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PRODUCTS – PRICING

Understand the importance of pricing as a marketing tool. Learn about pricing objectives, demand estimation, cost analysis, break-even points, and the impact of various pricing strategies on business profitability.

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PRODUCTS – PRICING

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  1. PRODUCTS – PRICING MARKETING 360 Brian Gillespie

  2. Price • The assignment of value, or the amount the consumer must exchange to receive the offering • Money • Goods • Services • Favors • Votes • Anything that has value to the other party • Price is a marketing tool and a key element in marketing promotions (the easiest P to change). Most retailers highlight product pricing in their advertising campaigns.

  3. Pricing Views • Customers view • what must be given up to obtain the benefits. Customers buy based on value and valued benefits, not price • Sellers view • Price reflects the revenue generated for each product sold and, thus, is an important factor in determining profit

  4. Steps in Pricing

  5. Develop Pricing Objectives • Sales/market objective • Reach a certain level of sales or market share • Profit objective • Make as much money as possible • Best strategy for fads • Competitive effect objective • Have an impact on competition • Cut into their market share • Release a competing product before they do • Customer satisfaction objective • Price transparency • Image enhancement objective • Prestige products priced higher

  6. Estimate Demand • Demand • Customer’s desire for a product • Demand curves • Graphs that show impact of price on demand • Normal products • As price increases, demand decreases • Prestige products • Curvalinear in design • As price increases, demand increases to a maximum point • Eventually demand decreases as price increases

  7. Demand Curves

  8. Shifts in Demand Curves • Price remains constant while demand shifts (up or down) • May be due to • Advertising • Product introduction • Global event • Etc…

  9. Estimating Pullman Thai Food Demand

  10. Crystal Pepsi • Imagine it is 1993. You are interested in calculating demand for cans of Crystal Pepsi in Spokane. • Spokane has 250,000 residents. • You expect the average person drinks 1 can of soda a day. • Crystal Pepsi has a 5% share of the market. • What is the total annual demand for soda in Spokane, and what are the annual, monthly and daily demands for cans of Crystal Pepsi?

  11. % Change in Quantity Demand Price Elasticity = % Change in Price Demand up by 30% Demand up by 10% = 3.0 = 0.25 Elastic Demand = Inelastic Demand = Price down by 10% Price down by 40% Price Elasticity • The percentage change in unit sales that results from a percentage change in price

  12. Price Elasticity

  13. Cross-Elasticity of Demand • When changes in price for one product affects changes in demand for a different product • Substitute products • Complementary products

  14. Determining Costs • Fixed costs • Costs that remain constant independent of number of units produced • Rent, executive salaries, heating, etc… • Average fixed costs = fixed costs / number of units • Variable costs • Costs that vary with the number of units produced • Materials, labor, etc… • Total costs • Sum of fixed and variable costs

  15. Variable Costs Example

  16. Break Even Analysis • How many units must be produced and sold in order to cover costs? • Break-even point • When total costs equals total revenues • Positive break-even point is profit • Negative break-even point is loss

  17. Total Fixed Costs BEP (units) = Contribution Per Unit to Fixed Costs Selling Price Per Unit – Variable Cost Per Unit Computing the Break-Even Point in Units

  18. $200,000 BEP (units) = = 4000 $50 So, you need to produce 4,000 units to break even Sell Bookshelf for $100 Costs you $50 to produce (variable cost per unit) So, Contribution to Fixed Costs Per Unit $100 - $50 = $50 Computing the Break-Even Point in Units

  19. Total Fixed Costs BEP (in $) = Variable Cost Per Unit 1 - Price Per Unit Computing the Break-Even Point in Revenue

  20. $200,000 BEP (in $) = $50 1 - $100 $200,000 BEP (in $) = = $400,000 1 - .50 Computing the Break-Even Point in Revenue So, you need to Reach $400,000 In revenue to reach Break-even point

  21. Break-Even Point

  22. Crystal Pepsi Break-Even Example • Fixed cost = $10,000,000 • Variable cost = $0.25 per can • Priced at $0.50 per can • What is the break-even point in • Sales • units

  23. Evaluate the Pricing Environment • In addition to internal factors such as manufacturing costs and capacity • Marketers must assess external environmental factors (including competitors) when setting pricing • Broad economic trends, consumer trends, social trends, and intensity of competition • When the economy is growing • Inflation occurs and prices rise • When the economy is slow • Prices stagnate or contract to keep sales stable • Consumers may be less likely to buy luxury items

  24. Choose Pricing Strategy • Cost-plus pricing • Add a fixed amount to the total costs of producing the product • Demand-based pricing • Set price based on predicted demand • Target costing • Figure out price and quality of product customers want • Figure out the cost to make the product • Determine if production is profitable • Yield management pricing • Charge different customers different prices to manage demand and maximize profits

  25. Choose Pricing Strategy • Value pricing • Pricing to provide ultimate value to the customer • New product pricing • Skimming • High price for highly desired product • Penetration • Very low price to encourage quick sales • Trial • Initial low price so consumers can try out product

  26. Develop Pricing Tactics • Pricing for individual products • Two part pricing • Need to pay twice • Payment pricing • Break overall price into smaller payments

  27. Develop Pricing Tactics • Pricing for multiple products • Price bundling • Put multiple products together in a bundle • Captive pricing • Price basic product low • Complementary and necessary products at a high profit margin

  28. Psychological Issues in Pricing • Internal reference price • Set price or range of prices consumers think are reasonable • Price-quality inferences • Greater price equals greater quality • Odd-even prices • Odd prices sell more • For some products, this conveys low quality • Price lining • Develop a variety of products at different price points

  29. Pricing and Placebo • MIT study on “Veladone” • FDA approved drug used in dental surgery • Price conditions • 10 cents per pill • $2.50 per pill • Effectiveness • In low price point • 61% reported decrease in pain • In high price point • 85% reported decrease in pain

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