Chapter 19: Pricing Concepts

Price skimming strategy does not work in all cases, price skimming make sense only under certain conditions:

* The product quality and image must support the high initial price * There must be enough buyers that want the product at that price (strong demand for a good or service) * Competitors should not be insight, so if there are competitors that are able to enter the market easily an undercut that high price, price skimming is not going to work

A consumer psychological state at the time of purchase has a significant impact on the perception of price and quality:

- In general, when perceived higher and lower quality profit products are offered in setting where consumers have difficulty making comparisons. - Then, price promotions have an equal effect on sales, comparisons are more difficult also for end of aisle displays feature advertising and similar advertising structures. - Mission ship in those situations and so people just assume the high price equals high quality the low-price equals low quality

Cost and others determinants

- Marketers should understand all of the costs associated with its product offering whether the product is a good a service an idea or some combination of each of these. - Sometimes companies minimize or ignore the importance of demand and decide to price their products largely or solely on the basis of the company's costs.

Advantage/ Disadvantage of penetration pricing strategy

- The big advantage of penetration pricing is that it typically discourages or blocks competition from entering a market. - The disadvantage is that penetration means gearing up for mass production to sell a large volume at a low price.

Which pricing objective or which fine-tune tactic to use depend on

- The value customer perceives the product to have, their ability to pay, and how they intend to use the product.

Four step in setting the right price

1. Establish pricing goals 2. Estimate demand, costs, and profits 3.Choose a price strategy to help determine a base price 4. Fine-tune the base price with pricing tactics

Rebates

A cash refund given for the purchase of a product during a specific period * Rebates give the producer a way to be certain that final consumers actually get the price reduction rather than a retailer or a wholesaler taking that discount. * If the rebate amount were just taken off the price charged, they might not pass the savings along to the customers. * Rebates are a temporary inducement without altering the structure of our price.

Market Share

A company's product sales as a percentage of total sales for that industry. * It is very important to know whether market share is expressed in revenue or units because the results may be different. It's usually easier to measure a firm's market share than to determine the profit or if the profit is being maximized. High market share can offer economies of scale and you can use it as a negotiating power with suppliers.

Total revenue

A function of price and quantity demanded, and that quantity demanded depends on elasticity.

Return on investment (ROI) for a firm is _______. The firm's total assets multiplied by net profits after taxes Lower than the previous year if the firm has performed better in the market A measure of the firm's effectiveness in generating profits with the available assets The margin of profit earned by the firm inclusive of the taxes payable by the firm

A measure of the firm's effectiveness in generating profits with the available assets

Seasonal discounts

A price reduction offer on product or services that stimulate demand during out of season (Buying merchandise out of season).

Cash discounts

A price reduction offered to a consumer, an industrial user, or a marketing intermediary in return for prompt payment of a bill (When pay in cash or pay immediately).

Elastic demand

A situation in which consumer demand is sensitive to price

To avoid these pitfalls, marketers use

A systematic process to evaluate relevant factors when they're setting their prices.

Odd pricing strategy pricing

A tactic in which the firm prices its products a few cents below the next dollar amount. * For the strategy to be successful, the customers must perceive the product at $19.95 as being $19.00 rather than $20.00.

The general price level is correlated with the pricing policy:

Above the market (price skimming), at the market (status quo pricing), or below the market (penetration pricing)

Fine-tuning techniques pricing tactics allow the firm to:

Adjust for competition in certain markets, meet ever-changing government regulations, take advantage of unique demand situations, and meet promotional and positioning goals. - Pricing tactic of short- or long-term attempt to adjust the pricing of a product to achieve a particular pricing objective.

Noncumulative quantity discount

Applies only to individual orders, these discounts encourage large orders but do not tie a buyer to the seller after that one specific purchase. *Offering the discount in one transaction. *That one transaction is fairly large, and that discount is not generative or does not add up over a specific period of time.

Satisfactory profits

Are a reasonable level of profits. Many organizations strive for profits that are satisfactory to the stockholders and management—

Fine-tuning techniques

Are approaches that do not change the general price level. - Fine-tuning pricing tactics include various sorts of discounts and other pricing strategies

Quantity discounts

Are discounts offered to encourage customers to buy in large amounts. This let the seller get more of a buyer's business or it can shift some of the storing functions to the buyer or it may reduce the shipping and the selling costs, or it could do all of these items

Penetration pricing

At the opposite end of the spectrum from skimming, charging a relatively low price for a product when it is first rolled out as a way to penetrate the market quickly and fully.

Sales-Oriented Pricing Objectives

Based on market share as reported in dollar or unit sales without referring to profit. Included Sales Maximization and Market Share

Marketing managers are frequently challenged by

By the task of price setting, but they know that meeting the challenge of setting the right price can have a significant impact on the firm's bottom line

Price skimming strategy

Calls for setting a high price for a product and it skims the maximum revenues layer by layer from the market segments that are willing to pay the high price. - This means that the company lowers the price step wise, to skim the maximum profit from each segment, as a result of this new product pricing strategy, but company makes fewer but more profitable sales.

Prestige pricing

Charging a high price to help promote a high-quality image. - A successful prestige strategy requires a retail price that is reasonably consistent with consumers expectations. - Looking at our luxury goods, our luxury goods are more prestigious the higher the price.

Information Effect of Price

Consumers do not always choose the lowest-priced product in a category even when the products are otherwise similar. *People infer quality information from price—that is, higher quality equals higher price.

Fixed costs

Costs that remain constant and do not vary based on the number of units produced or sold. *Example: Salary, rent, insurance. *Regardless of the level of production or sales activities, they must be recovered during the course of doing business so marketers must set a final price that allows a firm to cover all of these fixed costs over the long term.

Variable costs

Costs that vary depending on the number of units sold or produced. *Variable costs include things like raw materials sales commissions and even delivery costs so we're going to example on the difference of the two types of costs car dealerships workout is excellent

Two main types of quantity discounts:

Cumulative quantity discounts Noncumulative quantity discount

Price strategy

Defines the initial price and gives direction for price movements over the product's life cycle.

Break-even analysis

Determines what sales volume must be reached before the company breaks even (its total costs equal total revenue) and no profits are earned. * If a firm is operating close to the break-even point, it may want to see what can be done to reduce costs or increase sales.

Customers grow accustom to having favorite brands characteristics, so a change in the quality or the price of their favorite brand may

Disrupt the product's hedonistic and allocative effects, which then affects the consumers desire to purchase that product.

Integrating the pricing strategy with other marketing mix elements

Ensures that the firm's products include only those features that add value to customers.

Value

Equals perceived satisfaction, where the price can relate to anything with a perceived value or a perceived level of satisfaction, not just money.

Profit

Firms bottom line, the revenue minus the total expenses

Sales Maximization

Firms with the objective of maximizing sales ignores profits, competition, and the marketing environment as long as sales are rising. Some managers that are more concerned about sales growth than profits, they think that sales growth will then lead to profits. Business managers should really usually pay more attention to the profits not just the sales.

Calculating the total cost of a product begins with an understanding of two major types of costs we have:

Fixed Costs Variable Cost

Researchers also found though that there are two other basic effects associated with this price quality relationship:

Hedonistic consumption Allocative effect

Profit-Oriented Pricing Objectives

Include profit maximization, satisfactory profits, and target return on investment.

2.Estimate demand, costs, and profits

Included Demand, Supply, Total revenue, and Elasticity of demand

Price to customer

It is the cost of something Price is what the costumers must give up getting the benefits offers the rest of the firms marketing mix. * Play direct role in shaping customer values.

Key in price quality relationships.

Maintaining consistency

In attempting to maximize profits

Managers can try to expand revenue by increasing customer satisfaction, or they can attempt to reduce costs by operating more efficiently

Advantage/Disadvantage of Markup pricing

Markup pricing it has some advantages of being easy, unfortunately it's not effective at maximizing profits. - The reason: that retailers and others speak of markups on selling price is that many important figures in financial reports, such as gross sales and revenues, are sales figures, not cost figures.

Odd-even pricing (or psychological pricing)

Means pricing at odd-numbered prices to connote a bargain and pricing at even-numbered prices to imply quality.

Profit maximization

Means setting prices so that total revenue is as large as possible relative to total costs. * Seek to earn as much profit as possible. * Charge all that the traffic will bear — going to charge as absolutely much as you're willing to pay.

Inelastic demand

Means that an increase or a decrease in price will not significantly affect demand for the product.

Flexible pricing (or variable pricing)

Means that different customers pay different prices for essentially the same merchandise bought in equal quantities. * Find flexible pricing in specialty merchandise and industrial good. * Example: Car dealership.

Status Quo Pricing

Meeting the competition or it can be called the going rate pricing or even sometimes referred to as don't rock the boat pricing. Means charging a price that's identical to or very close to our competitors.

Single-Price Tactic

Offers all goods and services at the same price to all customers, under the same condition, in the same quantity. * The majority of US retailers use this single pricing tactic, mainly for administrative convenience and to maintain goodwill among its customers * This could amount to broadcasting a price that competitors can undercut, especially at the prices somewhat high, so if we have one single pricing tactic, we're charging all of our customers one single price.

- Price skimming works well:

On our consumer electronics, products that are a little bit more expensive then cheaper product.

4. Fine-tune the base price with pricing tactics

Once we've set our pricing strategy, we set our base price, so we can use a number of fine-tuning tactics to adjust our price in a short run

In the absence of all other information

People typically do assume that prices are higher because the products contain better materials, they're more carefully made or that specific company has more expertise.

Promotion Strategy

Price is often used as a promotional tool to increase consumer interest. * In many cases, consumer perceptions of a store's prices are more impactful than the actual prices themselves. * If our consumers perceive that the prices are lower or that we're constantly having a sale, this perception is more impactful than the actual price on the item stack * Pricing can be a tool for trade promotions as well.

What is price?

Price is one of the four major strategy decision variables that the marketing managers can control.

Price to the seller

Price is revenue—the primary source of profits. Pricing decision affect both the numbers of sales the firms makes, and how much money it earns.

Consumers are more likely to perceive the value of a product to be less than its price tag indicates if the product's _______. Demand is inelastic Price is set too high in their minds Manufacturer gains very little profit from the product Demand and supply attain the state of price equilibrium

Price is set too high in their minds

Three price strategies

Price skimming strategy Penetration pricing Status Quo Pricing

3.Choose a price strategy to help determine a base price

Price strategy: Defines the initial price and gives direction for price movements over the product's life cycle. - Sets a competitive price in a specific market segment based on a well-defined positioning strategy.

The important of price

Pricing is one of the most important strategic decisions, a firm basis it reflects the value that the product delivers to consumers as well as the value the product captures for the firm *When used correctly pricing strategies can maximize profits and help the firm take a commanding market position. * However, when used incorrectly pricing strategies can limit revenue profits and the perceptions of the brand.

1. Establish pricing goals

Pricing objectives fall into two categories: profit oriented, sales oriented. *These goals are derived from the firm's overall objectives. *A profit-maximization objective may require a bigger initial investment than the firm can commit to or wants to commit

Pricing objectives

Pricing objectives should be explicitly stated because they have a direct effect on pricing policies as well as the methods used to set those prices. To survive in today's highly competitive marketplace, companies need pricing objectives that are specific, attainable, and measurable

Two main price objective

Profit-Oriented Pricing Objectives Sales-Oriented Pricing Objectives

Price-Quality Relationship

Purchase decisions involve uncertainty; consumers tend to rely on the high price as a predictor of good quality * High price = good quality, low price = low or bad quality

Elasticity of demand

Refers to consumers' responsiveness or sensitivity to changes in price.

Hedonistic consumption

Refers to pursuing emotional responses associated with using a product

Allocative effect

Refers to the notion that consumers must allocate their budgets across alternative goods and services The more you spend on one product the less you have to spend on others.

Keystoning

Retailers markup merchandise 100 percent over cost — they double the cost. *Using keystoning is one of the easiest ways to complete market pricing

Price also plays two roles in the evaluation of product alternatives

Sacrifice Effect of Price Information Effect of Price

Even-numbered pricing

Set prices at even dollar amount prices that end with zero *Price that end in zero are often easier for customers to process and also retrieve from memory. *Luxury or higher priced item is priced at an even pricing ending in $20.00 which gives the illusion of higher quality to our customers.

Target Return on Investment (ROI)

Sets a specific level of profit as an objective, often this amount as a stated or a percentage of sales or a capital investment. The most common profit objective, sometimes called the firm's return on total assets.

Advantage/ Disadvantage of Status Quo Pricing

Status quo pricing has the advantage of simplicity, its disadvantage is that the strategy may ignore demand or cost or both.

The quantity of a product that will be offered to the market by a supplier at various prices for a specified period determines the product's _______. product share market share demand supply

Supply

If a company is operating close to the break-even point, it should see what can be done to reduce costs or increase sales.

TRUE

Pay What You Want

Telling the customers, they can pay what they want or pay what they can, you might think that with the pay what you want pricing tactics individuals pay less for a product. * This pay what you want pricing tactic you don't have a base price that you're trying to hit from, instead your base price is essentially zero. * While that's good thinking, because of social pressures and social norms individuals actually spend up end up spending more money to pay what you want type of establishment.

Price

That which is given up in an exchange to acquire a good or service. The amount of money that charged for something of value price can be called many different things in different settings.

If, the price is too low

The consumers might proceed it as great value, this is a great deal, but the firms lose revenue that it could have earn by charging higher price

Base price

The general price level at which the company expects to sell the good or service, the general price level is correlated with the pricing policy.

Price lining

The practice of offering a product line with several items at specific price points. * Price lining reduces confusion for both the salesperson and the consumer, because it enables a seller to reach several market segments.

Which of the following defines demand? A company's product sales as a percentage of total sales for that industry A part of profit percentage that is given up in exchange for acquiring a good or service The quantity of a product offered to the market by a supplier at various prices for a specified period The quantity of a product that could be sold in the market at various prices for a specified period

The quantity of a product that could be sold in the market at various prices for a specified period

Supply

The quantity of a product that will be offered to the market by a supplier or suppliers at various prices for a specified period. *At higher prices, manufacturers earn more capital and can produce more products.

Demand

The quantity of a product that will be sold in the market at various prices for a specified period. *The quantity of a product that people will buy depends on its price. The higher the price, the fewer goods or services consumers will demand. Conversely, the lower the price, the more goods or services they will demand

Revenue

The result of the price charged to customers multiplied by the number of units sold.

The assertion "price is that which is given up to get a good or service" indicates which of the following effects of price? The sacrifice effect of price The information effect of price The perceived satisfaction effect of price The quality effect of price

The sacrifice effect of price

Cumulative quantity discounts

These apply to purchases over a given of time, such as six months or a year and the discount usually increase as the amount purchased increases. *Encourage repeat buying by reducing the customers costs for additional purchases. *This is a way to develop loyalty and ongoing relationships with customers. Often attractive to business customers who don't want to run up their inventory costs, they're rewarded for buying large quantities, even though each individual order may be smaller

Leader pricing (or loss-leader pricing)

This involve selling a product at a price that causes the firm financial loss. * Although firms may lose money selling this product at that price, it attracts customers who are also going to buy other more profitable product, whether they are in the same shopping trip or in the near future.

The status quo pricing objective it may also be part of an aggressive overall marketing strategy, that focuses non-price competition:

This is an aggressive action, on one or more of the P other than price, so now we're looking at product, promotion and place.

Bait pricing

Tries to get consumers into a store through false or misleading price advertising and then uses high-pressure selling to persuade them to buy more expensive merchandise. * The Federal Trade Commission considers bait pricing a deceptive act and has banned its use in interstate commerce.

Markup pricing

Usually the cost of buying the product from the producer, plus amounts for profit and for expenses not otherwise accounted for. * Also known as [cost + pricing] and if they most commonly used pricing tactic mostly because it's pretty easy.

Sacrifice Effect of Price

What is sacrificed to get a good or service, usually money, but it can be other things as well such as time.

Questions related to estimating demand costs and profits

What is too low, what to high, what is the maximum and what's considered expensive, what are customers willing to pay. - After establishing pricing goals, managers should estimate total revenue at a variety of prices. This may require marketing research.

A penetration strategy tends to be effective in

a price-sensitive market

Pricing is an essential element for capturing

both revenue and profits

To earn a profit, managers must

choose a price that is not too high or too low * a price that equals the perceived value to target consumers.

The organization must ensure that the prices they set generate

profit, after they account for both the fixed and variable costs.

Reliance on price as an indicator of quality

seems to occur for a lot of products but it reveals itself more strongly for some items than others.

Final step after we created that base price:

the final step is to use fine tuning tactics on this base price.

If, in consumers' minds, a price is set too high,

the perceived value will be less than the cost, and sale opportunities will be lost.

The prices of the products that you're considering

typically factor into your decision about what to purchase