1. Marketing Concepts Price
MKTG
Spring 2014
Mrs. Tamara L. Cohen
Marketing Concepts Price
Classes
#18-19

2. KEY TERMS price barter value total revenue average revenue
marginal revenue
total cost
fixed cost
variable cost
marginal cost
price fixing
price discrimination
predatory pricing
price = money or other negotiable instrument exchanged for the ownership or use of a product or service
barter = exchange of products/services for products/services; money is not used in the exchange
value = consumer’s perceived benefit from product/service, e.g. quality, durability
total revenue = total money received from sale of product
average revenue = average amount of money received from selling one unit of product = price
marginal revenue = change in total revenue from producing & marketing one additional unit of that product
total cost = total expense incurred by a company to produce & market a product
fixed cost = overhead = company’s expenses that are stable, and do not change with quantities of product produced & sold
variable cost = company’s expenses that change directly with the quantity of product produced & sold
marginal cost = change in total cost from producing one more unit of product
price fixing = conspiracy among companies to set prices for a product; illegal in the US
price discrimination = charging different prices to different buyers for the same products
predatory pricing = charging a very low price in order to drive competitors out of business

3. KEY CONCEPTS demand curve price elasticity of demand
break-even analysis
discounts
allowances
FOB pricing
uniform delivered pricing
demand curve = curve on a graph showing number of units consumers will buy in a given time period, at different prices that might be charged
price elasticity of demand = a measure of the sensitivity of demand to changes in price
break-even analysis = analysis of relationship between total cost and total revenue to determine profitability at various levels of production
discount = straight reduction in price on purchases during stated period of time
allowance = promotional money paid by manufacturers to retailers in return for featuring manufacturer’s products
FOB pricing = geographical pricing strategy where goods are placed Free On Board (FOB) a carrier; customer pays freight from factory to destination
uniform delivered pricing = geographical pricing strategy where company charges same price plus freight to all customers, regardless of location

4. PRICING STRATEGIES Skimming pricing Penetration pricing
Prestige pricing
Price lining
Odd-even pricing
Target pricing
Bundle pricing
Yield-management pricing
Standard mark-up pricing
Cost-plus pricing
Experience curve pricing
Target profit pricing
Target return-on-sales pricing
Target return-on-investment pricing
Customary pricing
Above-, at-, or below-market pricing
Loss-leader pricing
One-price policy
Flexible-price policy
Skimming pricing = setting a very high initial price for a new or innovative product
Penetration pricing = setting a low initial price on a new product to appeal quickly to the mass market
Prestige pricing = setting a high price to attract quality- or status-conscious consumers
Price lining = setting prices for a line of products at a number of different price points
Odd-even pricing = pricing a few cents or dollars below an even number, e.g. $11.99 rather than $12.00
Target pricing = working backwards from price consumers are thought to be willing to pay
Bundle pricing = marketing 2 or more products or services in a single package price
Yield-management pricing = pricing in differentiated categories to maximize revenue for finite capacity; commonly used by airlines
Standard mark-up pricing = adding a fixed percentage to the cost of all items in a specific product category
Cost-plus pricing = markup pricing = adding a specific amount to the cost of providing a product or service; common in some professions and in construction
Experience curve pricing = pricing based on experience that unit cost of particular product/service declines 10 – 30 % each time a company’s experience at producing and selling them doubles; used in electronics industry
Target profit pricing = pricing to achieve a target of a specific $ volume of profit
Target return-on-sales pricing = pricing to return a profit of a specified percentage of sales; used by some supermarket chains
Target return-on-investment pricing = pricing to meet a target of a particular return on investment; commonly used by public utilities
Target return pricing is also known as break-even pricing.
Customary pricing = pricing levels set by tradition, a standardized channel of distribution, or some other competitive factor
Above-, at-, or below-market pricing = pricing strategy in relation to competitors or market leaders
Loss-leader pricing = intentionally pricing below customary price, in order to entice customers into sales venue, where they will be tempted to buy other goods, in addition to the loss-leader
One-price policy = fixed pricing = setting one price for all buyers of a product/service
Flexible-price policy = dynamic pricing = setting different prices for products/services depending on individual buyers and purchase situations

5. What is PRICE? = amount of money charged for a product or service
= sum of all values the consumer exchanges for the benefits of owning or using a product or service
≠ cost
PRICE is
the only element in the marketing mix that produces revenue; all other elements represent costs
one of the most flexible elements of marketing mix: price can be changed quickly
the biggest problem for many marketing executives
historically the major factor affecting buyer choice (but this has waned in recent years)
price = money or other negotiable instrument exchanged for the ownership or use of a product or service
(Assigned reading p.318)

6. “PRICE” has many names Tuition Rent Interest Premium Fee Dues Fare
$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
Tuition Rent Interest Premium Fee $1
Dues
Fare
Salary
Wage
Commission
barter = exchange of products/services for products/services; money is not used in the exchange

7. The PRICE you see is not the PRICE you pay
PRICE = LIST PRICE – DISCOUNTS + FEES What about TAXES?
LIST PRICE = advertised/published price
DISCOUNTS include incentives and allowances, e.g. rebate, cash discount, trade-in, scholarship, financial aid, quantity discount, seasonal discount
FEES include charges required to process sale, e.g. financing, shipment
TAXES are not usually included in quoted prices, unless explicitly stated.
$ ?

8. PRICE as an indicator of VALUE
value = consumer’s perceived benefit from product/service
value = consumer’s perceived benefit from product/service, e.g. quality, durability
“Give people something of value, and they’ll happily pay for it.” Ronald Shaich, CEO of Panera Bread Company
“Give people something of value, and they’ll happily pay for it.”

9. concentrated soap powder
Value Pricing
McDonald’s began its Supersize program in the 1990s. Other fast foods followed. All were discontinued by 2006.
concentrated soap powder
Value pricing = increasing product and/or service benefits + maintaining or decreasing price
Supersize = very large portion of fast food

10. Profit equation PROFIT = TOTAL REVENUE – TOTAL COST
unit price fixed cost x
quantity sold variable cost
(Assigned reading p.322)

11. 6 steps in setting price
Kerin, Hartley, Rudelius

12. 6 steps in setting price
Kerin, Hartley, Rudelius

13. 6 steps in setting price
Kerin, Hartley, Rudelius

14. 6 steps in setting price
Kerin, Hartley, Rudelius

15. 6 steps in setting price
Kerin, Hartley, Rudelius

16. 6 steps in setting price
Kerin, Hartley, Rudelius

17. Step 1: Identify pricing objectives & constraints
Profit - long-run and/or short-run or not at all
Sales
Market share
Unit volume
Survival
Social responsibility
This list of pricing objectives includes criteria commonly used by organizations.

18. Step 1: Identify pricing objectives & constraints
Market size / demand
Newness / life cycle
Strength / status versus competition
Cover costs of production & marketing
Lag time
Type of competitive market
This list of pricing constraints includes criteria commonly used by organizations.

19. Pricing, product, & advertising strategies available to firms in 4 types of competitive markets
Kerin, Hartley, Rudelius
(Assigned reading p.327 Marketing Matters)
Walmart’s EDLP strategy affects all its competitors
Walmart and Target form an oligopoly with regard to the broad range of products they both sell. Competitors are keenly aware of each other’s prices, and want to avoid price wars in which they lose big time.

20. Step 2: Estimate demand & revenue
The demand curve shows us that for most products and services:
When prices are high, few consumers are willing to buy.
When prices drop, more consumers are willing to buy.
When prices are low, many consumers are willing to buy.
demand curve = curve on a graph showing number of units consumers will buy in a given time period, at different prices that might be charged
What affects demand? These are demand factors: (The first 2 factors are what consumers WANT to buy; the 3rd is what they CAN buy.)
Consumer tastes
Price & availability of similar (competitive) products
Consumer income
Kerin, Hartley, Rudelius: Demand curves for Newsweek showing the effect on annual sales (quantity demanded per year) by a change in price caused by a movement along the demand curve

21. Step 2: Estimate demand & revenue
Total Revenue (TR) = total money received from sale of product
TR = P x Q where P = unit price of product
and Q = quantity of product sold
Average Revenue (AR) = average amount of money received for selling one unit of a product = PRICE of that unit
AR = TR ÷ Q = P
Marginal Revenue (MR) = change in total revenue from producing & marketing one additional unit of product
MR = change in TR ÷ 1 unit increase in Q
= ΔTR ÷ ΔQ = slope of TR curve
Fundamental revenue concepts

22. Price Elasticity of Demand
measures sensitivity of consumer demand to changes in product’s price
Price elasticity of demand = E =
% change in quantity demanded
% change in price
INELASTIC demand: A slight change in price has very little effect on demand.
ELASTIC demand: A slight change in price has a big effect on demand.
price elasticity of demand = a measure of the sensitivity of demand to changes in price
Unitary demand exists when % change in price causes exactly the same % change in quantity demanded.
Graphs:

23. INELASTIC ELASTIC Elasticity examples Necessities Luxuries
e.g. toothpaste;
open-heart surgery
Gasoline price strategy
e.g. Gas prices tend to rise in summer, but this doesn’t stop many people from driving extensively
Luxuries
e.g. yacht;
skiing vacation
Public policy implications
e.g. Increase price of cigarettes in NY via higher excise tax causes less smoking by teens, who often have limited spending money, i.e. price elastic re cigarettes
Fundamental revenue concepts

24. Step 3: Determine cost, volume & profit relationships
Total Cost (TC) = total expense to produce & market a product
Fixed Cost (FC) = company’s expenses that are stable, and do not change with quantities of product produced & sold
Variable Cost (VC) = company’s expenses that change directly with the quantity of product produced & sold
TC = FC + VC
Marginal Cost (MC) = change in total cost from producing one more unit of product
MC = change in TC ÷ 1 unit increase in Q
= ΔTC ÷ ΔQ = slope of TC curve
total cost = total expense incurred by a company to produce & market a product
fixed cost = company’s expenses that are stable, and do not change with quantities of product produced & sold; e.g. rent of building, executive salaries, insurance, costs of business permits & licenses
variable cost = company’s expenses that change directly with the quantity of product produced & sold; e.g. direct labor, direct materials, sales commissions based on quantities sold
marginal cost = change in total cost from producing one more unit of product
Everyone wants to reduce costs & increase revenues.
If Total Costs > Total Revenues for too long, the company can no longer remain in business.

25. Break-Even Analysis
= analysis of relationship between total cost and total revenue to determine profitability at various levels of production
Break-Even Point = quantity where TC = TR (i.e. Total Cost = Total Revenue)
Profit will come from units sold AFTER Break-Even Point.
Profit is maximized where MC = MR (i.e. Marginal Cost = Marginal Revenue)
Break-even analysis is used in marketing to study the effects of price changes, fixed costs and variable costs on profits. “What if” questions are well handled by spreadsheets like Excel. e.g. Automation - increases fixed costs, which raises break-even point; after this point, potential profit increases much more rapidly than without automation
Profit is a maximum at the quantity at which marginal revenue and marginal cost are equal

26. Break-even analysis chart for a picture frame store shows the break-even point at 400 pictures
Kerin, Hartley, Rudelius

27. 4 approaches for selecting approximate price level
4.1
4.2
4.3
4.4
Kerin, Hartley, Rudelius

28. Step 4: Select an approximate price level
Demand-oriented approaches to pricing:
Skimming
Penetration
Prestige
Price lining
Odd-even
Target
Bundle
Yield management
There are 4 basic approaches to figuring out an approximate starting price, and each of these includes several strategies:
Demand-orientation - focus on expected customer preferences & tastes
Cost-orientation - focus on production & marketing costs
Profit-orientation - balance revenues & costs
Competition-orientation - focus on what “the market” (i.e. competitors) is (are) doing
Skimming pricing = setting a very high initial price for a new or innovative product
Penetration pricing = setting a low initial price on a new product to appeal quickly to the mass market
Prestige pricing = setting a high price to attract quality- or status-conscious consumers
Price lining = setting prices for a line of products at a number of different price points
Odd-even pricing = pricing a few cents or dollars below an even number, e.g. $11.99 rather than $12.00
Target pricing = working backwards from price consumers are thought to be willing to pay
Bundle pricing = marketing 2 or more products or services in a single package price
Yield-management pricing = pricing in differentiated categories to maximize revenue for finite capacity; commonly used by airlines

29. 4.1 DEMAND-oriented pricing approach
Skimming
Penetration
Prestige pricing
Price lining
Skimming pricing = setting a very high initial price for a new or innovative product
Effective strategy when:
enough customers will pay initial high price so as to make sales profitable
high initial price acts as barrier to entry (to deter competitors)
elastic demand
customers correlate high price with high quality
Sony
Sony introduced first HDTV in Japan: $43,000
Price reduced over next few years to attract new buyers
$6,000 for 40-inch HDTV in Japan
$2,000 for 40-inch HDTV in Japan
$500 for 40-inch HDTV in USA
Apple iPhone
Initial price (2010) was $599 per phone - purchased by customers who really wanted the cool new gadget and could afford the high price.
6 months later, prices dropped to $399 (8GB model), $499 (16GB model)
1 year later (2011), prices dropped to $199 & $299.
2013, you could buy an 8GB model for $49.
In this way, Apple skimmed maximum revenue from its market segments.
Penetration pricing = setting a low initial price on a new product to appeal quickly to the mass market
many segments of market are price sensitive
low initial price discourages competitors
unit production & marketing costs fall dramatically as production volume increases; high sales volume reduces unit costs, allowing further price reductions
Dell used penetration pricing to enter personal computer market, selling high quality computer products through lower-cost direct distribution channels. IBM, Apple and others selling through retail stores could not match Dell’s prices.
IKEA used penetration pricing since it first opened in China in Shoppers came for freebies (a/c, toilets, even decorating ideas). IKEA in China stocks many more Chinese-made products at dramatically discounted prices (up to 70%), compared to IKEAs elsewhere in the world. This has worked remarkably well. IKEA commands 43% of China’s growing home-wares market; sales grew 23% last year (2012). The Beijing store attracts nearly 6 million visitors a year.
The Chinese name for IKEA is Yi Jia Jia Ju (宜家家具); most people just call it yíjiā” (宜家), pronounced ee-gee-ah; roughly translates as ‘affordable home’.
Prestige pricing = setting a high price to attract quality- or status-conscious consumers (also called psychological pricing)
e.g. Rolls Royce cars, TAG Heuer watches, Rolex watches, Breitling “high end watch manufacturer of the highest quality and precision” (‘Blackbird’ model, above, $5,000), Tiffany luxury jewelry, silver & crystal, Chanel No.5
Price lining = setting prices for a line of products at a number of different price points
Companies with a range of products may find it simpler to adhere to selected price ‘lines’, rather than pricing every product individually.
Price lines = price points
Price steps are set between the products in a line, based on cost differences between those products, customer evaluations of features, and competitors’ prices.
A limited number of price points (like 3 or 4) is best; too many (8-10) confuses customers
Snapper makes a range of lawnmowers, ranging from simple push-mowers (priced at $259.95, $299.95, $399.95) to fancy, ride-on lawn tractors (priced at $1,000 and up). Each lawnmower in the line offers more distinguishable features.
Car washes typically offer a variety of ‘packages’, e.g. ‘basic’ wash costs $5, ‘premium’ costs $6, ‘superior’ costs $7, etc. Each increment adds one or two extra services.
USPS has aggressively adopted price lining. All domestic letters weighing up to 1 oz cost 46 cents to mail anywhere in the contiguous USA. Flat rate package services charge a single price for specified ranges of weights and sizes.

30. 4.1 DEMAND-oriented pricing approach (cont.)
Odd-even pricing
Target pricing
Bundle pricing
Yield-management pricing
Odd-even pricing = pricing a few cents or dollars below an even number, e.g. $11.99 rather than $12.00
Consumers see the initial number and perceive the price as being lower. They round DOWN. This becomes significant when $299 is seen as $200 rather than $300. The perception of the consumer is that anything odd-priced is a bargain price. Gas stations do this all over the US.
Target pricing = working backwards from price consumers are thought to be willing to pay
Manufacturers who are very familiar with their markets will identify a price point they believe consumers will be willing to pay. They then work backwards through standard retail and wholesale margins, to work out what features and quality they can afford to build into this particular product. This is typical in many categories of products sold through mass retailers.
Bundle pricing = marketing 2 or more products or services in a single package price
Several products/services are offered for sale as one combined product. This is very common in the software business (e.g. bundle a word processor, a spreadsheet, and a database into one office ‘suite’) in the cable TV industry (e.g. basic cable service comes with several channels at one price, with the option of adding other channels that are bundled together), in the fast food industry, where multiple items are combined into a ‘meal’, and in the travel business, where flights are bundled with accommodations, car rentals, and tours.
Bundling is effective when:
there are economies of scale in production and/or distribution
consumers appreciate a simplified purchase decision
consumers perceive the superior value of the bundle as a sort of synergy
Yield-management pricing = pricing in differentiated categories to maximize revenue for finite capacity; initiated and still commonly used by airlines, also by hotels. This method blends marketing, operations and financial principles.
3 essential conditions for yield management to be applicable:
that there is a fixed amount of resources available for sale
that the resources sold are perishable
that different customers are willing to pay different prices for using the same amount of resources

31. 4.2 COST-oriented pricing approach
Standard mark-up pricing
Cost-plus pricing
Experience curve pricing
Standard mark-up pricing = adding a fixed percentage to the cost of all items in a specific product category
Supermarkets and some retail stores have so many products (SKUs), that individual pricing is impractical. They depend on their buyers to obtain a good price up front, then they add on a fixed percentage to the cost of all items in a specific product class. This percentage must cover all fixed costs, and sometimes some variable costs too.
Rules of thumb: high volume items usually have low % markups; low volume items usually have high % markups
Basic items in supermarkets: 10 – 23%; discretionary items 27 – 47%
Movie theaters: 87% (soft drinks), 65% (candy), 90% (popcorn)
Costco policy ≤ 14%; most around 10%
Department stores: around 50%
Cost-plus pricing = adding a specific amount to the cost of providing a product or service; common in some professions and in construction, also in large contract work where it’s difficult to predict all costs ahead of time
Experience curve pricing = pricing based on experience that unit cost of particular product/service declines 10 – 30 % each time a company’s experience at producing and selling them doubles; used in electronics industry

32. 4.3 PROFIT-oriented pricing approach
Target profit pricing
Target return-on-sales pricing
Target return-on-investment pricing
Target profit pricing = pricing to achieve a target of a specific $ volume of profit
Target return-on-sales pricing = pricing to return a profit of a specified percentage of sales; used by some supermarket chains
Target return-on-investment pricing = pricing to meet a target of a particular return on investment; commonly used by public utilities

33. 4.4 COMPETITION-oriented pricing approach
Customary pricing
Above-, at-, or below-market pricing
Loss-leader pricing
Customary pricing = pricing levels set by tradition, a standardized channel of distribution, or some other competitive factor
e.g. Swatch watches are customarily priced at $40; specific price point traditional for some candy bars, especially for vending machine trade. Change content of candy bar rather than change price point.
Above-, at-, or below-market pricing = pricing strategy in relation to competitors or market leaders. Neiman Marcus likes its image of above-market pricing, arguing that the customer receives above-market service and products to match their premium prices. Private brands typically are priced 8-10% below national brands like Skippy peanut butter.
Loss-leader pricing = intentionally pricing below customary price, in order to entice customers into sales venue, where they will be tempted to buy other goods, in addition to the loss-leader
Prior to 2012 holiday season, Overstock Auction advertised iPhone 5s at dramatically low prices. Walmart and some electronics stores advertised the iPhone 5 at competitively low prices too at that time, but assigned stocks are usually very low for these loss leader prices.
Apple's iPhone 5 as loss leader by Philip Elmer-DeWitt, FORTUNE, December 19, 2012: 8:03 AM ET

34. Step 5: Set the List or Quoted Price
One-price policy = fixed pricing
Flexible-price policy = dynamic pricing
One-price policy = fixed pricing = setting one price for all buyers of a product/service
Flexible-price policy = dynamic pricing = setting different prices for products/services depending on individual buyers and purchase situations. Some sophisticated companies monitor customers’ ‘click streams’.
Dynamic pricing includes different prices charged such as off-peak pricing for utilities and tourism, futures contracts on commodities, seats in some sports stadiums (e.g. San Francisco Giants, Oakland A’s, St Louis Cardinals)

35. Effects on Pricing Company effects Customer effects
product substitutes & complementary products
product line pricing
Customer effects
beware of setting different kinds of middlemen against one another
Competitive effects
price war (successive price cutting by competitors)

36. Step 6: Adjust the List or Quoted Price
Discount = straight reduction in price on purchases during stated period of time
Allowance = promotional money paid by manufacturers to retailers in return for featuring manufacturer’s products
FOB pricing = geographical pricing strategy where goods are placed Free On Board (FOB) a carrier; customer pays freight from factory to destination
Delivered pricing = geographical pricing strategy where company charges same price plus freight to all customers, regardless of location
CIF pricing = geographical pricing strategy where price includes Cost + Insurance + Freight (CIF)
discount = straight reduction in price on purchases during stated period of time
allowance = promotional money paid by manufacturers to retailers in return for featuring manufacturer’s products
FOB pricing = geographical pricing strategy where goods are placed Free On Board (FOB) a carrier; customer pays freight from factory to destination
delivered pricing = geographical pricing strategy where company charges same price plus freight to all customers, regardless of location

37. 3 special adjustments to list or quoted price include discounts, allowances, & geographical adjustments
Kerin, Hartley, Rudelius

38. Several pricing practices are affected by legal & regulatory restrictions, which benefit both consumers & firms
Kerin, Hartley, Rudelius

39. Laws & Regulations in Pricing
price fixing = conspiracy among companies to set prices for a product; illegal in the US (Sherman Act & Consumer Goods Pricing Act)
price discrimination = charging different prices to different buyers for the same products; illegal in the US (Robinson-Patman Act)
predatory pricing = charging a very low price in order to drive competitors out of business; illegal in the US (Sherman Act & Federal Trade Commission Act)

40. 5 most common deceptive pricing practices
Kerin, Hartley, Rudelius

41. Next class March 26 & 31 : Place
Homework Assignment #7
DUE Mar.26: Retailer Comparison
Go into two different retail stores and compare the following features: lighting, flooring, shelf fixtures, signage, help/service, image, ambiance.
Next class March 26 & 31 : Place
Preparation: Read ch.15 pp.378-9; pp.392-3; p ch.16 pp.404-5; pp.423
Homework #7: Retailer Comparison