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Price is....
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the 1.most dynamic of the marketing mix (4P) variables
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What is pricing?
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revenue (value capturing)
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Product, Promotion, Place represent costs to a business
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...
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There are many ways a company can try to position itself, but price is often central to positioning (e.g., Walmart, Dollar Store
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...
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Why is low price not always best?
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•Pricing needs to be consistent with other aspects of the company...
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what is marketing strategy?
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•Target certain customers, position (in their minds)
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What is marketing mix?
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•Promotion, Product, Place (value producing)
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What are the 3 major pricing strategies?
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1.Customer Value-Based Pricing
2.Cost-Based Pricing
3.Competitor Based Pricing
2.Cost-Based Pricing
3.Competitor Based Pricing
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What does value = (formula)
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(benefits-cost)
pi = (p-c)q
pi = (p-c)q
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What is Customer Value-Based Pricing?
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•Setting price based on buyers' perceptions of value rather than on the seller's / manufacturer's cost.
•Price is decided on in conjunction with decisions about product, promotion, and place/distribution
•Price is decided on in conjunction with decisions about product, promotion, and place/distribution
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What are Customer Value-Based Pricing Options?
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Value-added pricing
good-value pricing
good-value pricing
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what is value-added pricing?
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1.attaches value-added features and services to differentiate the company's offerings and thus their higher prices (e.g., Tiffany & Co., Nordstrom, Supreme)
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what is good-value pricing?
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1.is offering just the right combination of quality and good service at a "fair" price.
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What is every day low pricing?
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1.(EDLP) involves charging a constant everyday low price with few or no temporary price discounts. (e.g., WalMart)
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What is high-low pricing?
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1.involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items. (e.g., CVS, JC Penney)
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Ex of value added pricing?
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•Tide Pods - Introduced during last recession
•One-pack-per-load pellets
•Priced at a premium (per-load) to liquid Tide
•$500MM in sales during first year!
•"We switched to the bargain brand. But I found myself using three times more than you're supposed to and still the clothes weren't as clean."
•One-pack-per-load pellets
•Priced at a premium (per-load) to liquid Tide
•$500MM in sales during first year!
•"We switched to the bargain brand. But I found myself using three times more than you're supposed to and still the clothes weren't as clean."
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good-value pricing?
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Good-value pricing has typically focused on the low-price side of the price / benefits equation, but it need not
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What is cost-based pricing?
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Designed to cover both fixed and variable costs.
cost-plus/ markup pricing
breakeven/ target return pricing
cost-plus/ markup pricing
breakeven/ target return pricing
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cost-plus/ markup pricing?
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•This car costs us $20,000 to make... We will mark that up by 20% and sell it for $24,000
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breakeven/ target return pricing ?
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•This car is costing us 1 Million to develop. We want to make a 20% return on that... How many units would we need to sell at each of these prices to make $200,000 in profit. Are those numbers feasible?
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Cost-based pricing
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design a good product
determine product costs
set price based on cost
convince buyers of products value
determine product costs
set price based on cost
convince buyers of products value
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Value Based Pricing
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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 a target price
set target price to match customer perceived value
determine costs that can be incurred
design product to deliver desired value at a target price
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Competition based pricing?
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•Setting prices based on competitor's strategies, prices, costs, and market position / offerings
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•Remember - a company's position reflects how consumers see it relative to its competitors on dimensions they care about
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...
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•
•Your pricing decision should reflect your chosen marketing strategy
•Your pricing decision should reflect your chosen marketing strategy
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...
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Price setting to maximize revenue?
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•Companies want to set prices in a way that will maximize revenue...
•Revenue = # Units Sold * Price
•This is a form of breakeven analysis! (Remember Chipotle considering cutting the price of a burrito?)
•Revenue = # Units Sold * Price
•This is a form of breakeven analysis! (Remember Chipotle considering cutting the price of a burrito?)
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what do we ask to maximize revenue?
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1.Can we increase total revenue by increasing price (will any decline in # of sales be offset by the higher price per sale)
2.Can we increase total revenue by decreasing price (will any increase in # of sales compensate for the lower price per sale)
2.Can we increase total revenue by decreasing price (will any increase in # of sales compensate for the lower price per sale)
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Price Elasticity of Demand?
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•Is a measure of how responsive demand is to changes in price
•Specifically, it is measured as the percent change in quantity demanded generated by a 1% change in price.
•An elasticity of -1.6 (this is relatively high) would mean that a 1% increase in price would result in a 1.6% decrease in sales...
•Or that a 1% decrease in price would result in a 1.6% increase in sales
•Specifically, it is measured as the percent change in quantity demanded generated by a 1% change in price.
•An elasticity of -1.6 (this is relatively high) would mean that a 1% increase in price would result in a 1.6% decrease in sales...
•Or that a 1% decrease in price would result in a 1.6% increase in sales
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Highly elastic
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•people are highly price sensitive (E > 1)
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highly inelastic
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•demand barely changes with price change (0<E<1)
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•Note: elasticity (η) is always negative
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...
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Elastic =
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("consumers are price sensitive")
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Inelastic=
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("consumers not price sensitive")
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elasticity formula
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E= P1(Q2-Q1) / Q1(P2-P1)
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Factors influencing Price Elasticity of Demand:•Buyers are less price sensitive when a product is...
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•Unique / has few substitutes or competitors
•High in quality or prestige
•A necessity
•Low in cost relative to the consumer's income
•When customers are brand loyal
•High in quality or prestige
•A necessity
•Low in cost relative to the consumer's income
•When customers are brand loyal
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Factors influencing Price Elasticity of Demand: •Elasticity can vary by consumer
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•Cigarettes to adult smokers... Cigarettes to teens
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Factors influencing Price Elasticity of Demand:•Elasticity can vary by time frame
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•In the short term, demand for gasoline is inelastic. In the long term, it becomes more elastic
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Psychological (Aspects of) Pricing?
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Pricing that considers the psychology of prices (not simply the economics) and recognizes that the price communicates something about the product.
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Reference pricing?
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Reference prices are prices that buyers carry in their minds and use to evaluate the price of a different product (you refer to these prices when evaluating other items)
àAll comparisons are reference-dependent
àExample: people use price of other items to determine their attitudes towards the price of one item (known as "context effect")
àAll comparisons are reference-dependent
àExample: people use price of other items to determine their attitudes towards the price of one item (known as "context effect")
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Psychological Pricing: Why bundle products when you are not offering a price discount for the bundle?
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•"We look at the customer buying behavior, and that's how we land on multiples — to get customers a little higher than their typical purchase rate." --Tom O'Boyle, VP-Marketing, Pathmark/Food Emporium
ØPeople usually bought 2 more items when advertised as 10-for-$10 versus 5-for-$5. Advertising at 1-for-$1 led to a 10% decline in sales.
ØPeople usually bought 2 more items when advertised as 10-for-$10 versus 5-for-$5. Advertising at 1-for-$1 led to a 10% decline in sales.
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Psychological pricing: Psychology behind why it works?
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•84% of shoppers make a list before going to the grocery store. Need something (i.e., a push) to change habitual or pre-established buying behavior
•Simple power of suggestion!
•"At Stores, Making 5 for $5 a Bigger Draw Than 1 for $1" -- NYTimes, July 2011
•Simple power of suggestion!
•"At Stores, Making 5 for $5 a Bigger Draw Than 1 for $1" -- NYTimes, July 2011
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•Pricing strategies are basically cost-based, value-based, competitor-based
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•Company and its costs dictate the lower-bound price
•Customers' willingness to pay marks the upper bound
•In the middle, price is tweaked up or down relative to competitors' prices
•Customers' willingness to pay marks the upper bound
•In the middle, price is tweaked up or down relative to competitors' prices
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•Pricing can be used to shape a brand's positioning and to attract/repeal different target segments
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...
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•There are economic, psychological, and competitive elements to pricing
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...
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Downward Sloping Demand Curve
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•Demand tends to decrease as price increases
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Elasticity and Customer Segments
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•Elasticity varies with customer segments
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Price Sensitivity and Scanner Data:•Scanner data methods
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1.Run experiments by manipulating prices in randomly selected stores and comparing sales to control groups
•Calculate PS assuming 20% discount:
PS=((S_(@20%off)-S_benchmark)∕S_benchmark)/((P_(@20%off)-P_benchmark)∕P_benchmark)
•Calculate PS assuming 20% discount:
PS=((S_(@20%off)-S_benchmark)∕S_benchmark)/((P_(@20%off)-P_benchmark)∕P_benchmark)
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Price Sensitivity and Scanner Data:•Scanner data methods using regression analysis
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SalesEst. = b_0+ b_1 Price+ b_2 Ad+...+ b_k 〖Factor〗_k
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Price Sensitivity and Survey Methods: •Conduct price studies
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•Surveys are identical except pricing
•A may have higher price than B, B than C, etc.
•Each customer fills out an assigned survey
•A may have higher price than B, B than C, etc.
•Each customer fills out an assigned survey
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Price Sensitivity and Survey Methods: •Conduct a survey to assess willingness to pay (WTP)
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•$25.00 definitely would not buy 1 2 3 4 5 6 7 definitely would buy
•$35.00 definitely would not buy 1 2 3 4 5 6 7 definitely would buy
•$35.00 definitely would not buy 1 2 3 4 5 6 7 definitely would buy
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Price Sensitivity and Conjoint Analysis
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•Show product combinations with price; ask "Which do you most prefer?" "Next?"
•Two segments are represented below
•Left segment wants the brand and will pay more
•Right segment gives up brand for lower price
•Two segments are represented below
•Left segment wants the brand and will pay more
•Right segment gives up brand for lower price
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New Product Pricing Strategies:1.Market-skimming (or price skimming)
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•Set high initial price to "skim revenue" off the top
•Eventually reduce price after innovators/early adopters pay more
•Assumes "innovators" are relatively price inelastic
•Apple -- First iPhone introduced in June 2007 at $599. Two months later, $399. A few months after, 3G = $199
Requirements:
1.Product quality and image must support high initial price
2.Product should not be so easy to copy that competitors can easily undercut high price with comparable products
•Eventually reduce price after innovators/early adopters pay more
•Assumes "innovators" are relatively price inelastic
•Apple -- First iPhone introduced in June 2007 at $599. Two months later, $399. A few months after, 3G = $199
Requirements:
1.Product quality and image must support high initial price
2.Product should not be so easy to copy that competitors can easily undercut high price with comparable products
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Market Skimming Pricing: advantages
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•Gain insight into what consumers are willing to pay
•Maximizes possible revenue/ROI from a new product
•High initial price may communicate prestige (brand image)
•Maximizes possible revenue/ROI from a new product
•High initial price may communicate prestige (brand image)
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Market Skimming Pricing: disadvantages
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•Slower to build market share
•High profits may attract competition (market can't be crowded)
•It only works if your demand curve is inelastic
•It can anger early adopters
•High profits may attract competition (market can't be crowded)
•It only works if your demand curve is inelastic
•It can anger early adopters
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New Product Pricing Strategies: market-penetration pricing
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•Set low initial price in order to rapidly gain market share
•Amazon's Kindle Fire - $199 introductory price was a $10 loss per!
•
•Why might Amazon sell Kindles at a loss?
1.Speed to market (competition)
2.Can make $$$ off of selling content
•Amazon's Kindle Fire - $199 introductory price was a $10 loss per!
•
•Why might Amazon sell Kindles at a loss?
1.Speed to market (competition)
2.Can make $$$ off of selling content
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Market Penetration Pricing: requirements
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1.Market must be highly price sensitive (elastic demand)
2.Production and distribution costs must be lower with larger sales volumes
2.Production and distribution costs must be lower with larger sales volumes
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Market Penetration Pricing: advantages
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•Rapidly builds market share and name/brand recognition
•Price/quality ratio can keep competition at bay
•Price/quality ratio can keep competition at bay
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Market Penetration Pricing: disadvantages
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•Requires a large initial investment (large volume relatively quickly)
•This high initial investment also means high risk if demand is not as strong as anticipated
•Requires a high promotional budget - need to get the word out quickly
•This high initial investment also means high risk if demand is not as strong as anticipated
•Requires a high promotional budget - need to get the word out quickly
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