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Trader Joe's Price Value Equation
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What They Offer: Trading Joe's Niche: Offers gourmet caliber, one of a kind products at impossibly low prices. Limited product assortment of 2,000 specialty items unique to Trader Joes. 80% of items are store brands (private label goods).
Retail Atmosphere and Staff: Festive, vacation-like atmosphere that makes shopping fun provides Trader Joes with a cool edge. Associates wear Hawaiian shirts and consult with customers
Keeping Prices Low: Cost Control is Key
Retail Atmosphere and Staff: Festive, vacation-like atmosphere that makes shopping fun provides Trader Joes with a cool edge. Associates wear Hawaiian shirts and consult with customers
Keeping Prices Low: Cost Control is Key
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Look at Marketing by Numbers in the back of the book
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VALS
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Less Price Sensitive above the line, More Price Sensitive below the line
45% above the line, 55% below the line
45% above the line, 55% below the line
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Innovators
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Take charge, sophisticated, curious
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Thinkers
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Reflective, Informed, and Content
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Achievers
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Goal Oriented, Brand Conscious, Conventional
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Experiencers
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Trend setting, impulsive, variety seeking
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Believer
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Literal Loyal Moralistic
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Strivers
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Contemporary, Imitative,
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Makers
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Survivors
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What Price to set?
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What the market will allow
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Price
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The amount of money charged for a product or service, or the sum of the values that consumers exchange for the benefits of having or using the product or service
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Price by other names
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Tuition- Education
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Price Ceiling
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No demand above this price
Customer perceptions of value
Customer perceptions of value
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Price Floor
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No profits below the price
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Cost-Based Pricing
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Setting price based on costs
variable cost = 20
Fixed cost = 500,000
Expected Sales = 100,000 units
Desired Sales Markup = 20%
Unit Cost = variable + (fixed cost/unit sales)
20 + (500,000/100,000) = 25 per unit
Markup Price = Unit Cost/(1 - Desired Return on Sales)
25/(1-.2) = 31.25
**problem is doesnt take in your desire to pay more!
variable cost = 20
Fixed cost = 500,000
Expected Sales = 100,000 units
Desired Sales Markup = 20%
Unit Cost = variable + (fixed cost/unit sales)
20 + (500,000/100,000) = 25 per unit
Markup Price = Unit Cost/(1 - Desired Return on Sales)
25/(1-.2) = 31.25
**problem is doesnt take in your desire to pay more!
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Cost-Plus Pricing
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Advantages:
Simplifies the pricing proccess
Price competition may be minimized
It is perceived as more fair to both buyers and sellers
Disadvantages:
Ignores demand and competition
Simplifies the pricing proccess
Price competition may be minimized
It is perceived as more fair to both buyers and sellers
Disadvantages:
Ignores demand and competition
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Breakeven Pricing
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Dollars on y-axis
Sales on x-axis
Where total costs(including fixed costs) intersects the total revenue curve
Sales on x-axis
Where total costs(including fixed costs) intersects the total revenue curve
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What is the problem with breakeven pricing?
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Break-even pricing computers a price that simply offsets costs without actually generating a profit! If you set your price using breakeven pricing, your goal is not to make money but to avoid losing money
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Cost-based pricing steps
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Design a good product
Determine product costs
Set price based on costs
Convince buyers of products value
Determine product costs
Set price based on costs
Convince buyers of products value
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Value-based pricing steps
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Assess customer needs and value perceptions
Set target price to match customer perceived value
Determine costs that can be incurred
Design product to deliver desired value at target price
Set target price to match customer perceived value
Determine costs that can be incurred
Design product to deliver desired value at target price
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Value-Based Pricing
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Customer Value: The difference between the benefits a customer sees from a market offering and the costs of obtaining these benefits ex.) the ratio of perceived benefits to price
Uses buyers perceptions of value rather than sellers costs to set price
-Start with what price you expect buyers are willing to pay (demand)
-Look at the competitive environment
Uses buyers perceptions of value rather than sellers costs to set price
-Start with what price you expect buyers are willing to pay (demand)
-Look at the competitive environment
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Example of Value-based pricing
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A steinway piano costs a lot. But to those who own one, a steinway is a great value.
Marketers first assess customer needs and value perceptions, then set the products price
Marketers first assess customer needs and value perceptions, then set the products price
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Example of Value-added pricing
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Many consumers believe that customization and personalization adds value to products, and are willing to pay the price!
Value-added M&M customization pricing scheme has been well-received, a similar attempt to market Dove Chocs failed. Why?
Value-added M&M customization pricing scheme has been well-received, a similar attempt to market Dove Chocs failed. Why?
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Competition-Based Pricing
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Also called Going rate pricing
May price at the same level, above, or below the compeition
ex.) Pharmaceutical Industry
May price at the same level, above, or below the compeition
ex.) Pharmaceutical Industry
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What is a good reason to employ a competitive price approach in which you undercut all compeitors?
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By setting the price before you know the costs, you could lose money on every razor you sell. The biggest flaw in the compeitive pricing approach is that it could backfire. If you set a price that prohibits making a profit, you have no way of succeeding
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What is greatest danger in using cost-plus pricing?
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The price that is set will dramatically decrease demand. Cost plus estimates costs, then adds a profit markup to those costs to determine a price. This method fails to take demand into account.
ex.) A price that is slightly too high could decrease demand
ex.) A price that is slightly too high could decrease demand
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Pricing in Different Types of Markets
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Pure Competition
Monopolistic Competition
Monopolistic Competition
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Internal and External Considerations
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Pricing Objectves
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Profit Oriented - Target return of max. profits
Sales Oriented- Dollar or Unit Sales Growth or Growth in Market Share
Status Quo Oriented-Meeting Competition of Nonprice Competition
Sales Oriented- Dollar or Unit Sales Growth or Growth in Market Share
Status Quo Oriented-Meeting Competition of Nonprice Competition
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Setting price based on buyers perceptions of value rather than on the sellers cost is called
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Value-based pricing begins with a complete understanding of the value that a product or service creates for customers
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Sales
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Price x Quantity
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Pro Forma Income Statement
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Similar to a historical income statement, except it projects the future rather than tracks the past
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Promotion to Sales Ratio
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A marketing control measure used to determine whether the amount spent on promotion was excessive; total expenditure on promotion in a given period is expressed as a percentage of total sales revenue for the same period
Promotional Dollars/Gross Sales`
Promotional Dollars/Gross Sales`
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External Factors
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Market and Demand
Different types of market
Different types of market
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Demand Curve
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The visual representation of the number of units of the product that consumers will demand at a given price
Demand varies with..
1.) Movement along the curve (Price is the factor)
2.) Shift or rotation of the curve (non-price)
-Changing consumer tastes
Demand varies with..
1.) Movement along the curve (Price is the factor)
2.) Shift or rotation of the curve (non-price)
-Changing consumer tastes
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Price Elasticity
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The change in demand with the change in price
Elastic or inelastic
Elastic or inelastic
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Price Elasticity of Demand
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Measures the response of consumers to changes in price
***% change in quantity demanded/% change in price
***% change in quantity demanded/% change in price
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Quantity demanded when the price is 9 is 150 and when the price is 10 is 110
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110-150/150 = -.2667
10-9/9 = .1111
PEoD = -.2667/.1111 = -2.4005
HIGHLY ELASTIC in the negative direction so do NOT take the price increase
Anything above 2 is highly elastic/responsive
-First look at value then look at direction
10-9/9 = .1111
PEoD = -.2667/.1111 = -2.4005
HIGHLY ELASTIC in the negative direction so do NOT take the price increase
Anything above 2 is highly elastic/responsive
-First look at value then look at direction
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How to interpret elasticity
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E>1 = Elastic = Responsive
E < 1 = Inelastic = Unresponsive
E = 1 = Unitary Elastic = Proportional
*The main determinant of demand elasticity is the availability of substitutes for the good in question
E < 1 = Inelastic = Unresponsive
E = 1 = Unitary Elastic = Proportional
*The main determinant of demand elasticity is the availability of substitutes for the good in question
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Examples of different demands
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Water = .20 suggests that a 10% increase in the price of water would decrease the quantity demanded by only 2%
Sale = 0.1
Cigs = 0.3
Housing = 1
Cars = 1.2
Air Travel = 2.4
*when percentage change in price (10%) is smaller than the corresponding percentage change in demand (40%) demand is elastic
Sale = 0.1
Cigs = 0.3
Housing = 1
Cars = 1.2
Air Travel = 2.4
*when percentage change in price (10%) is smaller than the corresponding percentage change in demand (40%) demand is elastic
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Whats example of a good-value pricing approach?
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Less expensive model that has features that are similar to the name brand product. Intended to make the customer feel that she got good value for her money. This can be done in two ways: giving her a premium product at a standard, industry
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Whats example of value-added pricing approach?
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3G Smart phone with all standard features with a few exciting features at a price that is higher than the industry standard
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New Product Pricing
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Market Skimming Pricing
Market Penetration Pricing
Market Penetration Pricing
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Skim the cream pricing
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Selling at a high price to those who are willing to pay before aiming at more price-sensitive customers
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Penetration Pricing
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Works best when consumers are price sensitive, low prices keep competitors at bay, and per unit and distribution costs fall as sales volume rise. NOT has a premium image
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Captive Pricing
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Bundle Pricing
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