Marketing Final Chapter 20
Sales-Oriented Pricing Objectives -Market Share
-A company's product sales as a percentage of total sales for that industry -Many companies believe that maintaining or increasing market share is an indicator of the effectiveness of their marketing mix. Larger market shares often mean higher profits, thanks to economies of scale, market power, and ability to compensate top-quality management -Many companies with low market share survive if they are in a slow growth industry and experience few product changes
Dynamic Pricing
-A strategy whereby prices are adjusted over time to maximize a company's revenues -More and more companies are turning to dynamic pricing to help adjust prices. -Dynamic pricing is most useful when two product or service characteristics co-exist.
Prestige Pricing
-Charging a high price to help promote a high-quality image -takes these consumer attitudes into account when devising price strategies. A successful prestige pricing strategy requires a retail price that is reasonably consistent with consumers' expectations.
Trends Influencing Price
-Flood of new products -Increased availability of bargain-priced private and generic brands -Price cutting as a strategy to maintain or regain market share -Internet used for comparison shopping
Other Determinants of Price -Stages of the PLC
-Introductory stage: Price is high -Growth stage: Price stabilizes -Maturity stage: Price decreases -Decline stage: Price decreases
Demands of Large Customers
-Manufacturers find that their large customers often make specific pricing demands that the suppliers must agree to. -Require suppliers to pay cash rebates if stores' profit margins aren't met. -Fines for violations of ticketing, packing, and shipping rules.
Other Determinants of Price -Distribution Strategy
-Manufacturers: Offer a larger profit margin or trade allowance, Use exclusive distribution, Franchising, Avoid business with price-cutting discounters, Develop brand loyalty -Wholesalers/Retailers: Sell against the brand, Buy gray-market goods
Sales-Oriented Pricing Objectives -Sales Maximization
-Maximization of cash should never be a long-run objective because cash maximization may mean little or no profitability. Without profits, a company cannot survive -Rather than strive for market share, sometimes companies try to maximize sales 1. Uses a short-term objective to maximize sales 2. Ignores profits, competition, and the marketing environment 3. May be used to sell off excess inventory
Profit-Oriented Pricing Objectives -Target return on investment
-Net profit after taxes divided by total assets -The higher the firm's ROI, the better off the firm is. ROI puts a firm's profits into perspective by showing profits relative to investment
Profit Maximization
A method of setting prices that occurs when marginal revenue equals marginal cost
How Demand and Supply Establish Price -Price Equilibrium
The price at which demand and supply are equal
The Demand Determinant of Price -Supply
The quantity of a product that will be offered to the market by a supplier at various prices for a specific period.
The Demand Determinant of Price -Demand
The quantity of a product that will be sold in the market at various prices for a specified period
Other Determinants of Price -The Impact of the Internet and Extranets: Extranets
are private electronic networks that link companies with their suppliers and customers
Yield Management Systems (YMS)
make it possible for a company to: -Stimulate demand when demand is low -Maximize profits when demand is high ex, people on tight budgets buy air fare, they usually accept the inconvenience of planning ahead and staying over on a Saturday night to get cheaper fares. The last-minute planner pays more for their fare and (essentially) subsidizes the cost-sensitive customer
Profit-Oriented Pricing Objectives -Satisfactory profits
reasonable level of profits that is consistent with the level of risk an organization faces
Other Determinants of Price -The Impact of the Internet and Extranets: Shopping bots
search the Web for the best price. The two types of shopping bots are broad-based types and niche-oriented types. Most shopping bots give preferential listings to e-tailers who pay for the privilege, and not necessarily the lowest-priced retailer
Other Determinants of Price -The Impact of the Internet and Extranets: Internet auctions
such as eBay, are huge. Business-to-business auctions are likely to be the dominant form in the future
Profit Maximization -Marginal Revenue
the extra revenue associated with selling an extra unit of output. As long as the revenue of the last unit produced and sold is greater than the cost of the last unit produced and sold, the firm should continue manufacturing and selling the product
What is Price?
-Price is that which is given up in an exchange to acquire a good or service. -Price is typically money exchanged for a good or service; however, it may include other costs such as time lost while waiting to acquire the good or service. -Consumers are interested in obtaining a "reasonable price," which means a "perceived reasonable value" at the time of the transaction. The price paid is based on the satisfaction consumers expect to receive from a product and not necessarily the satisfaction they actually receive. -Price can relate to anything with perceived value, not just money. When goods or services are exchanged, the trade is called barter.
Pricing Objectives
-Pricing objectives must be specific, attainable, and measurable to survive in today's competitive market -Pricing objectives can be divided into the three categories 1. Profit oriented 2. Sales oriented 3. Statue Quo
The Importance of Price to Marketing Managers -Profit
-Revenue minus expenses. -Managers strive to charge a price that will earn a fair profit
The Cost Determinant of Price
-Sometimes the importance of demand is ignored when prices are decided, based largely or solely on the basis of costs. -Prices set on the basis of cost may be too high for the target market. On the other hand, if prices are set too low, the firm will earn a lower return than it should. -Costs should be determined as part of any price determination, in part to determine the floor below which a good or service must not be priced in the long run. -Variable and fixed costs are important aspects of price determination
Status Quo Pricing Objectives
-Status quo pricing seeks to maintain existing prices or to meet the competition's prices. -This category requires little planning, and is essentially a passive policy.
Markup Pricing
-The cost of buying the product from the producer plus amounts for profit and for expenses not otherwise accounted for -most popular method to establish a selling price. Instead of using the costs of production to set price, markup pricing uses the costs of buying the product from the producer, plus amounts for profit and expenses. The total determines the selling price
Keystoning
-The practice of marking up prices by 100 percent, or doubling the cost -method based on experience, with many small retailers doubling the cost. Other factors that influence markups are the merchandise's appeal to customers, past response to the markup, the item's promotional value, the seasonality of the goods, their fashion appeal, the product's traditional selling price, and competition.
The Importance of Price to Marketing Managers -Revenue
-The price charged to customers multiplied by the number of units sold -pays for every activity of the company
The Importance of Price
-To the seller...Price is revenue -To the consumer...Price is the cost of something -Price allocates resources in a free-market economy
The Relationship of Price to Quality
-When a purchase decision involves uncertainty, consumers tend to rely on a high price as a predictor of good quality. -When a purchase decision involves uncertainty, consumers tend to rely on a high price as a predictor of good quality. Consumers assume that "you get what you pay for."
Break-Even Pricing
-determines what sales volume must be reached before the company breaks even and no profits are earned. A typical break even model assumes a given fixed cost an a constant AVC. -The advantage of break-even analysis is that it provides a quick estimate of how much the firm must sell to break even and how much profit can be earned if a higher sales volume is obtained. -Sometimes, however, it is hard to know whether a cost is fixed or variable. Furthermore, simple break-even analysis ignores demand.
Yield Management Systems (YMS)
-prices are adjusted using complex mathematical software to profitably fill unused capacity -When competitive pressures are high, a company must know when it can raise prices to maximize its revenues. -The software employs techniques such as discounting early purchases, limiting early sales at these discounted prices, and overbooking capacity
Other Determinants of Price -Competition
-varies during the product life cycle. Although a firm may not have competition at first, the high prices obtained may induce other firms to enter the market. -Sometimes competition can lead to price wars -High prices may induce firms to enter the market -can lead to price wars
Profit-Oriented Pricing Objectives -Profit Maximization
Although profit maximization aims at setting prices for a large total revenue, it does not always signify unreasonably high prices. Both price and profits depend on the competitive environment and the product's perceived value. Remember, too, that a firm cannot charge a price higher than the product's perceived value
Unitary Elasticity
An increase in sales exactly offsets a decrease in prices, so total revenue remains the same
Inelastic Demand
An increase or a decrease in price will not significantly affect demand
Elastic Demand
Consumers buy more or less of a product when the rice changes
How Demand and Supply Establish Price -Elasticity of Demand
Consumers' responsiveness or sensitivity to changes in price.
Dimensions of Quality
Ease of use, Versatility, Durability, Serviceability, Performance, Prestige
Factors that Affect Elasticity of Demand -Price relative to purchasing power
If a price is so low that it is an inconsequential part of an individual's budget, demand will be inelastic.
Setting Prices
Methods used to set prices 1. Markup pricing 2. Keystoning 3. Profit Maximization Pricing 4. Break-Even Pricing
Promotion Strategy
Price is often used as a promotional tool to increase consumer interest
Factors that Affect Elasticity of Demand -Product durability
Repairing durable products rather than replacing them prolongs their useful life. Thus, people are sensitive to the price increase, and the demand is elastic
Factors that Affect Elasticity of Demand -A product's other uses
The greater the number of uses for a product, the more elastic demand tends to be. If a product has only one use, the quantity purchased probably will not vary as price varies
Factors that Affect Elasticity of Demand -Rate of inflation
When inflation is high, demand becomes more elastic—rising price levels make consumers more price sensitive
Factors that Affect Elasticity of Demand -Availability of substitutes
When many substitutes are available, it is easy to switch products, making demand elastic. The same is true in reverse, if no substitutes are available
