1. Kent 31 BAD 67051 Marketing Management
Lecture 3 Pricing

2. Managing Pricing

3. I. Pricing Programs A. What is Price?
Price is the VALUE of a bundle of attributes to the customer.

4. I. Pricing Programs
A. What is Price?
B. Importance of Price?

5. Price as a Marketing Mix Variable
Target
Market
Product:
Engineering Excellence
High Status
High Quality Components
Desired
Attributes
Promotion:
“Classy & Upscale”
Media?
Style?
Distribution:
Exclusive
What Price Fits the Mix:
Premium? Market? Discount?
QUESTION

6. Possible Range of Prices
VARIABLE
COST =
Absolute
Minimum
VALUE to
Customer =
Absolute
Maximum

7. Pricing Strategy Fundamentals
1. Determine the Strategic Pricing Objectives
2. Know the Importance of Pricing to Your Target Audience
e.g., Perceived Value
3. Know the Demand for Your Product (how will price affect it?)
e.g., price elasticity

8. Pricing Strategy Fundamentals
4. Understand Your Costs
5. Determine Your Pricing Strategy
What are competitors’ prices?
What method will you use?
Set the price.
Plan for needed adaptations.

9. Income Oriented Objectives
A. Target Return on Investment (ROI)
Achieve high turnover
Drop product lines that cannot reach required RO
B. Maximize Profits
Control costs and adjust price
Some items in a mix may achieve this goal
C. Increase cash flow
Adjust prices and discounts
Encourage purchases and rapid payment

10. Income Oriented Objectives
D. Keep a Going Concern
Adapt prices to "hold on"
Going concern is easier to sell
E. Survive
Set prices to "scrape by"
Survive economic storm or achieve owner retirement

11. Sales Oriented Objectives
A. Maintain Market Share
Keep sales in roughly the same position relative to those of competitors
Firms want to keep leadership positions
B. Encourage Sales Growth
Adjust price and discounts
Encourage more purchases by existing buyers and attract new buyers

12. Competition-Oriented Objectives
A. Meet Competition:
Set prices and discounts about equal to those of competitors
Avoid price competition; price stabilization
B. Avoid Competition:
Set prices at a level that will discourage competition in the firm's market
Develop a distinctive image or use as a defensive move

13. Competition-Oriented Objectives
C. Undercut Competition:
Set prices lower than the competition's
Project bargain image or increase share

14. Objectives of Social Concern
A. Behave Ethically
Due to special considerations, set prices at levels lower than they could have been
Avoid government regulations; long-term view
B. Maintain Employment
Set prices at levels that will maintain production and employment of workers
Support community commitment; increase attraction for a buyer

15. II. Details of Two Approaches to Pricing

16. A. Cost Driven Pricing
1. Mark-up or Cost-plus

17. 1. Mark-up or Cost-plus Total Cost = Fixed Cost + Variable Cost OR
Total Cost = Fixed Cost + (Estimated Quantity
x Unit Variable Cost)
Unit Cost = Variable Cost + Fixed Cost/Expected
Unit Sales

18. 1. Mark-up or Cost-plus TO SET PRICE: 1) Estimate Total Cost Per Unit
2) Apply the “Formula”
e.g., TOTAL COST + 50%
Problem
IGNORES price sensitivity of demand
Advantage
SIMPLE

19. A. Cost Driven Pricing 2. Target Return on Investment or
1. Mark-up or Cost-plus
2. Target Return on Investment or
Target Pricing

20. Review Break Even Break Even Point FC (in Units) = (SP-VC) $5,000,000

21. Review Break Even Break Even Point FC (in Dollars) = 1-(VC/SP)
$5,000,000
1-($6.25/$15) = $8,571,429

22. “The Plan”
We plan to sell 800,000 units at a total cost of $12.50 each. So, our total costs are 800,000 x $12.50 or $10,000,000.
We want a 20% return on our investment.
Profit is ?
Total Revenue needs to be ?
What do we need to charge per unit?

23. 2. Target Return on Investment or Target Pricing
Total Revenue
Target
Return
a. Estimated Unit Cost = $12.50
b. Estimated Sales Volume = 800,000 units
c. TOTAL COST = $10,000,000
d. Target ROI = 20%
.20 x $10,000,000 = $2,000,000 Needed Profit $
Costs
&
Revenue
Break even
Total Cost
Fixed Costs
Expected Sales
571
800
Sales Volume in Units (000’s)

24. 2. Target Return on Investment or Target Pricing
d. Target ROI = 20%
.20 x $10,000,000 = $2,000,000 Needed Profit
e. Needed (Target) Revenue =
Total Cost + Profit
= $10,000,000 + $2,000,000 = $12,000,000
f. Unit Price
= REVENUE / VOLUME
= $12,000,000 / 800,000
=$15.00 / Unit Price

25. 2. Target Return on Investment or Target Pricing
g. Problems
--Must be able to forecast the demand
--Will the customer pay the price?

26. B. Market or Demand Driven Pricing
1. Perceived Value Pricing

27. 1. Perceived Value Pricing
Scripto
--Weak with teens and young adults
--Found 42% of Eraser Mate bought by year olds
--Established “Value” in Focus Group Research
--Verified in Placement Tests
--Market Success

28. B. Market or Demand Driven Pricing
1. Perceived Value Pricing
2. Demand and Elasticity
--Kinked Demand Curves

29. III. Pricing By Market Leaders

30. A. Price Skimming
involves setting the highest initial price that customers really desiring the product are willing to pay.
used when introducing a new or innovative product; so it is seen in the early stage of the PLC

31. Price / Cost Cost Curve Time/Experience
In Price Skimming, we set the price HIGH relative to our costs.
Price / Cost
We create significant PROFITS as we drop our price in steps over time
As we discussed before, costs go down over time, with longer production runs and more experience
Cost Curve
Time/Experience

32. Price Skimming issues
Used to rapidly recover investments in developing a new product
Works because:
consumers WANT the product,
there are no competitors (yet)
We have a protection on the product (copyright; patents; unique process)
As a result, there are no (easy) substitutes And SO we have an INELASTIC demand curve.

33. 7. Advantages of Price Skimming
Allows us to recover development costs quickly
IF the price is perceived as “too high” by the market, we can easily lower it (RAISING a price is much harder to do)
Apple QUICKLY dropped the price of its iPhones, as initial sales were less than expected (from $599 to $399).

34. 8. Disadvantage of Price Skimming
The major disadvantage is that the large profit margins will ATTRACT competition

35. B. Umbrella Pricing
1. Umbrella Pricing Defined

36. B. Umbrella Pricing Skim Price / Cost Umbrella Cost Curve
Time/Experience

37. B. Umbrella Pricing 1. Umbrella Pricing Defined
2. Relationship to Product Life Cycle (PLC)
3. Advantage
4. Disadvantage

38. C. Slide Down the Demand Curve
Involves starting with a Price Skimming approach and then REDUCING price as our costs decline
This is done to appeal to a wider market once the “premium price” buyers are satisfied or
To react to an influx of competitors

39. Price / Cost Skim Time/Experience
“Slide down the demand curve” Pricing
Begin with a high price relative to our costs
Price / Cost
And then we reduce our price as the premium market is satisfied and as competition enters
Skim
Which produces a significant profit initially
Price
Cost Curve
Time/Experience

40. Advantages of “slide down the demand curve”
Allows us to recover development costs early in the PLC
Helps to discourage competition as we drop price (note that OUR costs should be lower than those of the “late entrant” competitors).
(assumes a reasonably LONG PLC)

41. Disadvantages of “slide down the demand curve”
It is very hard to know just when to begin dropping prices
Drop too soon, and we give up profits,
Drop too late and we let competition in

42. D. Penetration Pricing
1. Penetration Pricing :
involves setting a low initial price on a new product
It is used to appeal immediately to the mass market
And so to capture a large share of the market quickly

43. D. Penetration Pricing
This is used when there are few barriers to competition entering the market,
When we expect the PLC to be long
When we expect demand to be ELASTIC (so there is a market response to our lower price).

44. D. Penetration Pricing Price / Cost Small Margin Price Cost Curve
Time/Experience

45. Advantages of Penetration Pricing
The small margin is likely to discourage competition
Because we get a large share of the market quickly:
i. our volume is larger and our production costs (per unit) drop more quickly
ii. And with high volume we still generate good profit

46. Disadvantages of Penetration Pricing
A risky strategy
We must be able to do a good job of forecasting the demand, because we will need to gear up FAST for mass production and distribution/marketing.
IF demand does not develop, our production costs stay high and we do not make a profit!

47. E. Prestige Pricing Prestige Pricing involves setting a high price
to attract quality- or status-conscious consumers
This should appeal to high-end consumers and limit it appeal to “others” (which ENHANCES the product’s image)

48. Prestige Pricing Price / Cost Cost Curve Time/Experience
We set our price high and keep it high
Cost Curve
Time/Experience

49. Advantages and Disadvantages of Prestige Pricing
Because of the high price, we are unlikely to sell in large volume, however,
This is not a problem as significant profit can be made with the large markup on each item sold

50. IV. Follower Pricing A. Meet Competition (Parity Pricing)
B. Build Share (Penetration Pricing)

51. V. Pre-emptive or Extinction Pricing
1. Defined
2. Not Recommended (Illegal)

52. About the Remote Day 1. READ:
Chapter 8 Integrated Marketing Communications
Chapter 9 Personal Selling, Relationship Building, and Sales Management
2. View the lecture from Vista 8 or CD (CD provided in Week 3 ) -- RESPOND to lecture questions using Vista 8.
3. DO: MINI-CASE 3—via Vista 8 discussion board.
4. Turn in 4th simulation decision – via to by the end of class time.

53. GOT MILK?