Marketing Management

Pricing

Chapter 8

Pricing
Pricing allows the company to obtain feedback from customers Pricing is easier to change than the other marketing mix variables
Pricing sends a signal regarding the positioning and image of the brand

Demand
Profit increases when price increases; however, demand tends to decrease as price increases Need to find happy medium

Elasticity
Elasticity
How much does demand (units sold) increase (or decrease) with a price change?
E>1, demand is elastic If 0<E<1, demand is inelastic If E=1, demand is unitary

Demand Increases
With increased customers desire With favorable perceptions of the products benefits or brand image If competitors brands arent favorable If there are few good substitutes If substitutes are priced even higher

Demand is More Elastic When

Customers dont care about the purchase Customers dont have strong preferences Item is a luxury rather than a necessity Many substitutes are available Purchase is large compared to income When household incomes are lower It is easier to compare prices

Costs
Costs set the minimum floor on pricing
If fixed costs are relatively high, maximize sales volume (to spread the fixed costs) If variable costs are relatively high, maximize per unit margins

Cost-plus pricing: P = (unit cost) / (1-X%)

where X% is the intended return

Breakeven Analysis
Breakeven
Number of units needed to sell to cover costs

High Prices and Price Sensitivity

How much would sales drop off in the face of a price increase?

Use existing PS estimate in formula OR Develop PS estimates using

Scanner Data Survey Data Conjoint Analysis

Scanner Data
Scanner data methods
Run experiments by manipulating prices in randomly selecting stores and comparing sales to control groups. Calculate PS:

Use regression analysis on previous sales

Survey Data
Survey to assess willingness to pay (WTP)
What are you willing to pay?

Conjoint Analysis
Show product combinations with price; ask Which do you most prefer? Next?
Two segments are represented below
Left segment want the brand and will pay more Right segment gives up brand for lower price

Brands and High Prices

Good brands are able to charge premium prices
Generic spandex sells for $8/lb DuPont sells Lycra for $15/lb

Some define good brands by whether or not the customer is price insensitive

Profit Maximization
Profit = revenue expense
Revenue = price x quantity sold

To maximize profits, find a price where any further increase in price would lead to a large falloff in quantity sold
Profit Maximization: marginal revenue equals marginal cost

Absolute vs. Relative Numbers

Absolute
$15 off of a $199 item and $15 off of a $49 item is the same in absolute terms
The savings is $15

Relative
$15 of $199 is 8% while $15 of $49 is 31%
Thus, the savings is relatively better on the $49 item

Framing
A $499 trip is the same as a $599 trip with a $100 discount at booking However, the $599 trip seems like a better deal because of the higher starting price

Discounts
Temporary price discounts make customers think they are smart shoppers They experience feelings of happiness, pride, appreciation, optimism, confidence, etc.

Mental Accounting
A case of wine purchased for an upcoming party is seen as an investment; later consumption of wine is seen as free
People pay less attention to future consequences

People categorize purchases and budget within each category

Vacation money is different than food money

Compromise Effect
The inner/middle choice between two extremes is attractive People assume that if a company charges more, it must be providing more

Pricing
Quantity Discounts
The more purchased, the more saved

Yield Management
Using price and scheduling to manage demand
Go to the movies during the day for less $ Book a flight last minute for less $

Need to manage perceptions of fairness

Product Life Cycle Pricing

Introduction stage
Penetration: seek market share
Price low to stimulate sales, encourage trial, and trigger word of mouth

Skimming: seek profit

Price high initially, then lower to make product more accessible

Adjust price in various stages; usually end with lower prices in decline stage

Temporary Price Cuts

Competitors can imitate; thus, impact may be negative while also squeezing margins Price drops attract disloyal customers Customers may stock up May negatively affect brand image

Coupons
Only relevant to coupon clippers
Price is more important to them than brand 350 billion coupons are available in U.S. Redemption rate is only about 1%

Effective at encouraging new/old customers to try old/new products

Game Theory
Marketers use game theory to try to estimate likely results of price cuts and competitive response
Think about the broader market not just optimizing own needs
Mutual cooperation can yield even better outcomes than both parties acting selfishly

Dynamic Pricing
Price is negotiated by buyer and seller
Auctions have been gaining in popularity
Sealed or open bid Bidders compete to buy item

Reservation price
Point of indifference: estimate of customers willingness to pay
If the price is higher than reservation, dont buy. If it is lower, then buy.

Value
Value is an assessment of what the customer gets compared with what the customer gives up