Chapter 12 Setting The Right Price PDF

Chapter 12 Setting the Right Price Adapted for the fifth Canadian edition by Janice M. Shearer, Consultant Learning Outcomes 12-1 Explain the importance of price 12-2 Describe the four-step pricing process 12-3 Recognize the legalities and ethics of setting price Copyright © 2022 by Cengage Can...

Chapter 12 Setting the Right Price Adapted for the fifth Canadian edition by Janice M. Shearer, Consultant Learning Outcomes 12-1 Explain the importance of price 12-2 Describe the four-step pricing process 12-3 Recognize the legalities and ethics of setting price Copyright © 2022 by Cengage Canada. The Importance of Price and the Pricing Process • Price means one thing to the consumer—the cost of something they want. • Price means another thing to the seller—revenue. • Internal pricing and external pricing must be balanced to meet bottom line and customer needs. Copyright © 2022 by Cengage Canada. What Is Price? • Price • That which is given up in exchange to acquire a good or service • Includes the time lost while waiting for the good or service • Reasonable price = perceived value at the time of transaction Copyright © 2022 by Cengage Canada. The Importance of Price to Marketing Managers Price Profits Revenue Copyright © 2022 by Cengage Canada. Trends • Potential buyers carefully evaluate price of a product against the value of existing products. • Increased availability of bargain-priced private and generic brands • Downward pressure on overall prices • Market share pressure • Using price cuts to gain share • Internet and mobile make comparison shopping seamless. • Downward pressure on pricing Copyright © 2022 by Cengage Canada. Poll Pricing products is one of the easiest tasks marketing managers undertake. A. True B. False Copyright © 2022 by Cengage Canada. The Pricing Process Copyright © 2022 by Cengage Canada. Establishing Pricing Objectives Sales Oriented Status Quo Profit Oriented Pricing Goals Copyright © 2022 by Cengage Canada. Profit-Oriented Pricing Objectives PROFIT MAXIMIZATION • Price so that total revenue is as large as possible relative to total costs • Does not necessarily = high prices SATISFACTORY PROFITS • Reasonable level of profit • Often connected to CSR Copyright © 2022 by Cengage Canada. TARGET RETURN ON INVESTMENT • Most common • Price to achieve a particular ROI Sales-Oriented Pricing Objectives MARKET SHARE SALES MAXIMIZATION • Many believe market share indicates effectiveness—not always the case. • Extreme competition may result in limited share growth. • Ignore profits, competition, and the marketing environment, as long as sales are rising. • Short-term focus Copyright © 2022 by Cengage Canada. Status Quo Pricing Objective STATUS QUO • Maintain existing prices. • Meet competition prices. • Requires little planning—passive policy Copyright © 2022 by Cengage Canada. Price Change through PLC Introduction Growth Maturity Decline • High price • Recover development costs. • Demand relatively inelastic • Pricesensitive market • Prices stabilize. • Product appeal has widened. • Economies of scale • Demand rises. • Price ↓ s as competition ↑. • Distribution channels intensify. • Prices stabilize due to competitive landscape. • Demand is limited. • Further price reductions • Prices could even go up if the remaining product becomes a specialty good. Copyright © 2022 by Cengage Canada. Poll Tentree, a Canadian apparel company, has a value proposition that sets it apart—for every item sold, they will plant 10 trees. While this does erode their bottom line and is a profit-eating proposition, they are pleased with the profits achieved and the good public relations they enjoy due to this strategy. This is an example of which pricing objective? A. Profit-oriented pricing objective B. Sales-oriented pricing objective C. Status quo pricing objective Copyright © 2022 by Cengage Canada. Step 2—Estimate Demand, Costs, and Profits • Cost Estimation • Variable costs • Fixed costs • Demand Estimation • Trickier • Historical data in the industry • Life cycle • Starts with price sensitivity and price elasticity of demand Copyright © 2022 by Cengage Canada. Price Sensitivity Price Units Sold $10 10 $9 12 $8 14 $7 16 $6 18 $5 20 Copyright © 2022 by Cengage Canada. Elasticity of Demand Copyright © 2022 by Cengage Canada. Break-Even Analysis • How much does it cost to bring the product to market? • How much is the market willing to pay for the product? • BEP = Fixed cost/(Variable price per unit – Variable cost per unit) Copyright © 2022 by Cengage Canada. Step 2—Estimate Demand, Costs, and Profits • Still left with the question What will the market bear? • In practice, answer is left to be determined once in market Copyright © 2022 by Cengage Canada. Poll Break-even analysis helps to determine the price point beyond which the firm can begin to make a profit on each unit sold. A. True B. False Copyright © 2022 by Cengage Canada. Step 3—Choose a Price Strategy • Chosen price strategy defines the initial price and the intended direction of price movements over the PLC Copyright © 2022 by Cengage Canada. Step 3—Choose a Price Strategy • Starts with current product positioning… • Then, a consideration of product’s costs and demand and PLC stage… • Then, a selection from three basic approaches 1. Price skimming 2. Penetration pricing 3. Status quo pricing Copyright © 2022 by Cengage Canada. Step 3—Choose a Price Strategy Skimming Penetration • Start high and lower over time • New with unique benefits • Low price initially • Capture large market share to reduce production costs and discourage competition Copyright © 2022 by Cengage Canada. Status Quo • Price at the competition • Identical or close to competition Poll In an effort to ensure that demand for her services is manageable and that they are considered to be of higher quality then her competitors, Serena launched her physiotherapy clinic specializing in acquired brain injuries with prices 10 percent above the marketplace average and not accepting any cases involving workplace health and safety claims. This is an example of which pricing strategy? A. Penetration pricing B. Price skimming C. Status quo pricing Copyright © 2022 by Cengage Canada. Step 4—Using a Price Tactic • Set a base price—a general price level at which the company plans to sell. • Fine-tune the base price using a variety of pricing tactics. • Provides the opportunity to adjust for unforeseen events in the marketplace • Irrespective of price tactic, the driving force is profit, which results from markup. • The profit-producing device of price Copyright © 2022 by Cengage Canada. Discounts and Allowances Cash Discounts Quantity Discounts Functional Discounts Discounts and Allowances Copyright © 2022 by Cengage Canada. Seasonal Discounts Value-Based Pricing Competition Value Price Consumer Copyright © 2022 by Cengage Canada. Dynamic Pricing Supply Demand Copyright © 2022 by Cengage Canada. Geographic Pricing Uniformly delivered Buyer absorbs freight cost Zone pricing Seller pays all freight Geographic Copyright © 2022 by Cengage Canada. Other Pricing Tactics Single Price • All goods and services at the same price • Netflix as an example Flexible Price Professional Services • Different customers pay different prices. • Good when dealing with price-conscious consumers • Shopping or specialty good • Used by people who have specialized training • Price sensitivity is limited so consumer will bear the price given Copyright © 2022 by Cengage Canada. Other Pricing Tactics Price Lining Loss Leader • A line of products with prices set at several price points within • Reduces confusion for both seller and buyer • Selling a product near or even below cost in the hope that shoppers will buy other items once in the store Copyright © 2022 by Cengage Canada. Odd-Even • Using odd numbers in the price to connote a bargain Other Pricing Tactics Price Bundling • Two or more products in a single package for a special price • Can stimulate demand • Telecommunications industry uses this • Unbundling Two-Part Pricing • Charging two separate amounts to consume a single good or service • Membership fee and and then a flat fee for use • Can attract consumers who will not pay a high upfront fee for limited use Copyright © 2022 by Cengage Canada. Pay What You Want • Very risky • Consumer chooses Poll While grocery shopping at Walmart, Leo uses a phone app to check the prices of the products he is buying. If a product he intends to buy is advertised at a lower price online, he presents his phone to the cashier. The store matches that lower price. Leo figures he saves at least $10 per week this way and, just as importantly, he does not have to shop different stores to take advantage of sale prices, as he used to. This is an example of which pricing tactic? A. Geographic pricing B. Flexible pricing C. Loss-leader pricing D. Dynamic pricing Copyright © 2022 by Cengage Canada. Legality and Ethics Bait Pricing • Luring customers in through false or misleading advertising • Use of high pressure in-store to sell up Deceptive Pricing • Promoting a saving that is not available or a low price on a limited number • Falsely promoting a discount • Selling above the advertised price and/or double ticketing Price Fixing • When two or more companies conspire to set a price— establishing a floor in a bidding situation or setting the market price that consumers will pay Copyright © 2022 by Cengage Canada. Legality and Ethics Predatory Pricing • Setting a price very low with the intent of driving competition out • Difficult to prove, as must show willful intent Resale Price Maintenance • Cannot dictate retailer price at or the minimum • Cannot discriminate against retailers that do not adhere to the MSR Price Discrimination • Charging different prices for different buyers to reduce competition • Must offer promo dollars to channel members proportionally Copyright © 2022 by Cengage Canada. Poll Right before the school year started, Liza saw an ad for a sale on a laptop computer. Since most of her classes would be online due to the COVID-19 pandemic, getting a new laptop was important. She arrived at the store the morning of the first day of the sale only to find that there were no laptops available at the advertised price, but there were plenty of other models at a higher price, which the salesperson tried without success to get her to buy. Liza was not impressed! This is an example of A. deceptive pricing B. bait pricing C. predatory pricing D. price discrimination Copyright © 2022 by Cengage Canada.