Marketing - Chapter 11

Skimming

A firm introducing a new or innovative product can use skimming pricing, setting the highest initial price that customers who really desire a product are willing to pay. These customers are not very price sensitive because they weigh the new product's price, quality, and ability to satisfy their needs against the same characteristics of substitutes. As these customers' demands are satisfied, the firm lowers the price to attract another, more price-sensitive segment. Thus, skimming pricing gets its name from skimming successive layers of "cream," or customer segments, as prices are lowered in a series of steps Skimming pricing is an effective strategy when (1) enough prospective customers are willing to buy the product immediately at the high initial price to make these sales profitable, (2) the high initial price will not attract competitors, (3) lowering the price has only a minor effect on increasing the sales volume and reducing the unit costs, and (4) customers interpret the high price as signifying high quality. These four conditions are most likely to exist when the new product is protected by patents or copyright, its uniqueness is understood and valued by customers, or the customer perceives the new product as simply better compared to existing offerings. In fact, recent Canadian research found that 67 percent of consumers are willing to pay more for a new product that they consider superior to what is currently available on the market.

Bundle pricing

A frequently used demand-oriented pricing practice is the marketing of two or more products in a single package price. For example, Delta Air Lines offers vacation packages that include airfare, car rental, and lodging. Bundle pricing is based on the idea that consumers value the package more than the individual items. Bundle pricing is based on the idea that consumers value the package more than the individual items. This is due to benefits received from not having to make separate purchases and enhanced satisfaction from one item given the presence of another. This is the idea behind McDonald's Extra Value Meal and DIRECTV's TV, phone, and Internet bundles. Moreover, bundle pricing often provides a lower total cost to buyers and lower marketing costs to sellers

Prestige

Although consumers tend to buy more o a product when the price is lower sometimes the reverse is true. If consumers are using the price a as measure of quality of an item, a company runs the risk of appearing to offer a low quality product if it sets the price below a certain point. Prestige pricing involves setting a high price so that quality - or status-conscious consumers will be attracted to the product an buy it.

Consumer taste

As we saw in Chapter 3, these depend on many forces such as demographics, culture, and technology. Because consumer tastes can change quickly, up-to-date marketing research is essential to estimate demand. For example, if research by nutritionists concludes that some pizzas are healthier (because they are now gluten-free or vegetarian), demand for them will probably increase

Demand Curve - 3 key factors that economists stress in estimating demand:

Consumer tastes, price and availability of other products, consumer income

Three C's of pricing

Costs, Customers (demand), Competition Don't forget Value and Price communicates

Competition-Oriented Approaches

Customary, above-at-or below market, loss leader

4 approaches for selecting an approximate price level:

Demand oriented, cost-oriented, profit oriented, competition oriented

Sales

Given that a firm's profit is high enough for it to remain in business, an objective may be to increase sales revenue, which will in turn lead to increases in market share and profit. Objectives related to dollar sales revenue or unit sales have the advantage of being translated easily into meaningful targets for marketing managers responsible for a product line or brand. However while cutting the price on one product in a firms line may increase its sales revenue, it may also reduce the sales revenue of related projects.

Yield management pricing

Have you ever been on an airplane and discovered the person next to you paid a lower price for her ticket than you paid?Annoying, isn't it? But what you observed is yield management pricing—the charging of different prices to maximize revenue for a set amount of capacity at any given time. Airlines, hotels, and car rental firms engage in capacity management (described in Chapter 10) by varying prices based on time, day, week, or season to match demand and supply. American Airlines estimates that yield management pricing produces an annual revenue that exceeds $500 million.

Consumer income

In general, as real consumers' incomes increase (allowing for inflation), demand for a product will also increase. So, if you get a scholarship and have extra cash for discretionary spending, you might eat more Red Baron frozen cheese pizzas and fewer peanut butter and jelly sandwiches to satisfy your appetite

Survival

In some instances, profits, sales, and market share are less important objectives of the firm than mere survival. Specialty-toy retailers increasingly are facing survival problems because they can't match the price cuts offered by big discount retailers like Walmart and Target. This was the dilemma faced by FAO Schwartz, which filed for bankruptcy and was subsequently bought by Toys " Я" Us.

Target pricing

Manufacturers will sometimes estimate the price that the ultimate consumer would be willing to pay for a product. They then work backward through markups taken by retailers and wholesalers to determine what price they can charge wholesalers for the product. After estimating the consumer price, the manufacturer adjusts the composition and features of the product to achieve the target price to consumers. Cannon uses target pricing for its digital cameras.

Unit Volume

Many firms use unit volume, the quantity produced or sold, as the pricing objective. These firms often sell multiple products at very different prices and need to match the unit volume demanded by customers with price and production capacity. Using unit volume as an objective can be counterproductive if a volume objective is achieved, say, by drastic price cutting that drives down profit

Cost plus pricing

Many manufacturing, professional services, and construction firms use a variation of standard mark up pricing. Cost plus pricing involves summing the total unit costs to arrive at a price. most common for business products. For example this pricing approach was used in setting the price for the $92 million Rock and Roll Hall of Fame and Museum.

Market share

Market share is the ratio of the firm's sales revenues or unit sales to those of the industry (competitors plus the firm itself). Companies often pursue a market share objective when industry sales are relatively flat or declining. In the late 1990s Boeing cut prices drastically to try to maintain its 60 percent share of the commercial airline market to compete with Airbus. As a result it encountered huge losses. Although increased market share is a primary goal of some firms, others see it as a means to other ends: increasing sales and profits.

The Price Equation:

Price = List Price - Incentives and Allowances + Extra Fees

Price and availability of similar products

Price and availability of similar products. If the price of a competitor's pizza that is a substitute for yours—like Tombstone®pizza—falls, more people will buy it; its demand will rise and the demand for yours will fall. Other low-priced dinners are also substitutes for pizza. For example, if you want something fast so you can study, you could call Domino's or a local Chinese restaurant and order a meal for home delivery. So, as the price of a substitute falls or its availability increases, thedemand for your Red Baron frozen cheese pizza will fall.P

Profit Equation

Profit = Total Revenue - Total Costs Total Revenue = unit price * quantity sold Total Costs = fixed costs + variable costs

Profit formula

Profit = total revenue - total costs Example (Pictures sold x price/picture) - [(cost/picture x pictures sold) + overhead cost]

Price Objectives

Profit, Sales, Market Share, Unit Volume, Survival, Social Responsibility

Price elasticity of demand example/principle

Reducing price from $3.25 per issue to $3.00 increases total revenue, making demand elastic in this price range (where units sold decreases from 1.25 million to 1 million).

Odd-Even pricing

Sears offers a Craftsman radial saw for $499.99, the suggested retail price for the Gillette Fusion shaving system is $11.99, and Kmartsells Windex glass cleaner on sale for 99 cents. Why not simply price these itemsat $500, $12, and $1, respectively? These firms are using odd-even pricing, which involves setting prices a few dollars or cents under an even number. The presumption is that consumers see the Sears radial saw as priced at "something over $400" rather than "about $500." In theory, demand increases if the price drops from $500 to $499.99. There is some evidence to suggest this does happen. However, research suggests that overuse of odd-ending prices tends to mute their effect on demand

Penetration

Setting a low initial price on a new product to appeal immediately to the mass market is penetration pricing, the exact opposite of skimming pricing. Amazon consciously chose a penetration strategy when it introduced its Amazon Kindle Fire tablet computer at $199 when competitive models were priced at $499. The conditions favoring penetration pricing are the reverse of those supporting skimming pricing: (1) many segments of the market are price sensitive, (2) a law initial price discourages competitors from entering the market, and (3) unit production and marketing costs fall dramatically as production volumes increase. A firm using penetration pricing may (1) maintain the initial price for a time to gain profit lost from its low introductory level, or (2) lower the price further counting on the new volume to generate the necessary profit

Demand-Oriented Approaches

Skimming, penetration, prestige, odd-even, target, bundle, yield management

Cost-Oriented Approaches

Standard markup, Cost-Plus

Profit-Oriented Approaches

Target profit, target return on sales, target return on investment

Profit

Three different objectives relate to a firm's profit, which is often measured in terms of return on investment. These objectives have different implications for pricing strategy. The three objectives include a target return, managing for long-run profits, and maximizing current profit.

Price as an Indicator of Value

Value = (perceived benefits / price)

Target profit pricing

When a firm sets an annual target of a specific dollar volume of profit, this is called target profit pricing. For example, if you owned a picture frame store and wanted to achieve a target profit of $7,000, how much would you need to charge for each frame? Because profit depends on revenues and costs, you would have to know your costs and then estimate how many frames you would sell.

Break even calculaiton

fixed cost / (unit price - unit variable cost)

Demand inelastic example

if a firm finds the demand for one of its products is inelastic, it can increase its total revenues by INCREASING PRICE

Standard markup pricing

managers of supermarkets and other retail stores have such a large number of products that estimating the demand for each product as a means of setting price is impossible, so they use standard markup pricing. This entails adding a fixed percentage to the cost of all items in a specific class. This percentage markup varies depending on the type of retail store (such as furniture, clothing, and grocery) and on the product involved. High volume products usually have smaller markups than do low volume products. Supermarkets such as kroger, Safeway, and Jewel have different markups for staple items and discretionary items.

Price elasticity of demand

percent change in quantity demanded / percentage change in price

Price elasticity of demand formula

percentage change in quantity demanded / percentage change in price