Exam 3 Study Guide Marketing

Break-Even Point Formula

Fixed costs / contribution per unit

wants

form that needs take

Profit Formula

profit = (price x quantity) - (fixed costs + ( variable costs x quantity)

Price Adjustments

In addition to setting the price, firms also have to make decisions about making adjustments to the price. For instance, shipping the product to the buyer may require making adjustments to the final price paid by the buyer.

elastic

In general, when price elasticity > 1

Empathy

Caring, individualized attention provided to customers. Example of questions airline customers might ask? Do the employees determine if i have special seating, meal, baggage, transfer, or rebooking needs?

Leader Pricing

Ever wondered how grocery stores can offer turkeys for such low prices around Thanksgiving? Those low prices get customers to come to the store, and once they're there they end up buying other stuff. After all, most consumers won't buy just turkey. They'll also buy cranberries, sweet potatoes, pies, bread, spices, and and all the other trimmings for a Thanksgiving feast. Thus, the retailers make enough profit from the sale of other products to recoup the reduced profits (or even losses) they incur from slashing prices on turkeys. Thus, this strategy involves offering one product at extremely low prices in order to get customers to buy other products that will create revenue.

Substitution availability

there is higher elasticity when lots of other options available.

demands

wants backed by buying power

Pricing Considerations: Control Over Pricing

In a pure competition, the market sets the price. No single seller can influence the price. In monopolistic competition, there is competition within a range of prices. For instance, customers would be only willing to pay a certain amount for a box of cereal. Any higher or lower than the range, and the firm will find no buyers. After all, who will buy a box of cereal priced at $1 or $50? However, firms can choose to price their cereal at $3.00 or $5.00, i.e., within the range acceptable to customers. Thus, in this type of marketplace, sellers have some control, but not complete control. In an oligopoly, the market leader(s) set the price and compete with each other. Thus, individual sellers have a lot of control. In a pure monopoly, there is only one seller. Therefore, the one seller sets the price and has tremendous control. However, in some cases, as with public utilities like electricity, government regulations restrict the firm's control over prices and prevent customers from being wildly overcharged

Demand Curves

In addition to these factors, demand is also very much influenced by the price of the product. Generally, as price increases, demand decreases. This relationship is often illustrated in the form of a demand curve, which shows the prices of a product in relation to the quantity sold at each price. However, for some products, this relationship changes to some extent. For prestige products, like diamonds or luxury watches, demand actually increases as price increases, but only up to a certain point

Price Elasticity

In both the figures above, you'll notice that the slope of the line varies. For some products, the line may be very steep indicating that small changes in price lead to large changes in the quantity demanded. For other products, the line may be relatively flat. This occurs because of varying price elasticity, which is a measure of the responsiveness of purchasers and suppliers to a change in price.

Competitive Effect (objectives)

The firm might choose a certain pricing strategy in order to respond to a competitor's marketing actions. If one firm reduces its prices, another might follow. For instance, some of the largest fast-food chains have been engaged in a price war. If one firm launches a new product, another might lower prices in order to increase the appeal of its products. Thus, pricing can be a way for firms to respond to one another.

Classification of Services

We can classify services in two ways. The first is based on delivery method and the second is based on revenue

Intangibility

We have to experience the service after purchase. It is not really possible to sample a service the way you might sample shampoo or fried chicken. Thus, consumers have to be persuaded to purchase services through other methods.

Price

We know there is a strong correlation between price and quality. Consumers expect high quality products to cost more and they expect high priced products to be better quality. This principle is also applicable to services; in fact more so, because consumers will use price as a cue in the absence of other information. You might not be able to sample the quality of haircuts provided at a salon prior without actually paying for now. However, most people would expect a higher quality experiences from a salon that charges $1000 for a haircut versus $100. Consequently, organizations must be careful in the pricing decisions they make.

Deceptive Pricing

When firms mislead consumers through their pricing, they are engaging in deceptive tactics. Two common methods are: Bait and Switch, Comparable value comparisons.

BEP quantity

fixed cost / (unit price - unit variable cost) FC/P-UVC Note: As fixed costs increase, the break-even point must also increase. As variable costs increase, the break-even point must also increase. As price increases, the break-even point must decreases.

Tangibility

the appearance of physical facilities, equipment, personnel, and communication materials. Example of questions airline customers might ask? Are the gate, the plane, and the baggage area clean

Assurance

the knowledge and courtesy of employees and their ability to convey trust and confidence Example of questions airline customers might ask? Are the ticket counter attendants, flight attendants, and pilots knowledgeable about their jobs?

vertical price fixing

the organizations conspiring are at different levels of the supply chain. For e.g., buyers and sellers

horizontal price fixing

the organizations conspiring are competitors. For instance, when multiple airlines attempt to set prices. The airlines are competitors, but work together to set higher prices. For example, Apple lost a price fixing case in 2013.

Responsiveness

willingness to help customers and provide prompt service. Examples of questions airline customers might ask? Are the flight attendants willing to answer my questions?

Total cost

= Fixed cost + Variable cost

Pricing Objectives

In order to determine the pricing for a single product or a product line the firm has to balance its objectives against limitations. Let's consider the objectives first:

Service-dominant purchases are thus unique because they have four characteristics

Intangibility, Inseparability, Variability, Perishability

Type of product

Necessities tend to be inelastic and luxuries are typically elastic.

inelastic

When price elasticity < 1

Revenue

We can also differentiate among service providers based on their revenue goals. Some organizations are for-profit and one of their primary goals is to make a profit. Other organizations are not-for-profit; government agencies are a sub-type of these. Consider the three universities below. Can you identify which type each one is?

Image Enhancement (objectives)

There is a strong correlation between consumers' perceptions of the quality of a product and its price. Therefore, firms may choose to set a price that leads to a certain perception of quality. For instance, this article describes a study about how the price of wine influences our perceptions of its taste. In the video below, Amazon's attempt to start selling high fashion brands is discussed in the context of the retailer being known for cheap prices.

Pricing Strategies

This strategy is typically used for new products. It involves setting high initial prices to attract customers who really want the product, and later lowering prices to attract other customers. The firm is only targeting particular segments. Often, the goal is to attract consumers who really want the product (e.g., innovators) and are willing to pay whatever it takes to get their hands on it. This strategy is possible only when the product quality and positioning justify the higher price

Price Discrimination

When a firm charges different buyers different prices for the same product(s), it can be considered price discrimination. Note that not all forms of price discrimination are illegal. In fact, retailers charge different prices for the same products quite frequently. Here's an article describing the phenomenon and some of the ways to beat the system. It is only illegal if the discrimination results in lowered competition. Thus, illegal price discrimination typically involves intermediaries in the supply chain. For instance, if a manufacturer were to charge different prices to different retailers.

Cost-based Pricing

A common cost-based pricing strategy is to do markup pricing: cost of producing the product + a markup to ensure profit. For example, many restaurants will use this strategy. It is not uncommon for a dish that costs $2.63 to be sold for $17. The $2.63 covers just the ingredients; labor and operations costs are going to be in addition to that. Once those have been factored in, the restaurant will decide on a profit markup, and that is what will ultimately result in the $17 price for the plate of food served to customers. One major benefit of this strategy is that sellers are certain about their costs. As a result, they can determine the pricing relatively easily. They don't need a lot of additional information in order to set the prices. Moreover, price competition is minimized and buyers may feel this is a fair strategy when the markup is transparent. One important disadvantage is that this strategy Ignores demand and competitor prices.

Adding in the Cost

Adding in the Cost Thus far, we have focused on the left side of the equation -- price. Let's switch gears a bit and think about the terms on the right side. In particular, costs. The highest price that a firm can charge depends on consumer willingness to pay that price. If you can find enough consumers willing to pay $100 for a bar of chocolate, then why not set the price at $100? In contrast, the lowest price that a firm can charge depends on their costs. The product's price has to be higher than the cost of making it or the firm will not make a profit. Thus, knowing the cost is critical for setting the price.

Promotions

Again, the unique characteristics of services, particularly their intangibility, means that promoting a service requires providing consumers with a sense of what they can expect prior to purchase. Here are two examples of this. State Farm attempts to make a rather vague and abstract product -- pay money to them so that if something bad happens, you can get some money -- very real and tangible in this ad.

Listen to the customer and involve them in the service recovery process

Allowing the customer to express their dissatisfaction and acknowledging that they have cause for disappointment is the first step. Everyone wants to feel heard, and particularly so if they're angry or upset about something.

Product

Among the product decisions that must be made for services, branding is one of the most critical. Remember that consumers won't really have a chance to experience the service before purchasing it. As a result, the brand can be used to convey quality assurances. The service providers below have strong brands that are clearly differentiated from the other service provider in their industry.

Consumer income

As consumer income increases, demand in general increases. People buy more of everything.

People

Given that service providers play a critical role (think inseparability and variability of services!), organizations must focus on the people involved in service delivery. One way they do this is through internal marketing, i.e., working toward ensuring that employees have the skills, knowledge, and attitude required of them. After all, customer satisfaction will depend on the ways in which the employees interact with them. Take a look at this Starbucks video featuring an event they held for their top managers. Why did they invest so many resources in putting together this event? Because they know that when you go to a Starbucks, you're not just consuming the free WiFi.

Pricing Considerations

Consumer Demand and Price Elasticity

Price elasticity can depend on several factors

Consumer income, Substitution availability, Type of product

Demand for a product can depend on a variety of factors:

Consumer tastes and preferences. The price and availability of substitute products. Consumer income.

Customary Pricing

Consumers are used to paying a certain price (determined by factors such as history, competition, distribution channels, etc.) for some products. When costs increase, the firm has to determine whether to increase prices which may lead to a backlash) or use some other method to keep prices the same. For example, subway's $5 Footlong was around for a long time. When they raised prices last year, many consumers were very upset`

The Gap Model

Delivering great service is difficult, and it is likely that at one point or another, there will be a service failure where a customer will be unhappy with the firm. The gap model is one useful way to think about the possible reasons why there might be a service failure

Place

Especially when it comes to services, organizations typically focus on convenience. They want to make it as easy as possible for you to purchase and consumer the service. Thus, providing a number of outlets located in convenient places and with accessible scheduling is critical. For instance, banks today use a variety of different ways to deliver services.

Profit (pricing objectives)

Firms may set a goal of reaching a certain target level of profit growth or a net profit margin. Here, the pricing is set up in order to maximize profits. This type of objective is particularly important for products that will have a short life cycle. For instance, firms marketing apps that suddenly become very popular and then die out just as quickly have to ensure that they maximize their profits before people lose interest and move on to the next thing.

Sales or Market Share (objectives)

Firms may wish to dominate a market and capture the greatest market share. Alternatively, they may want to increase their sales volume and reach a particular target. In either case, the pricing is set up in order to ensure that more consumers buy the product. Sometimes, this may mean lowering the price so that the product is cheaper than the competition. However, lowering the price is not the only way to capture greater market share. Having a unique competitive advantage that competing firms don't have can also lead to higher sales.

Consumer tastes and preferences

If consumers like a product, demand for it will increase. When a celebrity endorses a product, demand for it may suddenly increase. The Kate effect is so powerful that it has actually hurt some small businesses because of sudden increases in demand.

The price and availability of substitute products

If the consumer can buy a satisfactory substitute for cheaper, demand for the focal product is likely to decrease.

Inseparability

If you go to a restaurant and encounter a bad waiter who is mean and irritable the entire time, chances are that you would leave with a bad impression of the restaurant. In contrast, if you go to the same restaurant and encounter a great waiter who is personable and attentive, you would leave with a great impression of the restaurant. Thus, our experience of a service purchase depends very heavily on who happens to be the service provider we encounter.

Profit

In order to determine the profit, the firm has to take into account the fixed and the variable costs: Note: Setting a higher price leads to more profit. Selling more of the product leads to more profit (and also higher variable costs). Higher fixed costs lead to lower profit. Higher variable costs lead to lower profit.

Cross-price Elasticity

Interestingly, the price of one product can have an effect on demand for another product. This is cross-price elasticity.

Standards gap

Perhaps the dentist hires a marketing company to figure out why she has so much turnover and has to constantly work on getting new patients. The firm does a survey and informs the dentist that patients aren't coming back because they're unhappy with the reception staff's rudeness and inefficiency. They also get turned off by the dark, uninviting waiting area. Now the dentist knows these are concerns, but she doesn't make any changes. She doesn't talk to the staff and she doesn't change the waiting area. There will continue to be a service failure, but now because of a standards gap rather than a knowledge gap.

Did you know that the majority of the US GDP today comes from services?

It is important to remember that almost every product we purchase has an intangible component to it. Thus, even when we are purchasing groceries or apparel, we are also purchasing some services. Dinner at a restaurant is a great example of this. The food you consume is the tangible portion of your purchase. You can physically possess it; touch it, taste it, etc. However, the cooking and plating of the food, the wait staff checking in on you to make sure you have everything you want, the ambiance of the place, the music, etc. are all intangible components of your purchase. As a result, it is more useful to think of the service-product continuum where one end represents products comprising primarily intangible benefits, and the other end represents products comprising primarily tangible benefits.

Knowledge gap

It's possible that the dentist believes that patients only care about the quality of medical care they receive. Other aspects of the service -- such as the friendliness of the reception staff and the general ambiance of the office -- are unimportant. This represents a knowledge gap. These factors also matter to patients, but the dentist's lack of knowledge about their preferences can mean that her patients are unhappy with the service they're getting.

Geographic Adjustments

There are two major types of adjustments made to the price that take into account the cost of delivering the product to the consumer: Zone, Uniform delivered pricing

Predatory Pricing

Large firms often have the power to engage in predatory pricing. They set extremely low prices that smaller companies cannot compete with, and then raise prices once the competitors have died out. When this is done on an international basis, it's known as dumping. Large retailers like Walmart and Amazon have been accused of, and sometimes found guilty of predatory pricing within the US. Steel manufacturers in China and Russia have been accused of dumping by the EU.

Delivery gap

Let's say the dentist does take the marketing firm's recommendations seriously. She talks to the front office staff and spends time training them on how to be more friendly. She gets new software that allows them to be more efficient. She emphasizes the need to be responsive. However, despite her instructions, they continue to be rude. They don't bother learning how to use the new software and as a result, become even more inefficient. She tries to make changes to the waiting area by buying some nice furniture, installing a speaker system to play music, and getting some nice magazines. However, the staff forget to turn on the lights and the music, and don't replace the magazines when new issues are delivered. Now we have a delivery gap.

Consumer income

Lower income groups are more price elastic than higher-income groups.

substitute products

Price increases for one product leads to lower demand for it. In turn, lower demand for one product leads to higher demand for another product. For instance, if apples suddenly become expensive, most consumers would simply switch to a different fruit.

Why is Price Important?

Price is the only component of the marketing mix that produces revenue: Profit = Total Revenue - Total Cost Total revenue = Price per unit sold x quantity of units sold Notice that as revenue increases, profit also increases. As costs increase, profits decrease. Taking it further, as price and the quantity of the product increase, revenue also increases. Thus, as price increases, profit also increases. Firms set the prices for their products. As a result, small changes in pricing can have big implications for revenue and profits. Price is also important because it is very much related to consumers' perceptions of value. Here we are defining value as: Value = Perceived benefits / Price Here, perceived benefits refer to the consumers' beliefs about the benefits they're receiving from the product. Thus, when consumers are able to pay a lower price for the same product, they feel like they're getting better value. When a brand decides to increase prices, without changing the product, consumers' perceptions of the product's value decreases.

What is Price?

Price refers to the exchange value of a product. It can include not only the money you might pay for the product, but also other non-monetary resources like time and effort. Marketing exchanges that don't involve money can also occur. These are referred to as barter exchanges; products are being exchanged for products

Pricing Decisions

Pricing decisions are the second P in the marketing mix. In this module, we will be discussing: What is price? Why does it matter? Demand and elasticity Pricing strategies Ethical issues around pricing **A note about this module. We will be reviewing several equations in this module. It is important that you understand the relationships between the terms in each equation. In other words, you must know how changes in one term will affect the outcome.

The 7 P's of Marketing Services

Product, price, place, promotions, people, physical environment, process

Physical Environment

Recall that one of the dimensions by which a service is evaluated focused on the tangible aspects. Thus, the physical environment of the service provider is very important. Which of these doctor's offices would you expect to get better service?

Mental stimulus processing (process)

Refers to services that deliver a certain experience aimed at enriching or entertaining a person's mind. For instance, going to the movies or seeing a play.

People processing (process)

Refers to services that directly involve the customer's physical being. For instance, doctors are involved in people processing.

Possession processing (process)

Refers to services that involve the objects that people own. For instance, car maintenance or home cleaning.

Variability (aka inconsistency or heterogeneity)

Related to the above, different service providers can deliver a very different quality of service. As a result, there can be a great deal of inconsistency in the experiences that customers have with a given service. Even at the same location, we might encounter different service providers who vary in their demeanor and competence. Consider then what may happen when the firm is a national chain (like Starbucks for example) where there are thousands of individual store locations each with their own employees.

Evaluating Services on 5 dimensions.

Reliability, Tangibility, Responsiveness, Assurance, Empathy

Comparable value comparisons

Reporting a competitor's price as unrealistically high in order to make the firm's prices look very attractive.

What is a Service?

Services are defined as intangible activities or benefits that an organization provides to satisfy consumers' needs in exchange for money or something else of value.

Process

Services can involve processing people (such as when you get a haircut) or objects (when you take your car in for maintenance). Thus, the service provider must consider what processes they are using to deliver their service;

Perishability

Services must be consumed when they're available. For example, the United flight from Chicago to Louisville had a limited number of seats. If United can't get every one of those seats filled, then they cannot store them for a later flight. They must be consumed at that time on that day or the airline loses money. Because of this, idle production capacity is a problem unique to services. It refers to situations where a service provider is available but there is no customer to consume the service. If you make an appointment with your doctor or dentist and then don't show up, that appointment time is now lost unless they can find some other patient to use it. This idle production capacity is a major problem for service providers and they use all sorts of tactics--overbooking flights and charging patients for no shows--to minimize it.

Information processing (process)

Services that use technological tools or the service provider's skills to process the customer's assets. For instance, retirement planning or consulting.

Prestige Pricing

Setting a deliberately high price in order to communicate the brand's status and/or quality. Prestige pricing is commonly used by luxury brands to signal their exclusivity. If diamonds were cheap, everyone could buy them, and they wouldn't be nearly as special anymore. Here's a list of the designer handbags currently selling at Nordstrom

Customer Satisfaction (objectives)

Some firms may choose to focus on customer satisfaction rather than profits because they're interested in developing long term relationships with their customers. Maximizing customer satisfaction may mean offering benefits that cost more (and perhaps lower profits in the short term), but lead to greater satisfaction and loyalty in the long term.

Delivery Method

Some services are delivered by people and others by machine or some type of equipment. For instance, if you go to the ATM and withdraw money, you're taking advantage of a service delivered by equipment. In contrast, if you walk into the bank and get money from the teller (after an awkward and inane conversation!), you're getting service from a person.

Price Lining

Sometimes retailers will set different prices for different product lines in order to convey that they differ in quality. For example, Ikea sells a variety of different sofas at different price points.

Needs

States of deprivation

Break-even Analysis

The break-even point is when the total costs equal total revenue. The firm is not making a profit or a loss; it is just breaking even. Consider a picture framing shop. Their fixed costs are represented by the flat blue line in the image below. By definition, fixed costs do not increase as the amount of product sold increases. The total costs -- the red line -- does increase as the quantity of pictures sold increases because it takes into account the variable costs.

Communication gap

The dentist may not have realized that her front office staff are ignoring her instructions and training. She decides to do a direct marketing campaign where she emphasizes the friendly staff and the inviting waiting area. When new patients arrive, however, they don't experience what was promised in the flyers. This represents a communication gap.

Providing a fair solution

The next step is to arrive at a solution that the customer and the firm feel is fair. Note that the customer must also perceive this in order for the solution to be effective. The firm cannot make a unilateral decision and expect the customer to just accept it.

Fixed Cost

These costs do not vary with production or sales level. They are also known as overhead. Examples: rent, salaries, utilities, etc. For example, a physician can't argue that she has fewer patients now and so her rent should be less.

Variable Costs

These costs vary directly with the level of production. Examples: packaging, raw materials, etc. Here, higher sales can mean higher variable costs. The physician may need to spend less on medical supplies if she is seeing fewer patients.

Resolving the problem quickly

This is also critical. The firm must reach out to the customer and attempt to resolve the failure as quickly as possible. The longer they wait, the more unhappy the customer will be and the more time they'll have to reach out to other people and inform them of the service failure. It'll be increasingly difficulty to mollify such a customer.

Considerations Price Fixing

This refers to instances where two or more organizations conspire to set the price for a product. horizontal price fixing, vertical price fixing

Everyday Low Pricing (EDLP)

This strategy involves charging a constant everyday low price with few or no temporary price discounts. Note that this means that the average prices are low. It doe not mean you get the lowest prices on every item. Walmart is one of the best known retailers using this strategy.

Yield Management Pricing

This strategy involves charging different prices at different times in order to get the most revenue. This is a type of dynamic pricing; changing prices over time in response to different triggers. In the video below, Uber's practice of surge pricing is discussed by their CEO. It is typically used when the fixed costs are high compared to variable costs. For instance, the fixed costs of flying an aircraft from San Antonio to Las Vegas are much greater than the variable costs. Similarly, the fixed costs of keeping a hotel room ready and in perfect condition are higher than the variable costs. As a result, it makes sense for the airline or the hotel to charge lower prices early on to attract budget travel customers, and then increase prices closer to the date of travel for those people who have to travel at short notice and don't have much flexibility in their schedule. However, this strategy is possible only when the product is limited (in terms of the number available and/or the time when they're available).

Odd-Even Pricing

This strategy involves setting a price so that it doesn't end in a round number. In all the examples below, note that the price ends in an odd number.

Penetration Pricing

This strategy is also sometimes used for new products. It involves setting a low price to attract lots of customers. It allows the firm to attain high market share quickly, and may discourage competitors who may be unable to offer the product at such low prices. For example, Spirit Airlines offers extremely low prices for its base fare. Customers are then expected to pay additional fees for benefits like printing a boarding pass at the airport, However, it may signal low quality. Remember, price and quality are very much related in consumers' minds. Also, it may mean the firm is not maximizing profits. Consumers might be willing to pay more, but that money is being left on the table. This strategy relies on the experience curve effect, which states that as a firm gets more experience with manufacturing a product, costs decrease and the firm can lower prices. The firm has to be careful that it has the resources to be able to satisfy the high demand that might occur with low prices

Marketing Services

We've now reviewed the Marketing Mix or the 4 P's -- Product, Price, Place, and Promotions -- and our focus has been for the most part on goods. In this module, we'll review some of the same concepts as they relate to services. In many ways, marketing services is like marketing any other good. However, there are some differences because services have certain unique characteristics.

Marketing Channels

What are marketing channels? Why do we need intermediaries? Supply chain strategies Length of marketing channels Types of marketing channel systems Distribution, Transportation, Wholesaling, Retailing

Distributive versus procedural fairness

What do we mean by fair here? We can distinguish between fairness in terms of the final outcome and fairness in terms of how the outcome was reached. If an airline just bumps passengers from a flight and tells them they'd be getting $500 in travel vouchers (when they paid $300 for their tickets), the outcome may be perceived as fair, but the process may not be seen as such. By involving customers in the process, the firm can hope to achieve distributive fairness as well as procedural fairness.

Reliability

ability to perform the promised service dependably and accurately. Example of questions airline customers might ask? Is my flight on time?

complementary products

inelastic When price elasticity < 1 Price elasticity can depend on several factors Consumer income, Substitution availability, Type of product Consumer income Lower income groups are more price elastic than higher-income groups. Substitution availability there is higher elasticity when lots of other options available. Type of product Necessities tend to be inelastic and luxuries are typically elastic. Cross-price Elasticity Interestingly, the price of one product can have an effect on demand for another product. This is cross-price elasticity. complementary products

Zone pricing

occurs when the price depends on the distance. Longer distances between the buyer and the seller result in higher prices. For instance, Ikea charges different prices depending on how far the customer is from their store in Round Rock (north of Austin).

Uniform delivered pricing

occurs when the same flat fee is charged regardless of the distance between the buyer and the seller. Here, the seller selects the mode of transportation, pays freight charges, and is responsible for damages. This is a strategy commonly used by non-store retailers like television shopping networks. In the image below, Kim Kardashian is selling her perfume for $65.00 and the shipping costs are $7.94. Note that the shipping price doesn't change depending on the buyer's location.

Bait and switch

offering a very low price to attract customers, and then inducing them to purchase a higher-priced product. For example, advertising a camera model that is completely stripped of most desirable features, and then inducing customers who come to the store to purchase a higher priced camera