Principles of Marketing

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Principles of Marketing

• Price

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Strategic Objectives

• Profit
• Positioning and leadership
• Social responsibility

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The Feasible Price Range

• What is the highest price a consumer will pay?
• What is the lowest price a seller can charge?
• What encourages sellers to charge something
  between the two extremes?

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Demand

• Value analysis (economic value other values)
• Recognition of substitutes
• Price sensitivity
• Anticipation of price changes

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Value Analysis of compact fluorescents

• Price of typical incandescent bulb.75
• They use 100 watts per hour and average 1000
  hours.
• CF bulbs use 25 watts per hour and average 13,000
  hours.
• Electricity costs.05 per kwh (1000 watts/hour)
• What is the economic value of of CF bulb?

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Value Analysis of compact fluorescents
Value of X (Price of substitute costs
associated with substitute) -costs associated
with X
CF IB



Value CF
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Costs

• Fixed, Variable, Sunk
• Average
• Sensitivity to volume
• Marginal
• Mark-up calculations
• Breakeven analysis

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Mark-up problem

• Retailer price of lawnmower800
• Mfr. Cost312
• Retailer markup35
• Wholesaler markup20
• A. What was the cost to the wholesaler?
• B. What was the cost to the retailer?
• C. What was the mfrs markup?

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Breakeven problem Davis, Inc.

• Fixed costs200,000
• Product price-250
• VC per unit200
• Sales estimate1,250,000
• A. What is the breakeven point?
• B. What is the estimated profit (loss)?
• C. If sales are estimated at 875,000, ???

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Breakeven problem Davis, Inc.
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Competition

• Substitutability
• Aggressiveness
• Barriers to entry

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Market conditions

• Elasticity
• Scale economies in production
• Barriers to competition
• Innovativeness of product
• Diffusion rate of innovation
• Price sensitive segments?
• Resources available for production/marketing

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Price Elasticity

• change in demand per change in price
• Normal 1 change in price results in 1 change
  in demand. E1.0
• Elastic (extra stretch in response to price
  change) Egt1.0
• Inelastic (demand does NOT stretch in response
  to price change) Elt1.0
• In response to elastic markets, firms should
  lower prices.
• In response to inelastic markets, firms should
  raise prices.

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Price Elasticity Problem

• Acme Products had an average price of 800 and
  sales of 15,000 units
• They raise their price to 900 and have sales of
  13,000 units
• What should they do with price now?

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New Product Pricing Strategies

• Use Under These Conditions
• Products Quality and Image Must Support Its
  Higher Price.
• Costs Cant be so High that They Cancel the
  Advantage of Charging More.
• Competitors Shouldnt be Able to Enter Market
  Easily and Undercut the High Price.

• Market Skimming
• Setting a High Price for a New Product to Skim
  Maximum Revenues from the Target Market.
• Results in Fewer, But More Profitable Sales.

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Price Changes

• Discounts and Allowances
• Promotional Pricing
• Changes in list price
• Different prices for different customers

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Discount and Allowance Pricing
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Initiating Price Changes
Price Increases
Price Cuts


Why? Excess Capacity Falling Market
Share Dominate Market Through Lower Costs
Why? Cost Inflation Overdemand Company Cant
Supply All Customers Needs
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Factors determining reactions to price changes

• Number of firms in the market
• Product differentiation
• Level of buyer awareness
• Buyers perceptions of price cuts as signals that