Marketing Management Dawn Iacobucci © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Pricing Chapter 8 © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Pricing Pricing allows the company to obtain feedback from customers Pricing is easier to change than the other marketing mix variables Pricing sends a signal regarding the positioning and image of the brand © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Demand Profit increases when price increases; however, demand tends to decrease as price increases Need to find happy medium © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Elasticity –How much does demand (units sold) increase (or decrease) with a price change? E>1, demand is elastic If 0<E<1, demand is inelastic If E=1, demand is unitary © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Demand Increases… With increased customer’s desire With favorable perceptions of the product’s benefits or brand image If competitors’ brands aren’t favorable If there are few good substitutes If substitutes are priced even higher © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Demand is More Elastic When… Customers don’t care about the purchase Customers don’t have strong preferences Item is a luxury rather than a necessity Many substitutes are available Purchase is large compared to income When household incomes are lower It is easier to compare prices © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Costs Costs set the minimum floor on pricing –If fixed costs are relatively high, maximize sales volume (to spread the fixed costs) –If variable costs are relatively high, maximize per unit margins © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Breakeven Analysis Breakeven –Number of units needed to sell to cover costs © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Brands and High Prices Good brands are able to charge premium prices –Generic spandex sells for $8/lb –DuPont sells “Lycra” for $15/lb Some define “good” brands by whether or not the customer is price insensitive © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Profit Maximization Profit = revenue – expense –Revenue = price x quantity sold To maximize profits, find a price where any further increase in price would lead to a large falloff in quantity sold –Profit Maximization: marginal revenue equals marginal cost © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Absolute vs. Relative Numbers Absolute –$15 off of a $199 item and $15 off of a $49 item is the same in absolute terms The savings is $15 Relative –$15 of $199 is 8% while $15 of $49 is 31% Thus, the savings is relatively better on the $49 item © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Framing A $499 trip is the same as a $599 trip with a $100 discount at booking However, the $599 trip seems like a better deal because of the higher starting price © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Discounts Temporary price discounts make customers think they are smart shoppers They experience feelings of happiness, pride, appreciation, optimism, confidence, etc. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Mental Accounting A case of wine purchased for an upcoming party is seen as an investment; later consumption of wine is seen as “free” –People pay less attention to future consequences People categorize purchases and budget within each category –Vacation money is “different than” food money © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Compromise Effect The inner/middle choice between two extremes is attractive People assume that if a company charges more, it must be providing more © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Pricing Quantity Discounts –The more purchased, the more saved Yield Management –Using price and scheduling to manage demand Go to the movies during the day for less $ Book a flight last minute for less $ –Need to manage perceptions of fairness © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Product Life Cycle Pricing Introduction stage –Penetration: seek market share Price low to stimulate sales, encourage trial, and trigger word-of-mouth –Skimming: seek profit Price high initially, then lower to make product more accessible Adjust price in various stages; usually end with lower prices in decline stage © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Temporary Price Cuts Competitors can imitate; thus, impact may be negative while also squeezing margins Price drops attract disloyal customers Customers may “stock up” May negatively affect brand image © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Coupons Only relevant to coupon clippers –Price is more important to them than brand –350 billion coupons are available in U.S. –Redemption rate is only about 1% Effective at encouraging new/old customers to try old/new products © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Game Theory Marketers use game theory to try to estimate likely results of price cuts and competitive response –Think about the broader market not just optimizing own needs Mutual cooperation can yield even better outcomes than both parties acting selfishly © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Dynamic Pricing Price is negotiated by buyer and seller –Auctions have been gaining in popularity Sealed or open bid Bidders compete to buy item Reservation price –Point of indifference: estimate of customers willingness to pay If the price is higher than reservation, don’t buy. If it is lower, then buy. © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Value Value is an assessment of what the customer gets compared with what the customer gives up © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.