MAR3023 Exam 3 Material Principles of Marketing LECTURE NOTES Lecture 3 25 14 Part 1 This is the first lecture after Exam 2 At this point we have already talked about product and promotion now we re focusing on the PRICE part She begins by talking about an article saying your phone is now your first screen because people spend the most minutes on their phone today 151 min compared to 147 on TV even worse in other countries Advertising hasn t really caught up with this trend Initial Thoughts on Price Setting Profit Improvement as a function of a 1 improvement in Fixed costs Volume Variable Costs Price improving the price will give you more bang for your buck Price is important Particularly important in countries like US that use administered pricing set by manufacturer consumer decides whether or not to buy it Compare administered pricing to Participative Pricing negotiating the price consumer can bargain administered is most common form of pricing Outline Price Setting Overview Pricing Objectives Cost Based Pricing Profit Based Pricing Demand Based Pricing Value Based Pricing Prices go by many names 1 Tuition 2 Rent 3 Premium 4 Fee 5 Dues 6 Fare 7 Wage 8 Interest Goal is not to recover cost but to capture the value of the product in the consumer s mind Value is a function of perceived benefit if value is high you can charge more for your product COMPANY COST CONSUMER PERCEPTIONS OF VALUE Price Floor Price Ceiling No profits below this price No demand above this price Want to fit your price in the best spot Pricing Objectives What are you trying to do with your product Sales Related Objective o Dollar Revenue set your price so you know how much money you ll make each day Lemonade stand if we set our proce at 50 cents a cup we ll be able to make 10 by the end of the day setting a price to assure you sell so many units of your product We need to sell 2million iPads what should we set our price as to sell this many units o Unit Volume Profit Related Objective o Maximization Approach where you will make the most profit relative to your price To maximize the profit you want to set marginal revenue equal to marginal cost Theoretically this will maximize your profits MR MC o Satisficing Approach set your wanted profit then see what price you need to make that profit Market Share Objective Looking at Competitors Price o You want to maximize market share set your price so you gain a lot of market share maximizing market share might not include setting the highest price could have to start out with a lower price to get as many people as you can to buy the product over time your price will go up Stability Objective o Goal to keep price stable by keeping cost stable o Might include a long term contract Tuition is an example Social Responsibility o Setting a price because it s the right thing to do Colleges don t raise tuition even if students will still attend the college because it is the right thing to do Pricing Approaches Cost based Profit based Demand based Value based Cost Based Pricing Concepts Break Even Analysis o Fixed Cost FC cost you re going to incur no matter how much you sell or produce you have to buy machinery pay rent each month no matter what o Variable Cost VC change with the amount you produce ex labor costs the more you make the more people you have to employ o Total Cost TC Total cost is Fixed Costs Variable Costs o BE Price Total FC Units Unit Variable Cost o Example What price should Sleep Inn charge for one night o Hotel Capacity is 250 rooms o Two Knowns Total FC 4000 Unit VC 8 per room o Two unknowns Price P and Units Sold o Try 250 rooms sold out o BE Price 4000 250 8 per room o BE Price 16 per room 8 per room 24 per room o If the Inn charges 24 per room they will break even o What if the Inn doesn t sell out o Try 200 rooms 80 occupancy o BE 4000 200 8 per room o BE Price 20 per room 8 per room goes towards variable cost o BE Price 28 per room Contribution Margin How much each unit chips away lowers at the FIXED COST From the previous example each room chips off 20 from the fixed cost Markup Pricing Expressed as of selling price o NOT as of cost of goods o Used for manufacturer selling to the consumer o If a text book sells for 100 at a book store and the markup in 30 the retailer paid 70 for the book o Price Cost of Goods 1 MU markup is expressed as a o Example Cost is 1000 per item Markup is 50 o Price 1000 1 5 1000 5 2000 Price o Makes it easy to know how much cash you generate off of each decimal sale COMMERCIAL BREAK WOW that s a low price Staples Commercial Staples Low Prices IKEA Commercial showing how much they pay for their cabinets How firm communicates its price Profit Based Pricing o Target Profit Pricing Relevant terms Total Fixed Cost TFC Total Variable Cost TVC If it costs me 8 to procuse one unit if I produce 1000 units the TVC would be 8000 Total Profit Pi I want to make 1million this year Price TFC TVC Pi Total of Units Example TFC 100 000 Unit VC 100 Pi 30 000 Units 200 Price 100 000 100 x 200 30 000 200 750 per unit o Target ROI Pricing ROI Return on Investment Investment ROI Target Profit Calculated your profit a different way Price TFC TVC investment ROI Total of Units Example TFC 175 000 TVC 825 000 Investment 2 000 000 ROI 20 Units 700 Price 175 000 825 000 2 000 000 x 2 700 Price will be 2 000 per unit March 25th 2014 Lecture Part 2 General Problems with Pure Cost and Profit Based Pricing Internal Focus Ignores demand and competitive factors Assumes all that is produced is sold at full price Fails to account for economies of scale Cost Based May not be capturing as much value as you could be could charge more for your product because it is valued by consumers Target profit based May be charging more than benefits you deliver price is higher than consumers believe it should be Demand Based Pricing Skimming high to low Setting the price high at the beginning then lowering it over time This often happens with technology iPhones because when a product is new to the market people are excited and less price sensitive at the start Penetration low to high Reverse of skimming Price of the product is set low at the beginning to attract customers then gradually increases over time Prestige Pricing backward bending demand curve Product intentionally set high to give consumer prestige that the product should be valued If Rolex drops …