Principles of Marketing Chapter 9: Pricing Understanding & Capturing Value

What’s a Price? Price:  Narrow sense: The amount of money charged for a “product”  Broader sense: Sum of all values given up to gain benefits of having or using a product  Includes: Opportunity costs Travel costs Search costs, etc. Dr. James Carver – Auburn University

Organization Slide Part I:  The “process” of calculating Focused on “Cost-Plus” method  Adding a standard markup to the cost of a product Part II:  Conceptual topics, etc. Dr. James Carver – Auburn University

Part 1 Dr. James Carver – Auburn University

Using Markups Markup  Selling price of the merchandise less its cost Equivalent to the good’s gross margin.  The basic markup equation: MU$ = SP - C Where:  C = Dollar cost of merchandise (per unit)  MU = Dollar markup (per unit)  SP = Selling price (per unit) Dr. James Carver – Auburn University

Markup Percentages Markup on Selling Price:  MU SP = MU$ / SP Which is also equal to MU SP = (SP – C) / SP  This is always “markup” unless I explicitly ask for markup on cost Markup on Cost:  MU C = MU$ / C Which is also equal to MU C = (SP – C) / C Dr. James Carver – Auburn University

Break-Even Analysis Breakeven point:  The point where the total revenue from the quantity sold just equals the firm’s total costs  Formula: GM = FC + VC + Π  Where: GM = gross margin FC = fixed cost VC = variable cost Π = profit (which is equal to zero in break-even problems) Dr. James Carver – Auburn University

Part 2 Dr. James Carver – Auburn University

Increasing Focus on Non-Price Variables Price sensitivity has decreased  Due to increased desire for values like: Convenience, personalization, etc. Yet remains one of most important elements  Because: It’s extremely flexible (i.e., easily changed) It’s the only “mix” variable that produces revenue Dr. James Carver – Auburn University

Controllable Factors in Pricing Many firms focus too much on price.  Conditions customers to only purchase on sale.  Overlooks the relationship price has with the other variables of the marketing mix.  Two controllable factors in pricing are: 1. Cost paid for (or to produce) goods 2. Desired gross margin Dr. James Carver – Auburn University

“Law of Demand” and Price Sensitivity Dr. James Carver – Auburn University $ Q

“Law of Demand” and Price Sensitivity Dr. James Carver – Auburn University $ Q Perfectly Elastic

“Law of Demand” and Price Sensitivity Dr. James Carver – Auburn University $ Q Perfectly Inelastic

Pricing Freedom as a Function of Market Type Competition generally falls into one of four categories: 1. Pure Competition 2. Pure Monopoly 3. Monopolistic Competition 4. Oligopolistic Competition Dr. James Carver – Auburn University

Pure Competition Occurs when a market has: Homogenous products, Many buyers and sellers, Buyers and sellers have perfect knowledge, and There’s ease of entry for both buyers and sellers.  In such a situation: Firms face horizontal demand curve Must sell product at ‘‘market’’ or equilibrium price Extremely rare Dr. James Carver – Auburn University

Pure Monopoly Occurs when there is only one seller for a product or service.  Yet this does not mean one can simply sell at whatever price s/he wants… Not perfectly inelastic for two reasons: 1. Law of diminishing returns (i.e., declining marginal utility) Hot fudge sundae example 2. To sell more units, one must lower the selling price. Not all consumers have same utility for any one good Dr. James Carver – Auburn University

Monopolistic Competition Occurs when a market has: Heterogeneous products, Products are viewed as substitutes for each other, and Sellers recognize that they compete with sellers of these substitute products.  Here, firms attempt to differentiate themselves with the products or services they offer Most common form of competition in America  Particularly at the national-level Dr. James Carver – Auburn University

Oligopolistic Competition Occurs when a market has: Essentially homogeneous products (e.g., gas), Relatively few sellers (top 4 firms account for 60-80%),  Or, many small firms who follow the lead of a few larger firms, Any action taken by is expected to be noticed and reacted to by the other sellers.  Likely to lead to: Similar prices as everybody knows what others are doing. Dr. James Carver – Auburn University

Pricing Objectives and Policies Should be made after careful consideration of the firm’s… 1. Mission statement, 2. Goals/objectives, 3. Strategy, and 4. Marketing Mix Dr. James Carver – Auburn University

Specific Pricing Strategies Customary pricingMultiple-unit pricing Variable pricingBundle pricing Flexible pricingBait-and-switch pricing One-price policy pricingPrivate label pricing Odd pricingHi-low pricing Price liningLeader pricing Dr. James Carver – Auburn University

Specific Pricing Strategies Dr. James Carver – Auburn University Customary pricing The retailer sets prices for goods and services and seeks to maintain those prices over an extended period of time. Variable pricingRecognizes that differences in demand and cost necessitate that the retailer change prices in a fairly predictable manner. Flexible pricingEncourages offering the same products and quantities to different customers at different prices (common for products sold using personal selling). One-price policyEstablishes that the retailer will charge all customers the same price for an item. Not only does it speed up transactions, but also it reduces the need for highly skilled salespeople. Odd pricingPractice of setting retail prices that end in the digits 5, 8, 9— such as $29.95, $49.98, or $9.99.

Specific Pricing Strategies Price Lining Established to help customers make merchandise comparisons and involves establishing a specified number of price points for each merchandise classification.  Trading up - Occurs when a firm uses price lining, and a salesperson moves a customer from a lower priced line to a higher one.  Trading down - Occurs when a firm uses price lining, and a customer initially exposed to higher-priced lines expresses the desire to purchase a lower-priced line. Dr. James Carver – Auburn University

Specific Pricing Strategies Dr. James Carver – Auburn University Multiple-unit pricing Price of each unit in a multiple-unit package is less than the price of each unit if it were sold individually. Bundle PricingSelling distinct multiple items offered together at a special price. Bait-and-switch pricing Advertising or promoting a product at an unrealistically low price to serve as ‘‘bait’’ and then trying to ‘‘switch’’ the customer to a higher-priced product. Private-label brand pricing A private-label brand can be purchased by a retailer at a cheaper price, have a higher markup percentage, and still be priced lower than a comparable national brand. High-low pricingUse of high every day prices and low leader ‘‘specials’’ on items typically featured in weekly ads.

Specific Pricing Strategies Leader pricing  Used when a high-demand item is priced low and heavily advertised in order to attract customers into the store.  Loss leader - Extreme form of leader pricing where an item is sold below a firm’s cost. Example: Turkeys at Thanksgiving time Dr. James Carver – Auburn University