollar for an airline ticket, whereas others will travel A feature that makes Bitcoin and other digita only if there is a discount fare. The goal of yield management pricing is to accurately predict the proportion of globe is that it is organic. This means that it i Price elasticity of demand: % change in Q d/% change in P customers who fall into each category and allocate the percentages of the airline’s or hotel’s capacity entire records of the Bitcoin network are sto accordingly so that no product goes unsold. computers that help maintain the network. T Sometimes customers are sensitive to changes in prices, and a change in price results in a substantial change in the quantity they cryptocurrency such as Bitcoin from being co This network of computers that maintains th demand. Pricing Strategies Based on the Competition the blockchain. Sometimes a firm’s pricing strategy involves pricing its wares near, at, above, or below the competition’s prices. Elastic demand- demand in which changes in price have large effects on the amount demanded In the “good old days,” when U.S. automakers had the American market to themselves, pricing decisions were There are distinct advantages to cryptocurre straightforward: Industry giant General Motors would announce its new car prices, and Ford, Chrysler, Packard, credit card fraud that entices criminals to ste Inelastic demand- a change in price has little or no effect on the quantity consumers are willing to buy Studebaker, Hudson, and the others got in line or dropped out. A price leadership strategy, rule in an card numbers. oligopolistic industry that a few firms dominate, may be in the best interest of all players because it minimizes price competition. Price leadership strategies are popular because they provide an acceptable and legal way for There is also a societal benefit from the use o firms to agree on prices without ever coordinating these rates with each other. consumers do not have bank accounts. Inste higher each time they need to send a money Pricing Strategies Based on Customers’ Needs payments would cost only a fraction of that a Retailers typically practice one of two pricing strategies based on customers’ needs: EDLP and high/low pricing. will contribute to increased quality of life for Firms that practice value pricing, or everyday low pricing (EDLP) develop a pricing strategy that promises good countries. quality and durable products at reasonable prices every day. Many successful retail chains around the world— Cryptocurrencies can be sent electronically a including Walmart, Home Depot, Office Depot, and Target—all adopt a deliberate policy of EDLP. Because of good news for folks who need to make large their size, these firms are able to demand billions of dollars in cost efficiencies from their suppliers and pass the weeks with traditional transfers going throug savings on to customers. money back that you loaned a friend right aw The high/low pricing, or promo pricing, strategy means retailers have prices that are higher than EDLP chains, There are no “middlemen” (like banks) involv normally the MSRP or list price, but they run frequent, often weekly, promotions that heavily discount some (which is why many businesses like this optio products. occur only from person to person, so there is potential for Bitcoins to show up in illegal tra laundering drug money). New Product Pricing New products are vital to the growth and profits of a firm, but they also present unique pricing challenges. When a product is new to the market or when there is no established industry price norm, marketers may use a skimming pricing strategy, a penetration pricing strategy, or trial pricing. Digital and Mobile Wallets A skimming price firm charges a high, premium price for its new product with the intention of reducing it in the While there are some consumers who still lik future in response to market pressures. If a product is highly desirable and offers unique benefits, demand is they stand in the grocery line, many consum price inelastic during the introductory stage of the product life cycle, allowing a company to recover research digital wallets. A digital wallet is a financial a and development (R&D) and promotion costs. When rival products enter the market, the firm lowers the price to make transactions, and track payments by co remain competitive. Firms that focus on profit objectives when they develop their pricing strategies often set a bank’s mobile app or may be a payment pla skimming prices for new products. wallets are also the main means of moving c owner to another. A mobile wallet is an app or skimming pricing to be successful, there should be little chance that competitors can get into the market debit card, and rewards card information as quickly. With highly complex, technical products, it will take time for competitors to put a rival product into convenient way to make purchases and paym production. In developing nations, digital wallets allow co Penetration pricing is the opposite of skimming pricing. In this situation, the company prices a new product very financial system. Digital wallets mean individ Price elasticity of demand represents how demand responds to changes in prices. If a price increase results in little change in low to sell more in a short time and gain market share early. Another reason marketers use penetration pricing is receive funds from individuals in other natio demand, then demand is said to be price inelastic. If a price increase results in a large change in demand, demand is price elastic. to discourage competitors from entering the market. The firm that first introduces a new product has an account with a physical firm or branch, often important advantage. Experience shows that a pioneering brand often is able to maintain dominant market In Africa, where 80 percent of the population If demand is price inelastic, can marketers keep raising prices so that revenues and profits will grow larger and larger? And what if share for long periods. Campbell’s soup, with the iconic red label, is a brand that was first to market in 1895 and payment system has over 200 million consum demand is elastic? Does it mean that marketers can never raise prices? The answer to these questions is “no” (surprise!). Elasticity still dominates the industry today mean consumers in developing countries can of demand for a product often differs for different price levels and with different percentages of change. I more secure financial systems and participat Trial pricing means that a new product carries a low price for a limited time to generate a high level of customer Other factors can affect price elasticity and sales. Consider the availability of substitute goods or services. If a product has a close interest. Unlike penetration pricing, in which the company maintains the low price, the company increases the Buy-Now-Pay-Later (BNPL) substitute, its demand will be elastic; that is, a change in price will result in a change in demand as consumers move to buy the trial price after the introductory period. The idea is to win customer acceptance first and make profits later, as A controversial innovation in payments is the substitute product when a new health club offers an introductory membership to start pulling people in or a cable TV company allow consumers to get a product now and p offers a great low price for six months if you sign up for their TV, Internet, and phone bundle, after which you or “afterpay” payment option. Services like A Marketers of products with close substitutes are less likely to compete on price because they recognize that doing so could result will pay much more. the opportunity to get the product up front w in less profit as consumers switch from one brand to another. Price Segmentation months. The BNPL options have been criticiz Most markets are made up of consumers who have widely different characteristics. market segments. into debt and damage their credit scores. Changes in prices of other products also affect the demand for an item: cross-elasticity of demand. When products are Just as the same product may not be best for all segments, the best price for a product differs among market BNLP is, in many ways, just a new twist on th substitutes for each other, an increase in the price of one will increase the demand for the other segments. retailers that began during the Great Depres Price segmentation: practice of charging different prices to different market segments for the same product. without adequate financial resources to pay complements—that is, when one product is essential to the use of a second—an increase in the price of one decreases the layaway programs, the clothing or Christmas demand for the second For example, Captain George’s Seafood Restaurant in Myrtle Beach, South Carolina, segments buffet pricing by were paid for. age. They offer an adult buffet for $35.99, but access to the same buffet for children ages 5–12 is $19.99. Save-Now-Buy-Later (SNBL) Step 3: Determine Costs Segmenting on quantity occurs when the price of one large pizza is $9 but you can get two for $15. Of course Similar to BNPL programs, another installme Estimating demand helps marketers to determine possible prices to charge for a product. It tells them how much of the product marketers must be careful when using customer characteristics as criteria for price differences to avoid (SNBL) (payment process whereby payments they think they’ll be able to sell at different prices. Knowing this brings them to the third step in determining a product’s price: discriminating against some customers. bank account: when the agree upon amount making sure the price will cover costs. Before marketers can determine price, they must understand the relationship of cost, offering. Apps such as U.S.-based Reel and th demand, and revenue for their product The use of characteristics such as gender, race, Uber uses a surge pricing strategy; it raises the price of its Potential buyers can save up for higher-price product as demand goes up (as on a rainy Saturday night) and lowers it as demand declines. customer is given suggestions for payment p Variable and Fixed Costs the savings plan is agreed upon, the amount First, a firm incurs variable costs—the per-unit costs of production that will fluctuate depending on how many units or individual Bottom-of-the-Pyramid Pricing bank account. When the amount is saved, th products a firm produces Marketers face a different challenge when they wish to get a foothold in countries with huge populations of people with the lowest incomes, the bottom-of-the-pyramid countries. These marke