Levens
1
Levens
2
Levens
3
Levens
4
Levens
5
Creating value entails adding features to the base product, including greater
reliability, better performance, making the product last longer, increasing safety, and
creating a better design.
Levens
6
Price is the most closely related element of the marketing mix as the product, place,
and promotion each have a cost associated with them. Price can also be the easiest
to change since a price change can literally be implemented over night.
Prices should be aligned with the overall marketing strategy of the brand.
Levens
7
Monopoly: A single firm has the power to set and control price in a market. Drug
manufacturers, due to patent protections, are examples.
Oligopoly: Where several firms share price power by being able to control supply.
OPEC is an example.
Monopolistic: Limited number of firms compete and prices are dictated through
customer demand for specific brands. Car manufacturers are examples.
Pure Competition: Numerous producers selling undifferentiated products.
Levens
8
Levens
9
A products contribution per unit is the difference between the selling price and
variable costs. The profit margin is product contribution per unit divided by the selling
price. Take for example the following product:
Unit selling price - $1.59
Unit variable cost – 1.03
Contribution per unit = 1.59 – 1.03 = $0.56
Profit margin = .56/1.59 = 35.2%
Levens
10
Cost-Plus pricing is taking the variable cost of a product and adding a fixed percentage
to arrive at a selling price. This chart highlights the differences between a markup and
a margin. Selling price is calculated by dividing cost by the inverse of the intended
markup percent, or cost/(1-markup %). To calculate the selling price of a $12 product,
and a desired markup of 10% the formula would be $12 /(1-.10) or $12 / .9, which
equals $13.33. The margin is determined by dividing the contribution per unit, $1.33
in this case, by the selling price. In this example the margin is: $1.33 / $12 = 11%
This can be somewhat confusing for students, but things should become clearer in
the next few slides. The biggest area of confusion is that these calculations go against
most of what they know regarding margins. Students typically will see a cost of $12
and a 10% margin and would sell the product for $13.20. This type of markup is
known as markup on costs. The method outlined in the example on the slide uses
markup on selling price, which is the most common form of markup.
Levens
11
The formula to calculate break-even is: fixed cost / contribution per unit; contribution
= selling price – variable cost. In the example from the slide, fixed costs = $40,000;
selling price = $10; and variable cost = $5. Contribution per unit is: 10 – 5 = $5
So the breakeven volume = $40,000 / $5 = 8,000 units
Levens
12
•Demand tends to be elastic if consumers can easily find substitutes
•If the price of Coca-Cola rises, consumers can switch to Pepsi or another substitute
•Demand for luxuries exhibit elastic demand, while demand for necessities tend to be inelastic
•Insulin, a necessity for Diabetics, must be purchased regardless of the price
•The larger the portion of a budget an item consumes, the higher the elasticity
•Elasticity is greater for products such as cars and suits, than for matches or ice
The number of units sold for a given product is based, in part, on the price being
charged. For most products (i.e., elastic demand), raising prices will lead to lower unit
volume, while lowering price leads to higher volume. For products whose demand is
inelastic, a change in price will have little impact on the number of units sold.
Example: Gumball economics – The average gumball is priced at $0.25, at this price,
the company sells on average 200,000 units. If the price of gumballs were to increase
to $0.50, unit sales would fall to 100,000. A price decrease on the other hand would
lead to an increase in unit sales to 300,000 units. In this example, gumballs have an
elastic demand.
13
Levens
14
Levens
15
Legal requirements entail the role that governmental regulations play in setting
prices. Firms must ensure that federal antitrust laws are not violated when setting
prices (price is the most heavily regulated of the 4 P’s). Antitrust laws fall into three
categories: Price fixing (collusion among competitors), Price discrimination (charging
different prices to different customers), and predatory pricing (price reduction solely
to drive competitors out of business). These pricing issues, along with loss-leader
pricing (retailers charging a low price to increase traffic, which harms competitors)
deal mainly the B2B market, but federal and state governments also regulate pricing
as it relates to consumers. An example here would be deceptive pricing (bait-andswitch).
Competitive Bidding relates to the acquisition of goods/services in the B2B
environment. When a major purchase is to be undertaken by a firm they will issue a
“request for quote” (RFQ) that identifies the exact specifications of the product they
are seeking. Suppliers then submit a bid, which are sealed. All bids are unsealed on a
set date and the lowest bidder, in most cases, is awarded the contract. For other
types of purchases a firm’s purchasing agents enter into negotiation with the supplier
before finally settling on the final price. This can by related to the buying process
consumers use for purchasing a house or an automobile.
Managers must understand the implications of various factors when pricing for global
markets. Factors to be considered include Quotas (limits on the amount of specific
foreign products that are allowed into a country); tariffs (duties or fees imposed by
countries to ensure price parity with local producers); and currency exchange rates
(which can fluctuate overnight turning small profit into a loss).
Levens
16
Levens
17
Levens
18
Profitability – setting price to meet a specific profit target.
Volume – If a company can reduce its cost through achieving economies of scale
and/or the experience curve they may opt to price its products low in order to
generate significant volume. This is similar to “penetration pricing”. There are
numerous reasons for using this type of strategy: gain market share to limit
competitors from entering; or to have an entry point in a crowded market. Nintendo
used volume pricing with its Wii game system and quickly exceeded the sales volume
over PlayStation and Xbox.
Meet Competition – Allows a company to position its product close to a competitor, if
price is a key differentiator.
Prestige – Many brands enjoy perceptions of high quality or luxury. Since price is
often used by buyers as a proxy for quality, high prices can help maintain the desired
image.
Levens
19
Levens
20
Price skimming is where a products price is set high upon its introduction and then
lowered over time. This is done so as to generate as much profit as possible before
competitors enter the market. Innovators and early adopters are likely to pay a higher
price for the latest cool products. The key here is that prices will fall over time as
competitors enter the market.
Penetration pricing is pricing a product low so as to gain market share quickly. This
could be to take advantage of experience curve, where manufacturing costs are
reduced as more units are produced. A way to get this point across to students is to
asked them about their skill level the first time they played a particular video game.
Most will admit to doing poorly the first time or two. But over time they gain the
skills and knowledge needed to become advanced players. It is the same way with
employees. The more times they perform as task the quicker they become. As the
employees become more skilled they can produce more units in less time, thereby
reducing cost.
Levens
21
When a penetration price is used, the product or service is offered at a lower price
compared to its competition. Although the product may be sufficiently appealing to
command a higher price, a marketer might prefer to set a low price so as to quickly
generate sales volume, market segment penetration, and production scale.
Levens
22
Storefront pricing – prices being set based on brick and mortar sales. These prices
were set based on the required markup to support a physical location. Online
retailers do not incur the same expenses and thus can charge lower prices than
traditional merchants.
Online pricing refers to setting of prices based on the cost structure of an internet
retailer. While online retailer still incurs expenses they are significantly less than a
traditional retailer.
Tiered pricing is the practice of offering different products at different price points to
appeal to wider market audience. Price tiering is used most noticeably with
telecommunications companies through offering various levels of services or plans
that cover a wide range of pricing.
Dynamic pricing is where prices are charged based on various elements including
market conditions, cost to serve differences, or based on the value of the customer.
Forward auction are where a buyer announces their desire to purchase a certain
product and a merchant responses with the price they are willing to sell the product
for. Negotiations can take place to finalize the selling price.
Reverse auctions are similar to forward auctions except that the buyer also states the
price they are willing to pay. This is the type of auction that can be found with
Priceline.com.
Levens
23
Companies which have multiple brands and multiple lines must consider how to price
each specific product so as to gain the total maximum revenue for the company.
Within a brand family it is important that each product is priced in similar fashion. For
example, Johnson’s offers numerous baby product (shampoos, lotion, powder, etc).
Each of these products are connected to each other via their shared brand name
(Johnson’s Baby). If prices were inconsistent among the products, that is one being
highest priced in category (shampoo) and another being low priced (say baby
powder) then the buyers may judge the entire baby product line as being of lower
quality.
Company’s with multiple brands in the same product category can be priced at
various levels. A company can have three brands in a category and these can be
priced at the low end, middle, or high end. Think of the brands (those currently on
the market) of GM. The vehicles they offer range from the low-end (Chevrolet) to
high-end (Cadillac), and all points in between.
Levens
24
Cash discounts – receiving a discount for paying with cash (due to the expense
associated with credit card payments).
Quantity discount – buying more and paying less.
Trade in – receiving a cash value for trading in an old item for a new purchase. Applies
to more than just automobiles.
Rebate – cash payment made to buyer for purchasing a product.
Levens
25
Levens
26