Kent 29 BAD Marketing Management Lecture 3 Pricing

Managing Pricing

I. Pricing Programs A. What is Price? Price is the VALUE of a bundle of attributes to the customer.

I. Pricing Programs A. What is Price? B. Importance of Price?

Price as a Marketing Mix Variable Target Market Desired Attributes Product: Engineering Excellence High Status High Quality Components Promotion: “Classy & Upscale” Media? Style? Distribution: Exclusive QUESTION What Price Fits the Mix: Premium? Market? Discount?

Possible Range of Prices VARIABLE COST = Absolute Minimum VALUE to Customer = Absolute Maximum

Pricing Strategy Fundamentals 1. Determine the Strategic Pricing Objectives 2.Know the Importance of Pricing to Your Target Audience (e.g., Perceived Value) 3.Know the Demand for Your Product (how will price affect it?) (e.g., Price Elasticity of demand)

Pricing Strategy Fundamentals 4.Understand Costs Your Own Your Competitors’

Pricing Strategy Fundamentals 5.Determine Your Pricing Strategy Make Contingency Plans for special situations Variations in Demand Geographic Variations Market Segment Differences Channel Differences

A. Target Return on Investment (ROI) Achieve high turnover Drop product lines that cannot reach required RO B. Maximize Profits Control costs and adjust price Some items in a mix may achieve this goal C. Increase cash flow Adjust prices and discounts Encourage purchases and rapid payment Income Oriented Objectives

D. Keep a Going Concern Adapt prices to "hold on" Going concern is easier to sell E. Survive Set prices to "scrape by" Survive economic storm or achieve owner retirement Income Oriented Objectives

A. Maintain Market Share Keep sales in roughly the same position relative to those of competitors Firms want to keep leadership positions B. Encourage Sales Growth Adjust price and discounts Encourage more purchases by existing buyers and attract new buyers Sales Oriented Objectives

Competition-Oriented Objectives A. Meet Competition: Set prices and discounts about equal to those of competitors Avoid price competition; price stabilization B. Avoid Competition: Set prices at a level that will discourage competition in the firm's market Develop a distinctive image or use as a defensive move

Competition-Oriented Objectives C. Undercut Competition: Set prices lower than the competition's Project bargain image or increase share

Objectives of Social Concern A. Behave Ethically Due to special considerations, set prices at levels lower than they could have been Avoid government regulations; long-term view B. Maintain Employment Set prices at levels that will maintain production and employment of workers Support community commitment; increase attraction for a buyer

II. Details of Two Approaches to Pricing

A. Cost Driven Pricing 1. Mark-up or Cost-plus

Total Cost = Fixed Cost + Variable Cost OR Total Cost = Fixed Cost + (Estimated Quantity x Unit Variable Cost)

TO SET PRICE: 1) Estimate Total Cost Per Unit 2) Apply the “Formula” e.g., TOTAL COST + 50% (see spread sheet example) Problem IGNORES demand Advantage SIMPLE 1. Mark-up or Cost-plus

A. Cost Driven Pricing 1. Mark-up or Cost-plus 2. Target Return on Investment or Target Pricing

Review Break Even Break Even Point FC (in Units) = (SP-VC) ( ) 571,428.6units

Review Break Even Break Even Point FC (in Dollars) = 1-(VC/SP) 5,000,000 1-(6.25/15) $8,571,429

2. Target Return on Investment or Target Pricing a. Estimated Unit Cost = $12.50 b. Estimated Sales Volume = 800,000 units c. TOTAL COST = $10,000,000 d. Target ROI = 20%.20 x $10,000,000 = $2,000,000 Needed Profit $ Costs & Revenue Total Revenue Total Cost Fixed Costs Units (000’s) 800

2. Target Return on Investment or Target Pricing d. Target ROI = 20%.20 x $10,000,000 = $2,000,000 Needed Profit e. Needed (Target) Revenue = Total Cost + Profit = $10,000,000 + $2,000,000 = $12,000,000 f. Unit Price = REVENUE / VOLUME = $12,000,000 / 800,000 =$15.00 / Unit Price

2. Target Return on Investment or Target Pricing g. Problems --Must be able to forecast the demand --Will the customer pay the price?

B. Market or Demand Driven Pricing 1. Perceived Value Pricing

Scripto --Weak with teens and young adults --Found 42% of Eraser Mate bought by year olds --Established “Value” in Focus Group Research --Verified in Placement Tests --Market Success

B. Market or Demand Driven Pricing 1. Perceived Value Pricing 2. Demand and Elasticity --Kinked Demand Curves

III. Pricing By Market Leaders

A. Price Skimming 1. Price Skimming Defined 2. Relationship to Product Life Cycle (PLC) 3. Advantage 4. Disadvantage

B. Umbrella Pricing 1. Umbrella Pricing Defined

Skim Umbrella Cost Curve Time/Experience Price / Cost

B. Umbrella Pricing 1. Umbrella Pricing Defined 2. Relationship to Product Life Cycle (PLC) 3. Advantage 4. Disadvantage

C. Slide Down the Demand Curve 1. Slide Down the Demand Curve Defined

Skim Cost Curve Time/Experience Price / Cost

C. Slide Down the Demand Curve 1. Slide Down the Demand Curve Defined 2. Relationship to Product Life Cycle (PLC) 3. Advantage 4. Disadvantage

D. Penetration Pricing 1. Penetration Pricing Defined

Cost Curve Time/Experience Price / Cost Price Small Margin

D. Penetration Pricing 1. Penetration Pricing Defined 2. Relationship to Product Life Cycle (PLC) 3. Advantage 4. Disadvantage

IV. Follower Pricing A. Meet Competition (Parity Pricing) B. Build Share (Penetration Pricing)

V. Pre-emptive or Extinction Pricing 1. Defined 2. Not Recommended (Illegal)