Mark 3000 1st Edition Lecture 12 Outline of Last Lecture I Diffusion II Product Life Cycle Concept Outline of Current Lecture I Price II 5 C s of Pricing III Legal Aspects and Ethics of Pricing Current lecture Price is the overall sacrifice a customer is willing to make money time energy to acquire a specific product or service The revenue for the seller It is the cost of the item for the consumer Price allocates resources in a free market economy 5 C s of Pricing Company o Objectives of company Profit orientation Focus on target profit pricing maximizing profits or target return pricing Reach a set level of profits Target profit pricing Have a particular profit goal as overriding concern and use prices to stimulate certain level of sales at certain profit per unit Maximizing profits relies on the economic theory of a firm determining all the factors required to predict sales and profits to identify a price where profits are maximized Target return pricing Specific returns on specific investment Sales orientation Main goal of increasing sales volume 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 Maximize sales volume Premium pricing Firm prices a product above prices set for competing products to capture those customers who always shop for the best or for whom price does not matter Competitor orientation Measure itself against its competition Competitive parity Setting prices that are similar to those of major competitors Status quo pricing When a firm only changes prices to only meet those of competition Prestige products customer purchase for status rather than functionality Customer orientation create value for the customer Customer o Willingness to pay Ability to pay Nature of product Necessity or luxury All these factors affect the demand of a product o Demand is the quantity of a product that will be sold in the market at various prices Most products follow a downward sloping demand curve Prestige products follow a Sideways U demand curve o Elasticity of demand Consumer s responsiveness or sensitivity to changes in price Formula Elasticity change in quantity demanded of good change in price of good If greater than 1 Demand is elastic change in price has large change in demand in the opposite direction o Cars Luxuries If less than 1 Demand is inelastic Change in price has little change on demand o Gas Food Necessities If equal to 1 Demand is unitary Factors that affect elasticity Income As income increases demand for normal goods increases and vice versa Tastes Substitutes Complementary products o Demand Curve Assumes no change in factors influencing elasticity Shows quantity demanded at various price points Can either have movement along different prices or shift in demand curve Factors that shift the demand curve such as income taste substitute complements Costs o Variable Costs vary with production volume o Fixed Costs Unaffected with production volume o Total cost Sum of fixed and variable costs o Break even analysis used to set the must have price or minimum quantity to sell o Pricing Strategies for manufacturers Market penetration pricing Set the initial price low for introduction of new product or service Experience curve effect expect unit cost to drop significantly as accumulated volume sold increases Price skimming Selling a product at a high price that innovators are willing to pay in order to obtain it once the market becomes saturated then firm lowers the price to capture the remaining segments Competition o Monopoly One firm controls the entire market Less competition and fewer firms o Oligarchy A handful of firms control the market more competition and fewer firms Price wars 2 or more firms compete primarily by lowering prices o Monopolistic competition Many firms selling differentiated products at different prices Less price competition and many firms o Pure Competition Many firms selling commodities for same prices Many firms with more competition Channel Members o Retailers typically set price to consumer o Gray market Employs irregular but not illegal methods o Mark up Amount added above retailer s cost to purchase the item Includes retailer s expense and profit o Keystoning 100 markup Retailer doubles cost to get a selling price o Retail tactics Price bundling combing different products in a single package meals Leader Pricing Sell product near cost to generate Traffic High low pricing relies on promotion of sales during which prices are temporarily reduced to encourage purchases Loss leader pricing selling product below cost to generate traffic Odd even pricing Odd number prices imply bargain Even number prices imply quality Ever day low pricing no sales by retailer Wal Mart Bait and Switch pricing lure customers through false or misleading price advertising Legal aspects and ethics of Pricing Deceptive or Illegal price advertising Price advertisements should never deceive consumers to point of causing harm o Loss leader pricing is illegal in some places o Bait and switch is difficult to enforce Price Discrimination Firms sell same product to different resellers at different prices o Illegal under clayton and Robinson Patman Act o Quantity discounts are allowed Predatory Pricing When a firm sets a very low price for one or more of the products with an intent to drive our competition o Illegal under Sherman anti trust act and FTCA Price fixing Colluding with other firms to control prices o Horizontal price fixing is illegal under Sherman Anti Trust Act while Vertical is in the gray area o Horizontal when competitors that produce and sell competition products collude o Vertical parties at different levels of the same marketing channel agree to control prices passed on to consumers Manufacturers control price by issuing a MSRP