Chapter 14: pricing

-ideally:

firms could maximize their profits if they charged each customer as much as the customer was willing to pay.

Predatory pricing

illegal under SAA and FTC because it constrains free trade and represents a form of unfair competition. It also tends to promote a concentrated market with a few dominant firms (oligopoly)

Five C's of pricing

Company objectives, customers, costs, competition, and channel members • Price is the overall sacrifice a consumer is willing to make to acquire a specific product or service • Because price is the only element of the marketing mix that does not generate costs but instead generates revenue it is important in its own right • Successful pricing strategies are built around the five critical components of pricing. We examine these components in some detail because each makes a significant contribution to formulating good pricing policies.

Pricing strategies

EDLP and high low

- profit orientation

Focusing on target profit pricing, maximizing profits, or target return pricing • Target profit pricing: when they have a particular profit goal as there overriding concern. To meet this targeted profit objective, firms use price to stimulate a certain level of sales at a certain profit per unit • Maximizing profits: strategy relies primary on economic theory. Of course, the problem with this approach is that actually gathering the data on all these relevant factors and somehow coming up with an accurate mathematical model is an extremely difficult undertaking • Target return pricing: employ pricing strategies designed to product a specific return on their investment, usually expressed as a percentage of sales

Inelastic

The market for a product is generally viewed as price insensitive or inelastic: when a price elasticity is greater than -1 that is when a 1 percent decrease in price results in less than a 1 percent increase in quantity sold. insensitive. the change in price does not effect the items sold very much

predatory pricing

a firms practice of setting a very low price for one or more of its products with the intent to drive its competition out of business, illegal under both tote Sherman antitrust act and the FTC

dynamic pricing

also known as individualized pricing, refers to the process of charging different prices for goods or services based on the type of customer, time of the day, week, or even season or level of demand.

price skimming

appeals to theses segments of consumers who are willing to pay the premium price to have the innovation first. This tactic is particularly common in technology markets where sellers know that customers of the hottest and coolest products will wait in line for hours, desperate to be the first to own the newest version.

4. Competition

competition, has a profound impact on pricing strategies, we use this section to focus on its effect

1. company objective

each firm embraces objectives that seem to fit with where management thinks the firm needs to go to be successful in whatever way it defines success

- customer orientation

is when a firm sets its pricing strategy based on how it can add value to its products or services. When carmax promises a no haggle pricing structure, it exhibits a customer orientation because it provides additional value to potential used car buyers by making the process simple and easy

-break even analysis in decision making

o A useful technique that enables managers to examine the relationships among cost price revenue and profit over different levels of production and sales is called this o Break even point- the point at which the number of units sold generates just enough revenue to equal the total costs. At this point profits are zero. Although profit, which represents the difference between the total cost and the total revenue o The total cost curve starts where the fixed cost curve interests the vertical axis at 100000 dollars. When volume is equal to zero (no units are produced or sold) the fixed costs of operating the business remain and cannot be avoided. o Contribution per unit: which is the price less the variable cost per unit. When the hotel has crossed the break-even point of 2,500 rooms it will start earning profit at the same rate of the contribution per unit. o Although a break-even analysis cannot actually help mangers set prices, it does help them assess their pricing strategies because it clarifies the conditions in which different prices may make a product or service profitable. o Mark up and target return pricing: manufacturer may want to achieve a standard market.

New product pricing

o Developing pricing strategies for new products is one of the most channeling tasks of a manger can undertake.

3. Costs

o Firms must understand their cost structures so they can determine the degree to which their products or services will be profitable at different prices. o Variable costs: are those costs primarily labor and materials, which vary with production volume. As a firm produces more or less of a good or service, the total variable costs increase or decrease at the same time. o Fixed costs: are those costs that remain essentially at the same level, regardless of any changes in the volume of production. Typically these costs include items such as rent utilities insurance admin salaries and depreciation of the physical plant and equipment. o Total costs: is simply the sum of the variable and fixed costs.

channel members

o Manufacturers, wholesales and retailers have different perspectives when it comes to pricing strategies. Consider a manufacturer that is focused on increasing the image and reputation of its brand but working with a retailer that is primary concerned with increasing its sales o A gray market: employs irregular but not necessarily illegal methods; generally, it legally circumvents authorized channels of distribution to sell goods at prices lower than those intended by the manufacturer.

2. Customers

o When firms have developed their company objectives, they turn to understanding consumer's reactions to different prices. The second C of the five Cs of pricing focuses on the customers. Customers want value, and as you likely recall, price is half of the value equation

- horizontal price fixing

occurs when competitors that produce and sell competing products or services collude or work together to control prices, effectively taking price out of the decision process for consumers.

pure competition

occurs when different companies sell commodity products that consumers perceive as substitutable; price usually is set according to the laws of supply and demand.

vertical price fixing

occurs when parties at different levels of the same marketing channel (eg manufacturers and retailers) agree to control the prices passed on to consumers. Manufacturers often encourage retailers to sell their merchandise at a specific price, know as manufactures suggested retail price (MSRP)

monopolistic competition

occurs when there are many firms that sell closely related but not homogeneous products; these products may be viewed as substitutes but are not perfect substitutes

price war

occurs when two or more firms compete primarily by lowering their prices

-monopoly

one firm provides the product or service in a particular industry, which results in a less price competition. Ex: only one provider of power in each region of the country.

-oligopolistic

only a few firms dominate

MSRP

reduces retail price competition among retailers, stimulate retailers to provide complementary services and supports the manufacturers merchandise. Manufacturers enforce MSRPs by withholding benefits such as cooperative advertising or even refusing to deliver merchandise to non-complying retailers.

High low pricing

relies on the promotion of sales during which prices are temporarily reduced to encourage purchases. Appealing because it attracts two distinct market segments: those who are not price sensitive and are willing to pay the high price and more price sensitive customers who wait for the low scale price.

- demand curves and pricing

shows how many units of a product or service consumers will demand during a specific period of time at different prices. Although we call them curves demand curves can be either straight or curved. Any demand curve relating demand to prices assumes that everything remains unchanged.

EDLP: Every day low pricing

strategy, companies stress the continuity of their retail prices at a level somewhere between the regular non sale price and the deep discount sale prices their competitors may offer

price fixing

the practice of colluding with other firms to control prices.

- competitor orientation

they strategize according to the premise that they should measure themselves primarily against their competitions • Competitive parity: which means they set prices that are similar to those of their major competitors • Status quo pricing: changes prices only to meet those of competition. EX: when delta increases its averages fares, American Airlines of the United often follow with similar increases; if Delta rescinds that increase, its competitors tend to drop their fares too.

-prestige products of services

those that consumers purchase for status rather than functionality. With this, a higher price may lead to a grater quantity sold, but only up to a certain point. The price demonstrates just how rare, exclusive, and prestigious the product is.

- sales orientation

to set prices they believe that increasing sales will help the firm more than will increasing profits. • Premium pricing: means the firm deliberately prices a product above the prices set for competition products to capture those customers who always shop for the best or for whom price does not matter.

price discrimination

usually larger firms receive lower prices. The practice of selling the same product to different resellers or to the ultimate consumer at different prices some but not all forms of price discrimination is illegal.

-elastic

when the price elasticity is less than -1 that is, when a 1 percent decrease in price produces more than a 1 percent increase in the quantity sold. this is sensitive. it means that if a price changes the quantity is increased a lot

reference point

which is the price against which buyers compare the actual selling price of the product and that facilitates their evaluation process. The seller labels the reference price as the regular price or an original price. When consumers view the sale price and compare it with the provided reference price, their perceptions of the value of the deal will likely increase.

cross price elasticity

• Cross price elasticity: is the percentage change in the quantity of product A demanded compared with the percentage change in price in product B. if product A price increased, product B could either increase or decrease, depending on the situation and whether the products are complementary or substitutes. We refer to products like blue ray disc and blue ray players as complementary products: • Complementary products: which are products whose demands are positively related, such that they will rise or fall together. In other words, a percentage increase in the quantity demanded for Product a results in a percentage increase in the quantity demanded for product b. • Substitute products: because changes in their demand are negatively related. That is, a percentage increase in the quantity demanded for product a results in a percentage decrease in the quantity demand for product b.

Legal and ethical aspects of pricing

• Deceptive or illegal price advertising: it is always illegal and unethical to lie in advertising, a certain amount of puffery is typically allowed o Deceptive reference prices: if the reference price is bona fide, the advertisement is informative. o Loss leader pricing: as we discussed leader pricing is a legitimate attempt to build store traffic by pricing a regularly purchased item aggressively but still above the stores costs. • Loss leader pricing: takes this tactic one step further by lowering the price below the stores cost o Bait and switch: is a deceptive practice because the store lures customers in with a very low price on an item (the bait) only to aggressively pressure these customers into purchasing a higher priced model (the switch) by disparaging the low priced item comparing it unfavorably with the higher priced model or professing an inadequate supply of the lower priced item.

factors influencing price elasticity of demand

• Income effect: refers to the change in the quantity of a product demanded by consumers due to a change in their income. Generally, as people's income increases, their spending behavior changes: they tend to shift their demand from lower-priced products to higher priced alternatives • Substitution effect: refers to consumer's ability to substitute other products for the focal brand. The greater the availability of substitute products, the higher the price elasticity of demand for any given product will be, for ex, there are many close substitutes in the laundry detergent category.

-Market penetration pricing

• Market penetration strategy: sets the initial price low for the introduction of the new product or service. Their objective is to build sales, market share, and profits quickly. The low market penetration price is an incentive to purchase the product immediately. • Experience curve effect: as sales continue to grow, the costs continue to drop. • A penetration strategy has its drawbacks. First the firm must have the capacity to satisfy a rapid rise in demand- or at least be able to add that capacity quickly. Second, low price does not signal high quality. Third, firms should avoid a penetration pricing strategy if some segments of the market are willing to pay more for the product

price elasticity of demand

• We need to determine how consumers respond to actual changes in price • Price elasticity of demand: measures how changes in a price affect the quantity of the product demanded. Specifically it is the ratio of the percentage change in quantity demanded to the percentage change in price. We can calculate it with the following formula • In general the market for a product or service is price sensitive