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the assignment of value, or the amount the consumer must exchange to receive the offerings or product.
the value of something we give up to obtain something else
How Do Marketers Set Price
- Step 1: Develop Pricing Objectives
- Step 2: Estimate demand
- Step 3: Determine Costs
- Step 4: Evaluate the Pricing Environment
- Step 5: Develop a Pricing Strategy
- Step 6: Develop Pricing Tactics
- Step 7: Pricing and E-commerce
- Step 8: Psychological Issues and Legal Considerations
A Consumer’s View of Costs
- Operating costs: those involved in using the product.
- Switching costs: involved in moving from one brand to another.
- Opportunity costs: the benefits and value you give up by engaging in one activity or buying one product and not another.
- Personal Involvement: level of time, energy, expertise needed
- Psychological Costs: stress, hassle, cognitive difficulty, cognitive dissonance, etc.
Price should be seen as a communicative device between buyer and seller which continually reflects constantly changing market variables such as brand preference, the availability of supply, substitutable alternatives, and a host of other factors.
Sales/Market Share Objectives
- •Involves setting prices at a level that will maximize sales or increase market share.
- E.g. Mobile phones
- A target level of profit growth or a desired net profit margin
- The are three main profit objectives:
- –Maximizing profits (especially if the product is a fad – has a short product life-cycle)
- –Achieving a target level of profit growth
- –Achieving a desired net profit margin (or a target return on investment)
Competitive Effect Objectives
- Intended to have a certain effect on the marketing efforts of the competition.
- –Reduce Competitiveness of competitors
- E.g. Walmart
- –Price Stability
- E.g. Fuel
Customer Satisfaction Objectives
- Where firms set prices to maximize the value to the customer, believing that by focusing solely on the short-term profits, a company loses sight of keeping customers for the long term.
Image Enhancement Objectives
- When firms recognize that consumers often use price to make inferences about the quality of a product.
- –Status, exclusivity & high price
Step 2: Estimate Demand (Familiar)
- Price Elasticity of Demand: the percentage change in unit sales that results from a percentage change in price
- Elastic demand: demand in which changes in price have large effects on the amount demanded
- Inelastic demand: demand in which changes in price have little or no effect on the amount demanded
- Cross-elasticity of demand: when changes in the price of one product affect the demand for another item
Step 3: Determine Costs (Familiar)
- Variable costs
- Fixed Costs
- Average fixed cost: fixed cost per unit
- Break-even Analysis: a method for determining the number of units that a firm must produce and sell at a given price to cover all its costs
- Break-even point: the point at which the total revenue and total costs are equal and beyond which the company makes a profit; below that point, the firm will suffer a loss
- Marginal Analysis: look at cost and demand at the same time and to identify the output and the price that will generate the maximum profit
Step 4: Evaluate the Pricing Environment
- •The Economy
- –Recessions and Prices
- •The Competition
- –Status quo & oligopolistic competition
- –Price Wars
- •Consumers Trends
- –Age and Lifestyle
- –Social Class
Step 5: Choose a Pricing Strategy
Based on Cost
- Based on Cost
- •Associated with target profit or return objectives
- •Simple to calculate except some fixed costs such as executives’ salaries.
- •Ensures that costs are covered
- •Not sensitive to factors such as demand, product life cycle, competition, image
- •Cost-plus pricing: All units are sold at average costs (fixed + variable) plus the desired profit
- •Markup on cost vs. markup on selling price
- •E.g. how retailers price perishable/fast moving consumer goods
Pricing Strategies Based on Demand
- •Demand-Based Pricing
- –Based on estimates of demand at different prices
- •Customers’ willingness to pay
- •Target Cost Pricing: Adjusting costs to the price that the consumer is willing to pay.
- E.g. Honda Fit
- •Yield-Management Pricing: Charging different prices to different consumers in order to manage capacity
- E.g. Airlines, Hotels, Cruise Lines
Pricing Strategies Based on Competition
- •Price Leadership (Follower):The leader in the industry sets the price and the other players follow OR oligopolistic competition
- –Ex: Gasoline Industry: Price Parity keeping the prices at the same level
Pricing Strategies Based on Customers' Needs
- •Value Pricing & Everyday Low Pricing
- •Value Pricing: Considers customers + competition (Ex: jetBlue)
- •P&G and prices during recession
New Products Pricing Strategies
- •Skimming Price
- –Set prices high for those customers who want to be the first to use the product
- –E.g. Apple
- •Penetration Price
- –Set prices low to encourage more customers to purchase your product
- •Intel Pentium I
- –Trial Price: pricing new products low for a limited amount of time
Step 8: Psychological Issues in Setting Prices
- •Consumer expectations
- –Reference prices: the price range acceptable from the consumer’s perspective
- •Assimilation effect – if the price difference between two brands is small, lower price is evaluated positively
- •Contrast effect – if the price difference between two brands is large, lower price is evaluated negatively
- –Complex and technological products
- –Quality inferences: price as a cue or indicator of quality
Psychological Issues in Setting Prices.....
- •Odd-even pricing
- –Ex: “.99”
- –Professionals normally quote their fees in even dollars
- •Price Lining (price points) way to maximize profits because it provides the different ranges necessary to satisfy each segment of the market
- –Ex: Computers
- •Prestige pricing
- –Ex: Organic products
Legal and Ethical Considerations in Pricing
- Deceptive Pricing Practices
- –Bait and Switch
- Predatory Pricing and Unfair Sales Acts
- –Driving competition out of business
- –Loss Leader pricing: setting prices below cost to attract customers into the store.
- •Price Discrimination: prevent firms from selling the sale product to different retailers at different prices
- •Price Maintenance...two or more companies
- –Vertical Price Fixing: occurs when manufacturers or wholesalers attempt to force retailers to charge a certain price for the product
- e.g.“suggested sales price”
- –Horizontal Price Fixing: occurs when competitors making the same product jointly determine what price they charge
Loss Leader Pricing
setting prices below cost to attract customers into the store.
prevent firms from selling the sale product to different retailers at different prices
Vertical Price Fixing
occurs when manufacturers or wholesalers attempt to force retailers to charge a certain price for the product
Horizontal Price Fixing
occurs when competitors making the same product jointly determine what price they charge
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