Mark 3000 1st Edition Lecture 12Outline 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 - Companyo 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 shopfor 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 - Customero 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 curveo 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 directiono 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 differentprices, 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 harmo 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 colludeo Vertical: parties at different levels of the same marketing channel agree to control prices passed on to consumers  Manufacturers control price by issuing a