MGT252

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MGT252

• Pricing
• Chapter 15

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Where are we? The marketers tasks
Look for Opportunities Consumer Competition Com
pany (Uncontrollable 3Cs)
Implement Positioning Product Price Place Prom
otion (Controllable 4Ps)
Segmenting Targeting Positioning (STP)
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Todays Agenda

• Influences on Price
• Pricing Objectives
• Pricing Strategies Tactics
• Psychology of Pricing

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The Many Names for Price
Tuition is the price paid for ... Education Rent i
s the price paid for ... An apartment Premium is
the price paid for ... Car insurance Fee is the
price paid for ... Medical services Dues is the
price paid for ... A membership Fare is the
price paid for ... Transportation Wage is the
price paid for ... Hourly work Interest is the
price paid for ... Money
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Factors Influencing Price

• Effectively, just demand and supply.
• Demand factors
• Market size, number of competitors,
  differentiation from competitors, promotion,
  distribution.
• Supply factors
• Marginal cost. From product and distribution.
• Total CostFixed Cost Variable Cost

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Demand and Supply Curves
S
P
P1
Po
D1
D0
Qo
Q1
Q
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Price Competition

• A firm engages in price competition by
• Regularly offering products priced as low as
  possible
• Reacting to competitors price changes by engaging
  in a price warprice wars hurt financially weak
  competitors most largest companies least.
• In nonprice competition, firms compete in another
  dimension in order to protect prices
• Promotion, differentiation, distribution,
  variety, service, product attributes

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Example Price Competition

• Airlines
• One airline gets cost advantage and initiates
  price war. All others follow. All earn near
  zero profits. Some go out of business.
• Internet
• Pets.com, Petstore.com, Petsmart.com were price
  focused. Sold below marginal cost. Only
  Petsmart survived.

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Pricing Objectives/Strategies

• Profit-Oriented
• Sales-Oriented
• Status Quo-Oriented
• While firms may use other strategies to simplify
  concepts, the final goal for all pricing choices
  is MAXIMIZING PROFITS

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Profit-Oriented Pricing

• Maximize profits
• All pricing should have this as the fundamental
  goal. A firm that is not maximizing profits
  could, by definition, do better.
• Maximize over all products together.
• But sometimes this is complicated to implement
  directly as cannot measure whether profits are
  actually maximized.
• Achieve a target return
• Set a specific percentage return on sales or
  investment.
• Often done with a Markup on the product.
• Easier to measure than maximize profits goal.

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Sales Status Quo-Oriented Pricing

• Should only be used when direct connection
  between sales and profits is understood.
• Increase Sales Volume
• By X over Y years
• Maintain/Increase Market Share
• Usually to gain market power over both suppliers
  and buyers
• Stabilizing Prices/Meeting Competition

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Pricing Tactics

• Cost-Based Pricing
• Break-Even Analysis
• Pricing in relation to the market
• Market Entry Pricing
• Market skimming
• Market Penetration
• Discounts
• Legal issues

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Cost-Based Pricing

• Set price based on total cost of the unit plus
  desired profit.
• Ignores market demand.
• But also needs uncertainty of where overall
  demand lies.

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Evaluation of Cost-Based Pricing

• In any conditions, costs (especially variable
  costs) are the lowest prices should go.
• As a rule, this is a weak method in most
  industries because it ignores the market
  condition.

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Break-Even Analysis

• A way to calculate the break-even point how much
  output is required at each price to break even
• Needs to be done in conjunction with demand
  analysis.

Break-Even Point
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Example

• Futon Factory
• Fixed costs25,000
• Variable costs30 per unit
• Cost of producing 1 unit therefore 25,030
• If price is 80 then break even point is
• 25,000/(80-30)500
• If price is 280 then break even point is
• 25,000/(280-30)100

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Break-Even Analysis
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Pricing in relation to the market

• Pricing to meet the competition when there is
• Highly competitive market and undifferentiated
  products.
• An oligopoly (a few firms, similar products).
• Pricing below competition, commonly used by
  discount retailersmust have lower costs or will
  be forced out of business!
• Pricing above competition, usually only when the
  product is distinctive or the seller has acquired
  prestige.

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Market Entry Pricing

• Penetration
• Enter at a low price to build rapid trial
• Conditions
• Market growth with lower price -- i.e., price
  elastic
• Economies of scale
• Low price deters competitive entry

• Skimming
• Enter at a high price to take maximum short term
  profitprice discrimination
• Conditions
• Sufficiently high quality, image to attract
  buyers
• High production costs dont wipe out price
  advantage
• Difficult for competitors to enter and undercut

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Discounts

• Quantity discount The more you buy, the cheaper
  it becomes-- cumulative and non-cumulative.
• Trade discounts Reductions from list price for
  functions performed-- storage, promotion.
• Cash discount A deduction granted to buyers for
  paying their bills within a specified period of
  time, (after first deducting trade and quantity
  discounts from the base price)

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Calculating the Cash Discount

• Depends on (a) percent discount, (b) length of
  discount period, (c) time bill due.
• Suppose buyer owes 200 and is offered a 5
  discount if paid in 15 days. Otherwise the
  entire bill must be paid in 60 days. This is
  written as 5/15, n/60.
• In essence, the value of the cash discount is the
  opportunity cost of delaying payment.

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Calculating the Cash Discount

• Buyer owes 200. 5/15, n/60.
• 5 in 15 days. Full payment in 60. So a 5
  discount for 45 days.
• i.e., it is 5/450.00111 per day
• Then per year it is 0.0011136540.56
• 40.5 is a high annual interest rate. Take the
  discount!!!

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Legal Issues

• Canadian Federal Legislation restricts pricing
  behaviour. In particular, the Competition Act
  prohibits
• Price discrimination between competitors for the
  same quality quantity
• Predatory pricing
• Eg. Microsoft Internet Exlporer.

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Factors Lowering Price Sensitivity

• Fewer perceived substitutes tourist traps can
  charge more
• Unique Value Volvo, Lexus
• Switching Costs Lotus to Excel
• Difficult comparisons different sized packaging
• Price-quality effect

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Price Discrimination

• First-degree price discrimination (perfect price
  discrimination) a firm has perfect information
  on the willingness to pay of each consumer.
• Third-degree price discrimination (or market
  segmentation) a firm is aware of differences in
  willingness to pay across groups, but not within
  a group.
• Bundling

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Psychology of Pricing

• How do consumers assess price differences?
• Which station do you prefer?
• Station A Sells gas for 80 a liter and gives a
  10 discount for cash
• Station B Sells gas for 70 a liter and charges
  10 extra for credit cards

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Implications for presenting purchases (i.e.,
losses)

• Frame purchases as gains denied, not losses
• Fee structures
• Which is better
• Free no-interest checking if you have a balance
  of 1500 or more (savings accounts pay 4.5), or
• 5 service charge if balance is less than 1500.

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Implications for presenting purchases (i.e.,
losses)

• Selective discounts rather than surcharges
• Which tuition plan would you rather have
• Regular tuition of 10,000 and a 5,000
  scholarship to 50 of its needy or gifted
  students, or
• Regular tuition of 5,000 and an additional
  5,000 for students who dont cross a threshold
  of academic performance or financial need.

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Summary

• Pricing Objectives
• Influences on Price
• Pricing Strategies Tactics
• Psychology of Pricing