Value is the ratio of the perceived benefits to price.
Value = (Perceived benefits/price)
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Value pricing
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the practice of simultaneously increasing product and service benefits while maintaining or decreasing price.
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price influences
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consumers' perception of overall quality and ultimately its value to them.
- "The higher the price, the higher the quality"
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Reference value
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involves comparing the costs and benefits of substitute items
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Buy One, Get One: BOGO
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Ex: can save 60 percent off a second item if you purchase one at the full price
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Value Pricing
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To increase value, marketers should decrease price and increase benefits
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Does price signal quality?
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For some products, price influences consumers' perception of overall quality and ultimately its value to them.
"The higher the price, the higher the quality."
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The 5 C'S of Pricing
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competition, costs, company objectives, customers, channel members
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Competitor Orientation
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- Competitive parity
- Status quo pricing
- Value is not part of this pricing strategy
When firms take a competitor orientation, they strategize according to the premise that they should measure themselves primarily against their competition.
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Movement Along a Demand Curve
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With a movement along a demand curve, as the price is lowered, the quantity demanded increases assuming that other demand factors such as consumer tastes, price and availability of substitutes, and consumer income remain unchanged.
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Shift of a demand curve
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The shift in the demand curve shows that the quantity demanded increases without reducing the price. Economists emphasize three other key factors that influence demand for a product: consumer tastes, price and availability of substitutes, and consumer income.
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Price Elasticity of Demand
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is the percentage change in quantity demanded (QD) relative to a percentage change in price (P) and can be expressed as follows:
E= (%change in Qd)/(%change in P)
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Elastic Demand
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.% change in QD > % change in P or E > 1
Total revenue increases when price decreases, but decreases when price increases.
- a small percentage decrease in price produces a larger percentage increase in quantity demanded
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Demand curves
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-Not all are downward sloping
-Prestigious products or services have upward sloping curves
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Prestige Pricing
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The idea behind it is that if a person is concerned with the cost, it means the person is not rich enough to own an item. So you price high to signal exclusivity and prestige.
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Break Even
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is achieved when profit = 0, which is equivalent to
Total revenue (TR) = Total cost (TC)
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Total Variable Cost
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variable cost per unit x quantity
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Total Cost
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fixed cost + total variable cost
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Total Revenue
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Price x Quantity
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Break-even point (units)
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fixed costs / contribution margin per unit
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Break Even Price (quantity)
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Fixed cost/ (unit price - unit variable cost)
= FC/ P - UVC
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Profit
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total revenue - total cost
= (Unit price x Quantity sold) - (Total variable cost fixed costs)
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Break Even Analysis: Example 1
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#16/#17 slides
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4th C: Competition- Monopoly
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One firm controls the market
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4th C: Competition- Oligopoly
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A handful of firms control the market
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4th C: Competition- Monopolistic Competition
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Many firms selling differentiated products at different prices
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4th C: Competition- Pure Competition
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Many firms selling commodities for the same prices
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Demand Factors (Determinants of Demand)
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Key factors that influence demand for a product and include: consumer tastes, price and availability of similar products, consumer income.
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Inelastic Demand
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% change in QD < % change in P or E < 1. Total revenue increases when price increases, but decreases when price decreases
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Calculate a firm's total profit using the following information: the unit price (P) for a product is $40; the quantity sold (Q) is 2,000; the fixed cost (FC) is $50,000; and the variable cost (VC) is $20,000.
a. $10,000
b. $50,000
c. $110,000
d. $150,000
e. cannot be determined with the information provided
- Cost-base pricing methods start with cost
- All costs calculated on a per unit basis
- Assumes costs don't vary for different levels of production
Ex: Markup Pricing (next slide)
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Example 1: Markup
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If the cost/wholesale price for an item is $500 and a retailer wants a 30% markup:
$500 * (100% + 30%) = $650.00 COST * (100%+Markup) = SELLING PRICE
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Margin
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Margin is the percentage of the final selling price/retail price (including margin)
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Example 2: Margin
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If the cost/wholesale price for an item is $500 and a retailer wants a
30% margin:
$500 / (100%-30%) = $714.29 COST / (100%-Margin) = SELLING PRICE
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Variable costs
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very with production volume
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Fixed costs
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unaffected by production volume
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Total Cost
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Sum of variable and fixed costs
TC= FC+VC
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Unit variable cost
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variable cost expressed on a per unit basis for a product
UVC= VC/Q
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Marginal Cost
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the cost of producing one additional unit of output
MC = (Change in TC/ 1 unit increase is quantity)
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Pricing Strategies
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Everyday low pricing (EDLP)
High-low pricing
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Everyday low pricing
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When a retail store rarely sells deeply discounted or sale products, it is known as "everyday low pricing. Ex: Walmart, Amazon, P&G, Trade Joe's
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High Low pricing
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- A high/low pricing strategy relies on the promotion of sales, during which prices are temporarily reduced to encourage purchases. Ex: Macy's. JC Penny
- Sellers using an high/low pricing strategy often communicate their strategy through the creative use of a reference price
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Everyday Low Pricing vs.. High/Low Pricing
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- Create value in different ways
- EDLP saves search costs of finding lowest overall prices
- High/low provides the thrill of the chase for the lowest price
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Loss Leader Pricing
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Enticing consumers into the store with popular aggressively priced items and hoping they will pick up other items while shopping
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Yield Management Pricing
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the charging of different prices to maximize revenue for a set amount of capacity at any given time.
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Price Lining
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- a firm that sells a line of products price them at a number of different specific pricing points.
- Marketers establish a price floor and price ceiling and set prices in between
- Allows for easy comparison
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Predatory Pricing
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Prices set low with the intent to drive competitor out of business
- Illegal
- Difficult to prove
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Allowances
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-Lowers the final cost in return for specific behavior
-Advertising allowance
-Slotting allowance
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Trade-in Allowances
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a price reduction given when a used product is accepted as part of the payment on a new product
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promotional allowances
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given to retailers who undertakes certain advertising or selling activities to promote a product
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Quantity Discounts
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to encourage customers to buy larger quantities
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Cumulative quantity discount
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uses the amount purchased over a specified time period and usually involves several transactions. This type of discount particularly encourages resellers to maintain their current supplier because the cost to switch must include the loss of the discount
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Noncumulative quantity discount
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is based only on the amount purchased in a single order. It therefore provides the buyer with an incentive to purchase more merchandise immediately.
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Marketing Channel Definition
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A marketing channel consists of individuals and firms involved in the process of making a product or service available for use or consumption by consumers or industrial users. Make possible the flow of products and services from a producer, through intermediaries, to a buyer.
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Logistics
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Those activities that focus on getting the right amount of the right products to the right place at the right time at the lowest possible cost are referred to as logistic. A marketing channel relies on logistics to make products available to consumers and industrial users.
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Time Utility
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having a product or service when consumers want it
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Place utility
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having a product available where consumers want it
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Form utility
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enhances a product to make it more appealing to buyers
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Possession utility
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entails efforts by intermediaries to help buyers take possession of a product or service
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Indirect channel
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"There are no intermediaries between the buyer and seller in a direct marketing channel.
- one or more intermediaries work with manufacturers to provide goods and services to customers.
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Managing the Marketing Channel and Supply Chain through Vertical Marketing Systems
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The more independent the members of the supply chain, the more likely they are to have conflict goals and thus to experience supply chain conflict.
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Strategic channel alliance
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one firm's marketing channel is used to sell another firm's products
- Popular in global marketing
- Ex., General Mills and Nestle
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Corporate vertical marketing system
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- Reduce distribution costs
- Gain greater control
- Increase their capital investment and fixed costs
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Forward Integration
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Occurs when a producer owns an intermediary at the next level down in the channel.
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Backward Integration
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Occurs when a retailer owns a manufacturing operation.
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The AIDA Model
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Awareness, Interest, Desire, Action
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AIDA Model Explanation
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Marketing communications move consumers stepwise through a series of mental stages, for which there are several models. The most common is the AIDA model, which suggests that Awareness leads to Interest, which leads to Desire, which leads to Action.
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Product Lifecycle- Introduction
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to inform
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Product Lifecycle- Growth
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to persuade
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Product Lifecycle- Maturity
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to remind
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Product Lifecycle- Decline
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to phase out
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Push the product through the channel
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offer retailer incentives:
e.g., Objectives: Gain retailer support to carry, promote, and reduce price of item.
- Most visible element of IMC
- Extremely effective at creating awareness and generating interest
- Paid, non-personal
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Advertising TV
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- Is valuable because it communicates with sight, sound, and motion.
- High reach: high number of different people or households exposed to an advertisement.
- Wasted coverage due to wide reach: having people outside the market for the product see the advertisement.
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Personal Selling
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- Some products require the help of a salesperson
- More expensive than other forms of promotion
- Salespeople can add significant value, which makes the expense worth it
- Highly complex and risky products like a new house increase the need for an emphasis on personal selling.
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Three Forms of Product Advertisement (advertising objectives)
- What a product is, what it can do, where it can be found (Geico)
- Purpose: inform the target market ( VOLVO AI)
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Competitive (or persuasive)
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* persuasive messages seek to persuade the receiver to take some action.
- Promotes a specific brand's features and benefits
- Purpose: persuade the target market
- Comparative advertising: shows one brand's strengths relative to those of competitors (T-MOBILE)
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Reminder
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- Reinforce previous knowledge of a product (Geico Caveman)
- Good for well-recognized products (mature phase)
- Reinforcement advertising: assure current users they made the right choice
