Bus M300 1nd Edition Lecture 11 Outline of Current Lecture I. Promotional PricingII. EDLP PricingIII. Customary PricingIV. Psychological PricingV. Cost-Plus PricingVI. Cost-Plus Pricing ExampleCurrent Lecture I. Promotional Pricinga. Definition: The use of heavily advertised temporary price reductionsb. Example: loss leader – store is willing to lose money on one product because they hope you will buy other products. (Black Friday Sales)c. Why do firms offer price promotions?i. Increase demand for product (short/long term)ii. Drive traffic to stored. Is demand considered elastic or inelastic for a product being considered for a promotion? i. ElasticII. EDLP Pricinga. Definition: Promotion-oriented everyday low pricing strategyb. Why would a firm engage in this strategy?These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.i. Logistics, easy, appropriate for customersc. When might it be most effectivei. Customers are sensitived. Example: Wal-Mart has same prices over time, while Kroger will constantly have higher or lower prices.e. Why would a retailer like using the same price?i. It is easier to predict how much volume they need to bring into the store. III. Customary Pricinga. Definition: Tradition drives pricing as customers expect certain prices for certain products.b. Examples:i. USA Todayii. 1.99 single on iTunesiii. Soft drinksIV. Psychological Pricinga. Price Quality Relationships: there is a positive relationship between price and perceived quality in the absence of other product cues. b. Odd Pricing: the belief that certain prices carry information above/beyond the price itself and that some prices are more appealing than others. c. 9’s and 5’s – 19.99: consumers exaggerate the magnitude of the differencei. The price of cars uses this technique a lotV. Cost-Plus Pricinga. Markup pricing: specified amount added to the cost of the product to yield a pricei. Think of markup as the firm’s profitb. Cost = Price – Markupc. P = MU + Cd. MU on Price = MU/Pe. MU on Cost = MU/CVI. Cost-Plus Pricing Examplea. New image is a small company that develops webpages for local firms. The company wishes to have a 50% markup on the cost of its services. It charges $2000 for a standard web development effort. i. P = 600ii. C = 400iii. MU = 200iv. MUp = 1/3v. MUc =
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