1. Marketers generally believe that price promotions damage profitability, but increased price promotions have not led to lower profits while high-profile attempts to discontinue price promotions have suffered. 10/23/2015Paul Farris1

 Higher discounts are associated with higher prices and margins 10/23/2015Paul Farris2 $5.2 B

 Price is not important to consumers or B2B buyers as mangers believe. ◦ Studies show that consumers don’t know, can’t remember prices paid (Dickson & Sawyer (1990), Dickson, Sawyer, Urbany (2000) ◦ The “New Luxury” goods are growing and now account for as much as 20% of expenditures.“New Luxury” 10/23/2015Paul Farris3

 McDonald’s  Wal- Mart/Aldi/Migros  Southwest/Ryan Air  Dell  Linux  Starbucks  Tiffany’s  Swissair/Lufthansa  IBM  Microsoft 10/23/2015Paul Farris4

 Many (most) studies show that higher advertising leads to greater price sensitivity, lower market (average) prices.  Highly advertised and marketed brands have higher prices relative to unadvertised brands 10/23/2015Paul Farris5

 Studies of manufacturer price elasticity and advertising generally show advertising is associated with lower price elasticity.  Studies of retail price elasticity generally show advertising (manufacturer and retailer) is associated with higher price elasticity. 10/23/2015Paul Farris6

10/23/2015Paul Farris7 Example of Promotional “Spikes” used to estimate Price Elasticity

10/23/2015Paul Farris8 LeaderFollowerLaggard Retail Price $1.00$0.90$0.80 Retail Margin $0.10$0.18$0.24 Mfg Price $0.90$0.72$0.56 Mfg COGS $0.50 Mfg Profit $0.40$0.22$0.06 Price Leadership

10/23/2015Paul Farris9 Mfg 1 Mfg 2 P.L. Ret 1 Ret 2 Ret 3 Easy to Compare Prices, Margin Pressure on Retailers High Price Elasticity For Red Sales between retailers. High Retail Power Low Mfg Power Low Price Elasticity for Mfg1 versus, High for Private Label

10/23/2015Paul Farris10 "Intel inside":Two Words PC Makers Hate! Annual Operating Profit Margins

 Brand Equity is often associated with “trust” ◦ The capitalized value of the trust between the company and the consumer.” CEO, J&J  Marketers use “trust” established by brand equity to have customers pay more. ◦ Brands are “a tax.” CEO, Loblaw’s ◦ it [is] hard to avoid the conclusion that consumers are often presented with the opportunity to pay higher prices than they need to for a given quality and that many probably do so (p. 177). Ratchford, et al. (1996) 10/23/2015Paul Farris11

10/23/2015Paul Farris12  Marketing and brand equity measures emphasize the ability to command a price premium in the absence of other differences.  At least some marketers and economists believe that advertising is pro-competitive and is increasingly permitted, even when costs are of great social concern (prescription drugs)

10/23/2015Paul Farris13  Marketing creates/amplifies perceived product differentiation, reduces substitutability and price elasticity, allows prices to increase.  Higher prices increase unit profit margins, increasing optimal Marketing/Sales ratios  Establishment of brands increase willingness to invest in risky R&D to generate new, higher-quality products.

 Intel announced yet another round of price cuts between 11% and 24% for its Celeron line of low-end PC chips. That means that Intel chips will now sell for as low as $63. In response, AMD announced price cuts late Monday on its PC chips that bring its lowest-priced chip to $62. 10/23/2015Paul Farris14