CHAPTER Day 16 BUS 222

Agenda Questions? Quiz 4 Today (45 min.) – Chaps 10, 11 & 12 – 15 M/C and 1 extra credit – Open Book, Open Notes 45 mins Assignment 5 Due Assignment posted – Due April 10 – Marketing Assignment 6.pdf Marketing Assignment 6.pdf Begin Discussion on Pricing Concepts for Establishing Value (30 min.)

CHAPTER PRICING CONCEPTS FOR ESTABLISHING VALUE 13 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

LEARNING OBJECTIVES Pricing Concepts for Establishing Value LO1 List the four pricing orientations. LO2 Explain the relationship between price and quantity sold. LO3Explain price elasticity. LO4 Describe how to calculate a product’s break-even point. LO5Indicate the four types of price competitive levels.

Which is the best Wine? $40$70 $22

Price and Value ©Uden Graham/Redlink/Corbis

Price Benefits Sacrifice (costs)

Bottled vs. Tap Water

Price is a Signal Prices can be both too high and too low Price set too low may signal poor quality Price set too high might signal low value Website ©Brand X Pictures/PunchStock

The Role of Price in the Marketing Mix Price is the only marketing mix element that generates revenue Price is usually ranked as one of the most important factors in purchase decisions Chad Baker/Ryan McVay/Getty Images

The 5 C’s of Pricing

1 st C: Company Objectives

Profit Orientation Profit Orientation Target return pricing Target profit pricing Maximizing profits

Sales Orientation Focus on increasing sales More concerned with overall market share Does not always imply setting low prices

Competitor Orientation Competitive parity Status quo pricing Value is not part of this pricing strategy Roz Woodward/Getty Images

= Focus on customer expectations by matching prices to customer expectations Customer Orientation C Borland/PhotoLink/Getty ImagesDon Farrall/Getty Images

What are they trying to accomplish with this ad?

2nd C: Customers

Demand Curves and Pricing Knowing demand curve enables to see relationship between price and demand Photo by Simon Frederick/Getty Images

Can you name the price? $89.95 $ $ $ $ $ /

Demand Curves Not all are downward sloping Prestigious products or services have upward sloping curves

Price Elasticity of Demand Elastic (price sensitive) Inelastic (price insensitive) Consumers are less sensitive to price increases for necessities ©PhotoLink/Getty Images

Price Elasticity of Demand ©Dennis MacDonald/PhotoEdit, Inc.©Bill Aron/PhotoEdit, Inc.

When price of Porterhouse Steak is $10/lb I may buy one 32 oz steak every month When the price drops to $8/lb I will buy four 32 oz steaks every month % change of demand is (8-2)/8 = 75% % change in price is ($8 – $10)/$8 = -25% Price elasticity of demand is 75%/-25% = -3 Price Elasticity of Demand Example

Factors Influencing Price Elasticity of Demand Wal-Mart Commercial Income effect Substitution effect Cross- price elasticity

Substitution Effect Meet Pete, college student on a budget: Old Spice Sport Deodorant user At the store he notices that Old Spice is more expensive Pete decides to give another brand a try and save money BananaStock/JupiterImages

Cross-Price Elasticity Meet Kendra, self- supporting college student: Buys a new printer on sale for a great price Learns it requires special ink cartridges that cost more than the printer Getty Images/Digital Vision

3rd C: Costs Variable Costs – Vary with production volume Fixed Costs – Unaffected by production volume Total Cost – Sum of variable and fixed costs Michael Rosenfeld/Stone/Getty Images

Break Even Analysis and Decision Making BE Chart.xlsx

Break Even Analysis Example: Fixed Cost = 100, Variable Cost = 2, Unit Price = 7 Contribution per unit = Unit Price – Variable Cost = 7 – 2 = 5 Break even Point = 100 / 5 = 20 Total revenue = 20 * 7 = 140 BE Chart.xlsx

4th C: Competition Subway Commercial

Wal-Mart vs. Target

5th C: Channel Members Manufacturers, wholesalers and retailers can have different perspectives on pricing strategies Manufactures must protect against gray market transactions

Check Yourself 1. What are the five Cs of pricing? 2. Identify the four types of company objectives. 3. What is the difference between elastic versus inelastic demand? 4. How does one calculate the break- even point in units?

Macro Influences on Pricing The Internet Increased price sensitivity Growth of online auctions Ryan McVay/Getty Images

Economic Factors Local economic conditions Increasing disposable income Cross- shopping Increasing status consciousness Increasing globalization

1. How have the Internet and economic factors affected the way people react to prices? Check Yourself

Return to slide Break-even analysis enables managers to examine the relationships among cost, price, revenue, and profit over different levels of production and sales. Glossary

Return to slide Cross-price elasticity is the percentage change in the quantity of Product A demanded compared with the percentage change in price in Product B. Glossary

Return to slide Fixed costs are those costs that remain essentially at the same level, regardless of any changes in the volume of production. Glossary

Return to slide Income effect is the change in the quantity of a product demanded by consumers due to a change in their income. Glossary

Return to slide The maximizing profits strategy assumes that if a firm can accurately specify a mathematical model that captures all the factors required to explain and predict sales and profits, it should be able to identify the price at which its profits are maximized. Glossary

Return to slide Price is the overall sacrifice a consumer is willing to make to acquire a specific product or service. Glossary

Return to slide The substitution effect refers to consumers’ ability to substitute other products for the focal brand. Glossary

Return to slide Target profit pricing is implemented by firms to meet a targeted profit objective. The firms use price to stimulate a certain level of sales at a certain profit per unit. Glossary

Return to slide Target return pricing occurs when firms employ pricing strategies designed to produce a specific return on their investment, usually expressed as a percentage of sales. Glossary

Return to slide The total cost is the sum of the variable and fixed costs. Glossary

Return to slide Variable costs are the costs that vary with production value. Glossary