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MKTG 504 - PRICE Of what value is this to me? Dr. Dennis Pitta University of Baltimore
Pricing = the art of translating into quantity terms the value of the product to consumers.
How should firms set prices? STRATEGICALLY!!!
The STRATEGIC PRICING PROCESS z. I. SELECT A TARGET MARKET (Fundamental = the chosen target market responds in particular way)
How about this target market? z What level of quality would he expect? z What price would he be willing to pay?
The STRATEGIC PRICING PROCESS (continued. ) z. II. STUDY CONSUMER BEHAVIOR (What are the customer’s buying motives? PRESTIGE? UTILITY? ) (What is the customer’s PRICE ELASTICITY? ) Price elasticity can be the basis for: PRICE DISCRIMINATION!!
PRICE DISCRIMINATION The practice under which goods are sold at price differences which do not reflect the proportional difference in marginal costs
PRICE DISCRIMINATION FOUR forms of Price discrimination. Can be based on: z. CUSTOMER (Can be based on knowledge of intensity of demand) (e. g. INNOVATORS, Lawyers, . . . )
PRICE DISCRIMINATION (continued) z. PRODUCT VERSION (Different versions, higher price reflecting psychological demand) (e. g. , “Standard”, “Deluxe”)
PRICE DISCRIMINATION (continued) z. PLACE (A form of utility) (e. g. , a baseball stadium, at resorts, theatre seats, neighborhood, . . . )
If you can wait, when are the best times to buy auto tires? z. Memorial Day weekend (week) z. Labor Day weekend (week)
When does Pitta buy winter clothes?
When does Pitta go to Bethany Beach?
PRICE DISCRIMINATION (continued) z. TIME (Season - clothing; business cycle - many items; day - )
The STRATEGIC PRICING PROCESS (continued. ) z. III. IDENTIFY COMPETITION (Look at their marketing policies - for each of the 4 P’s; What is the structure of their industry? What are their price inputs? )
The STRATEGIC PRICING PROCESS (continued. ) z. IV. ASSIGN PRICE A ROLE IN THE MARKETING MIX Objectives (6): z (1) Market Penetration - low initial price z (2) Market Skimming - high initial price (gain a premium from initial buyers)
Market Penetration - low initial price Useful if: Market appears price sensitive, Economies of scale available, Low price discourages competition.
Market SKIMMING - HIGH initial price Useful if: Demand is relatively price INELASTIC, No scale economies exist, Rival firms are not likely to enter, High price encourages prestige perception.
Objectives (continued. ) z(3) Early Cash Recovery (need for funds - high or low price) Depends on: yprice elasticity and yeconomies of scale z(4) Satisficing Objective (typically a fear of a government reaction - aims at a satisfactory ROI - no need to maximize ROI since this can keep competition out)
Objectives (continued. ) z(5) Product Line Promotion Pricing (Consider the entire line, may underprice one item, to improve the overall line’s profitability) (e. g. , LOSS LEADER - or Sear’s GOOD, BETTER, BEST) z(6) Develop the distribution system
Let us consider two competing brands. . z Unicaps are advertised heavily and are well known vitamins from a respected company. z Unidose vitamins by Schultz - Schultz makes cosmetics and perfumes (with names like Evening in Bayonne) and decided to mix the ingredients to make vitamins.
Example of Developing the Distribution System (All prices per bottle of 100) z Unicap vitamins by Upjohn z Advertised z Retail price = $4. 95 z Wholesale price = $3. 95 z Resulting margin to retailer = $1. 00 z Unidose vitamins by Schultz z Not advertised z Retail price = $4. 25 z Wholesale price = $2. 25 z Resulting margin to retailer = $2. 00
Example of Developing the Distribution System - Why Stock Schultz’s Vitamins? z. If a customer asks for advice, the pharmacist can say - the two brands are equivalent - but Schultz will cost you less. z. He does NOT say - and I make and extra $1. 00 per bottle on Schultz.
The STRATEGIC PRICING PROCESS (continued. ) z. V. RELATE COSTS AND DEMAND (Estimate the costs for producing at several levels of output) (Perhaps graph the functional relationships)
The STRATEGIC PRICING PROCESS (continued. ) z. VI. SET THE STRATEGIC PRICE
How do firms actually set prices? ?
PRICE SETTING IN PRACTICE z. Cost Based Pricing y. MARKUP-PRICING - adding some fixed % to unit costs: Why use this? ? ? x. Simple x. Leads to price similarity x. Social Fairness Benefits: Seller does not take advantage of a buyer with an acute demand problem seller earns a fair return.
PRICE SETTING IN PRACTICE (continued. ) z. TARGET PRICING - Determine the price given a specified target rate of return Limitation: Demand may be influenced by price.
PRICE SETTING IN PRACTICE (continued. ) z. Competition-oriented Pricing y. GOING RATE PRICING - Set price about the average level in the industry (May depend on the market structure Perfect competition: No decision Oligopoly - it is wise to check industry prices. ) Other Pricing alternatives: Sealed bid pricing
Initiating Price Changes Must consider Buyer reactions, e. g. , elasticity and perceptions. Competitive reactions. Meeting price changes of competitors ? ? Sometimes no decision.
Darn competitors…. z Tylenol owned the acetominaphen market z Tylenol kept a high price z Datril entered competing on price z Tylenol cut their price immediately
When a new competitor uses price to gain a foothold in the marketplace, established companies should react quickly with their own reductions. AT&T and Kodak DIDN'T; thus Fuji and MCI became marketplace fixtures. Tylenol DID, and the upstart Datril never got more than a 1 -percent market share.
The Game No One Wins: Price Competition z Datril is just like Tylenol - only cheaper z After Mc. Neil laboratories cut price z Few people switched z Bristol Myers lost millions. .
Product Line Pricing Objective: A set of prices that maximizes demand from the entire line. (e. g. , Good, Better, Best) Must consider: Interrelationship of demand (substitutes, complements, unrelated factors). Interrelationship of costs (production, scheduling). Effect of competition.
Two types of pricing decisions z. BASE PRICE z. PRICE ADJUSTMENTS (6 types)
Types of PRICE ADJUSTMENTS - 6 TYPES z 1. FUNCTIONAL DISCOUNT (to other channel members - offer price which allows retailers and wholesalers traditional markups) z 2. QUANTITY DISCOUNT - price reduction based on amount of purchase. z 3. GEOGRAPHICAL DIFFERENCES - Based on location of the buyer z 4. SEASONAL DISCOUNTS z 5. BUYER’S PERSONAL SITUATION - Often a reason for an adjustment - e. g. , to keep a buyer in business.
Types of PRICE ADJUSTMENTS CONT z 6. CASH DISCOUNT (reflects the savings -avoiding finance and interest costs)
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