1. PRODUCTS – PRICING MARKETING 360 Brian Gillespie

2. Price  The assignment of value, or the amount the consumer must exchange to receive the offering  Money  Goods  Services  Favors  Votes  Anything that has value to the other party  Price is a marketing tool and a key element in marketing promotions (the easiest P to change). Most retailers highlight product pricing in their advertising campaigns.

3. Pricing Views  Customers view  what must be given up to obtain the benefits. Customers buy based on value and valued benefits, not price  Sellers view  Price reflects the revenue generated for each product sold and, thus, is an important factor in determining profit

4. Steps in Pricing

5. Develop Pricing Objectives  Sales/market objective  Reach a certain level of sales or market share  Profit objective  Make as much money as possible  Best strategy for fads  Competitive effect objective  Have an impact on competition Cut into their market share Release a competing product before they do  Customer satisfaction objective  Price transparency  Image enhancement objective  Prestige products priced higher

6. Estimate Demand  Demand  Customer’s desire for a product  Demand curves  Graphs that show impact of price on demand  Normal products  As price increases, demand decreases  Prestige products  Curvalinear in design As price increases, demand increases to a maximum point Eventually demand decreases as price increases

7. Demand Curves

8. Shifts in Demand Curves  Price remains constant while demand shifts (up or down)  May be due to  Advertising  Product introduction  Global event  Etc…

9. Estimating Pullman Thai Food Demand # People in Market25,000 Avg. # Thai Dinner/Year5 Total Annual Demand125,000 = (25,000 x 5) Predicted Share of Market4% Estimated Annual Demand5,000 = (125,000 x.04) Estimated Monthly Demand~ 417 = (5,000 / 12) Estimated Weekly Demand~ 104 = (417 / 4)

10. Crystal Pepsi  Imagine it is 1993. You are interested in calculating demand for cans of Crystal Pepsi in Spokane.  Spokane has 250,000 residents.  You expect the average person drinks 1 can of soda a day.  Crystal Pepsi has a 5% share of the market.  What is the total annual demand for soda in Spokane, and what are the annual, monthly and daily demands for cans of Crystal Pepsi?

11. Price Elasticity  The percentage change in unit sales that results from a percentage change in price Price Elasticity = % Change in Price % Change in Quantity Demand Elastic Demand = Price down by 10% Demand up by 30% = 3.0 Inelastic Demand = Price down by 40% Demand up by 10% = 0.25

12. Price Elasticity

13. Cross-Elasticity of Demand  When changes in price for one product affects changes in demand for a different product  Substitute products  Complementary products

14. Determining Costs  Fixed costs  Costs that remain constant independent of number of units produced  Rent, executive salaries, heating, etc…  Average fixed costs = fixed costs / number of units  Variable costs  Costs that vary with the number of units produced  Materials, labor, etc…  Total costs  Sum of fixed and variable costs

15. Variable Costs Example

16. Break Even Analysis  How many units must be produced and sold in order to cover costs?  Break-even point  When total costs equals total revenues Positive break-even point is profit Negative break-even point is loss

17. Computing the Break-Even Point in Units BEP (units) = Contribution Per Unit to Fixed Costs Total Fixed Costs Selling Price Per Unit – Variable Cost Per Unit

18. Computing the Break-Even Point in Units Sell Bookshelf for $100 Costs you $50 to produce (variable cost per unit) So, Contribution to Fixed Costs Per Unit $50 $100 - $50 = $50 BEP (units) = $50 $200,000 = 4000 So, you need to produce 4,000 units to break even

19. Computing the Break-Even Point in Revenue BEP (in $) = Total Fixed Costs Variable Cost Per Unit Price Per Unit 1 -

20. Computing the Break-Even Point in Revenue BEP (in $) = $200,000 $50 $100 1 - BEP (in $) = $200,000 1 -.50 = $400,000 So, you need to Reach $400,000 In revenue to reach Break-even point

21. Break-Even Point

22. Crystal Pepsi Break-Even Example  Fixed cost = $10,000,000  Variable cost = $0.25 per can  Priced at $0.50 per can  What is the break-even point in  Sales  units

23. Evaluate the Pricing Environment  In addition to internal factors such as manufacturing costs and capacity  Marketers must assess external environmental factors (including competitors) when setting pricing  Broad economic trends, consumer trends, social trends, and intensity of competition  When the economy is growing  Inflation occurs and prices rise  When the economy is slow  Prices stagnate or contract to keep sales stable  Consumers may be less likely to buy luxury items

24. Choose Pricing Strategy  Cost-plus pricing  Add a fixed amount to the total costs of producing the product  Demand-based pricing  Set price based on predicted demand  Target costing  Figure out price and quality of product customers want  Figure out the cost to make the product  Determine if production is profitable  Yield management pricing  Charge different customers different prices to manage demand and maximize profits

25. Choose Pricing Strategy  Value pricing  Pricing to provide ultimate value to the customer  New product pricing  Skimming High price for highly desired product  Penetration Very low price to encourage quick sales  Trial Initial low price so consumers can try out product

26. Develop Pricing Tactics  Pricing for individual products  Two part pricing Need to pay twice  Payment pricing Break overall price into smaller payments

27. Develop Pricing Tactics  Pricing for multiple products  Price bundling Put multiple products together in a bundle  Captive pricing Price basic product low Complementary and necessary products at a high profit margin

28. Psychological Issues in Pricing  Internal reference price  Set price or range of prices consumers think are reasonable  Price-quality inferences  Greater price equals greater quality  Odd-even prices  Odd prices sell more  For some products, this conveys low quality  Price lining  Develop a variety of products at different price points

29. Pricing and Placebo  MIT study on “Veladone”  FDA approved drug used in dental surgery  Price conditions  10 cents per pill  $2.50 per pill  Effectiveness  In low price point 61% reported decrease in pain  In high price point 85% reported decrease in pain