VO Management I - Marketing (MA) Week 3 – Pricing PDF

VO Management I - Marketing (MA) Week 3 – Pricing Univ.-Prof. Dr. Christoph Fuchs Chair of Marketing, [email protected] http://marketing.univie.ac.at Office hours: upon request Cours...

VO Management I - Marketing (MA) Week 3 – Pricing Univ.-Prof. Dr. Christoph Fuchs Chair of Marketing, [email protected] http://marketing.univie.ac.at Office hours: upon request Course Framework PRODUCT SEGMENTATION Marketing PRICE Research TARGETING PROMOTION Consumer Behavior POSITIONING PLACE PREREQUISITES MARKETING STRATEGY MARKETING PLAN Chair of Marketing Prof. Christoph Fuchs, Ph.D. 2 What would you do? A company has annual sales of 100,000 units for one of its products. The selling price for this product is $100, variable cost is $60, and the allocation of fixed overheads is $3 million. The analysis of the market suggests that you have the following two options for the next year: – Increase unit sales by 1% by keeping the current price, or – Increase price by 1% and have the same sales as this year. Which option would you choose and why? Chair of Marketing Prof. Christoph Fuchs, Ph.D. 3 The leverage of price Operating Profit Price Costs (var) Volume Costs (fix) Profit Chair of Marketing Prof. Christoph Fuchs, Ph.D. 4 The leverage of price a 10% improvement of …. Operating Profit old new old new Price Costs (var) Volume Costs (fix) 27 Mio. 13 30% Chair of Marketing Prof. Christoph Fuchs, Ph.D. 5 The leverage of price a 10% improvement of …. Operating Profit old new old new Price Costs (var) Volume 1.1 Mio. 14 40% Costs (fix) 27 Mio. 13 Chair of Marketing Prof. Christoph Fuchs, Ph.D. 6 The leverage of price a 10% improvement of …. Operating Profit old new old new Price Costs (var) 54 16 60% Volume 1.1 Mio. 14 Costs (fix) 27 Mio. 13 Chair of Marketing Prof. Christoph Fuchs, Ph.D. 7 The leverage of price a 10% improvement of …. Operating Profit old new old new Price 110 20 100% Costs (var) 54 16 Volume 1.1 Mio. 14 Costs (fix) 27 Mio. 13 Chair of Marketing Prof. Christoph Fuchs, Ph.D. 8 Price Volume Trade Off Can I reduce my price and get enough additional volume to increase profits? (incremental break- even analysis) 17.5% Price Decrease Based on average income Volume Increase statements of 1,200 largest publicly held companies in 2002. to Break Even Source: The Price Advantage, by -5.0% Marn, Roegner, and Zawada Chair of Marketing Prof. Christoph Fuchs, Ph.D. 9 Overview Price is the only component of the marketing mix that brings in revenue. It has a sizeable impact on profitability. Key requirements of pricing policy It should complement your strategic goals It should be based on perceived value to customer Pricing is subject to psychological biases Chair of Marketing Prof. Christoph Fuchs, Ph.D. 10 BUT… What is the relationship between Price & Demand? Chair of Marketing Prof. Christoph Fuchs, Ph.D. 11 Basic Demand Curve Chair of Marketing Prof. Christoph Fuchs, Ph.D. 12 BUT: What is the Relationship between Price and Demand? Have you heard about Elasticity? Chair of Marketing Prof. Christoph Fuchs, Ph.D. 13 Price elasticities are important and have to be taken into account for pricing strategies! Price elasticity of demand illustrates the response of demand to a change in price Inelastic demand occurs when demand hardly changes when there is a small change in price Elastic demand occurs when demand changes greatly for a small change in price Price elasticity of demand = % change in quantity demand % change in price Chair of Marketing Prof. Christoph Fuchs, Ph.D. 14 Price elasticities are important and have to be taken into account for pricing strategies! Price elasticity of demand = % change in quantity demand % change in price Chair of Marketing Prof. Christoph Fuchs, Ph.D. 15 Price elasticity in the product life cycle… Chair of Marketing Prof. Christoph Fuchs, Ph.D. 16 Example of assessing value (and determining demand curves) Demand curves based on consumers‘ WTP WTP 10 8 Producer made personal Control 6 4 2 0 1 11 21 31 41 51 61 71 81 91 101 111 121 131 141 151 161 171 181 191 201 Frequency Major Pricing Approaches Chair of Marketing Prof. Christoph Fuchs, Ph.D. 19 Pricing Approaches What affects price setting in the first place? Chair of Marketing Prof. Christoph Fuchs, Ph.D. 20 #1 Cost-Based Pricing Chair of Marketing Prof. Christoph Fuchs, Ph.D. 21 #2 Cost Based Pricing – Break Even Pricing Break-even pricing is the price at which total costs are equal to total revenue and there is no profit Target return pricing is the price at which the firm will break even or make the profit it’s seeking Chair of Marketing Prof. Christoph Fuchs, Ph.D. 22 #3 Competition-Based Pricing Setting prices based on competitors’ strategies, costs, prices, and market offerings. Consumers will base their judgments of a product’s value on the prices that competitors charge for similar products. Question: What is the problem with cost-based and competitor-based pricing? Chair of Marketing Prof. Christoph Fuchs, Ph.D. 23 #4 Customer-Value Based Pricing (!) Chair of Marketing Prof. Christoph Fuchs, Ph.D. 24 #4 Customer-Value Based Pricing (!) Chair of Marketing Prof. Christoph Fuchs, Ph.D. 25 Pricing Strategies Chair of Marketing Prof. Christoph Fuchs, Ph.D. 27 #1 Penetration vs. Skimming Pricing Chair of Marketing Prof. Christoph Fuchs, Ph.D. 28 #1 Penetration vs. Skimming Pricing Examples Chair of Marketing Prof. Christoph Fuchs, Ph.D. 29 Pricing strategy – penetration vs. skimming When would you pursue penetration pricing and when skimming? #1 Pricing strategy – penetration vs. skimming Fox 2015 (Lecture Slides) #1 Penetration vs. Skimming Pricing Chair of Marketing Prof. Christoph Fuchs, Ph.D. 32 #2 Loss Leader Chair of Marketing Prof. Christoph Fuchs, Ph.D. 34  #3 Price Differentiation (also known as Price Discrimination) Chair of Marketing Prof. Christoph Fuchs, Ph.D. 35  #3 Price Differentiation (customized value discrimination) Forms of price discrimination Quantitative (e.g., small vs. large quantities) Qualitative (e.g., depending on WTP of segments) Temporal (e.g., morning vs. evening), Location-based (e.g., urban vs. rural). Dynamic/demand/real-time pricing Different price at different time Based on demand, competition, capacity,… Personalized pricing Different price for different buyers (based on segments – either they can select or not) Based on estimate of individual’s value price #3 Price Differentiation Red can be default color and more expensive Chair of Marketing Prof. Christoph Fuchs, Ph.D. 38 #3 Price Differentiation Differentiation based on social groups (by socio demographics) A simple classification is, for example, according to age. Schoolchildren, students and pensioners regularly benefit from discounted offers. Or by Gender? Chair of Marketing Prof. Christoph Fuchs, Ph.D. 39 #4 Complementary Pricing What is the maximum amount you would spend for 1kg coffee beans? Chair of Marketing Prof. Christoph Fuchs, Ph.D. 40 #4 Complementary Pricing Who owns a Nespresso machine? Chair of Marketing Prof. Christoph Fuchs, Ph.D. 41 #4 Complementary Pricing Who owns a Nespresso machine? Approx.: Chair of Marketing Prof. Christoph Fuchs, Ph.D. 42 #4 Complementary Pricing Razor-Blade-Model Chair of Marketing Prof. Christoph Fuchs, Ph.D. 43 #4 Complementary Pricing → Threat Chair of Marketing Prof. Christoph Fuchs, Ph.D. 44 #5 Dynamic Pricing Dynamic pricing is a pricing strategy in which companies adjust prices for products or services on the basis of current market demand (also referred to as surge pricing). It is a model that calculates prices using automatic algorithms. Factors such as competitor pricing, supply and demand and other external factors are taken into account (e.g., Uber pricing). Chair of Marketing Prof. Christoph Fuchs, Ph.D. 45 The Psychology of Price (and its relationship to STP) Chair of Marketing Prof. Christoph Fuchs, Ph.D. 47 Close your Eyes… Chair of Marketing Prof. Christoph Fuchs, Ph.D. 48 Please rate the “expected quality“ on a 5 point scale (1=low expected quality, 5=high expecxted quality) A B 1.99 EUR 0.49 EUR Chair of Marketing Prof. Christoph Fuchs, Ph.D. 49 Please rate the “expected quality“ on a 5 point scale (1=low expected quality, 5=high expected quality) A B 0.49 EUR 1.99 EUR Chair of Marketing Prof. Christoph Fuchs, Ph.D. 50 Price Quality Inference higher quality lower quality lower higher price price Chair of Marketing Prof. Christoph Fuchs, Ph.D. 51 Price = Message consumers extract meaning from price inference about valence of an experience price communication should follow evidence-based principles Chair of Marketing Prof. Christoph Fuchs, Ph.D. 52  People believe that “you get what you pay for” especially for credence goods (quality is hard to judge even after use) Chair of Marketing Prof. Christoph Fuchs, Ph.D. 53 Expensive Wine tastes better!! Plassmann, O'Doherty, Shiv, & Rangel PNAS (2008) Chair of Marketing Prof. Christoph Fuchs, Ph.D. 54 Expensive Wine tastes better!! liking with price Plassmann, O'Doherty, Shiv, & Rangel PNAS (2008) Chair of Marketing Prof. Christoph Fuchs, Ph.D. 55 Pricing Tactics Communicating the Price Chair of Marketing Prof. Christoph Fuchs, Ph.D. 58 What is the Price? 450 gr. Nutella Chair of Marketing Prof. Christoph Fuchs, Ph.D. 59 Reference Prices People have little knowledge about the typical price of a product Use reference price to indicate “good” price “original price is …” “regularly priced at …” “compare elsewhere at …” “manufacturer’s suggested list price is …” Chair of Marketing Prof. Christoph Fuchs, Ph.D. 60  show the price to be a good value against a reference price the price of a condom seems a bargain compared to a Maxi Cosi Chair of Marketing Prof. Christoph Fuchs, Ph.D. 61 Chair of Marketing Prof. Christoph Fuchs, Ph.D. 62 In Comparison to 42.79 a price of 68.14 is ok! Chair of Marketing Prof. Christoph Fuchs, Ph.D. 63 Don‘t be fooled by reference prices Chair of Marketing Prof. Christoph Fuchs, Ph.D. 64  What is better? €29.99 vs. €30 Chair of Marketing Prof. Christoph Fuchs, Ph.D. 69 People are persuaded by odd prices! Chair of Marketing Prof. Christoph Fuchs, Ph.D. 70 9 Endings Effect of Advertised 9 Endings on Sales of Margarine Buyers perceive odd Price/lb ($) Unit Sales ______________________________________________________________ number prices as significantly lower Parkay Brand Regular price 0.83 2,817 than the slightly Discount price 0.63 8,283 (+194%) higher round Odd discount price 0.59 14,567 (+406%) numbers that they Imperial Brand approximate. Regular price 0.89 5,521 (e.g., $1.99 and $2.00) Discount price 0.71 9,120 (+65%) Odd discount price 0.69 17,814 (+222%) ______________________________________________________________ Source: Kenneth Wisniewski, and Robert Blattberg, Center for Research in Marketing, University of Chicago. Chair of Marketing Prof. Christoph Fuchs, Ph.D. 71 29.99 vs. 30.00 price = odd increases sales in short-run (odd price communicates “sale!”), but only interesting when it reduces left-most digit (€29.99 vs. €28.99 is not helpful) disadvantages harms recall, takes 1/3 time longer to think about, harms decision making, waste of time for customers & employees price = round preferred by 66% of customers perceived as more honest suggests higher quality Chair of Marketing Prof. Christoph Fuchs, Ph.D. 72 Price: Key take aways Price is important It is the only component of the marketing mix that brings in revenue. It has a significant impact on profitability But it’s not the only tool in your toolbox (not the only element in value equation) It should be based on your STP Key requirements of pricing policy – It should complement your strategic goals – It should be based on perceived value to customer Pricing is subject to psychological biases Chair of Marketing Prof. Christoph Fuchs, Ph.D. 74  Thank You. Chair of Marketing Prof. Christoph Fuchs, Ph.D. 75