Final Exam Study Guide Pricing Understanding and Capturing Customer Value Chapter 10 The Four P s of Marketing o Product o Price the right product offered at the right price o Place o Promotion The Nature of Price o Easy to change o Directly related to revenue generation and quantities sold o Key component of the profit equation Profit Total Revenues Total Costs Profits Price x Quantity Sold Total Costs Determinants of Price o Costs Variable costs that vary directly with the level of production Total the sum of the fixed and variable costs for any given level of Fixed costs that do not way with production or sales level production o Competition o Stage in product lifecycle o Promotion strategy o Perceived quality o Distribution strategy o Target market s demand What is a price o Essentially it s a value judgment o Price is the value product that customers give up or exchange to obtain a desired Prices can be both too high and too low Price set too low may signal poor quality Price set too high might signal low value o Giving up more value makes consumers more interested in doing research before purchasing listening to objective sources and bragging about their purchase afterwards o Payment may be in the form of money goods services favors votes or anything else that has value to the other party o Price is the only element in the marketing mix that produces revenue all other elements represent costs o Price plays a key role in creating customer value and building customer o Internal factors company s overall marketing strategy objectives and relationship marketing mix as well as other organizational considerations factors nature of the market and demand and other environmental o External factors Pricing Strategies o Customer Value Based Pricing the right way setting price based on buyers perceptions of value rather than on the seller s cost Value Pricing is customer driven We begin by thinking about how the product will benefit customers the core product benefits And whether or not our consumers can actually perceive all of these benefits We then price based on those predictions Price is considered along with all other marketing mix variables before the marketing program is set o Cost Based Pricing the wrong way setting prices based on the costs of producing distributing and selling the product plus a fair rate of return for effort and risk Cost Based Pricing is manufacturer driven product driven We begin by thinking about our costs We then consider the features of the good those expenses paid for We then price based on those considerations Companies Apple BMW and Steinway intentionally pay higher costs so that they can add value and claim higher prices and margins o Ex it cost more to make a handcrafted Steinway piano than a Yamaha production model But higher costs result in higher quality justifying that eye popping 72 000 price The key is to manage the spread between costs and prices how much the company makes for the customer value it delivers Two Types of Value Based Pricing o Good Value Pricing offering just the right combination of quality and good service at a fair price Competition Based Pricing An important type of good value pricing at the retail level is everyday low pricing EDLP involves charging a constant everyday low price with few or no temporary price discounts Ex Retailers like Wal Mart king of EDLP Costco In contrast high low pricing involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items Kohl s Macy s frequent sale days early bird savings Ex and bonus earnings for store credit card holders o Value Added Pricing attaching value added features and services to differentiate a company s offers and charging higher prices recession era consumer spending habits linger some movie Ex theater chains are adding amenities and charging more rather than cutting services to maintain lower admission prices o Value pricing can also be contrasted with competitive pricing o Competitor driven pricing setting prices based on competitors strategies costs prices and market offerings o Typically intended to capture market share o Risky Hot Mama fast growing clothing boutique pricing against larger Partly allowing competition to drive our pricing strategy Easy to get into price wars lower price competitors Macy s or Kohl s o Ex Relies on personal service a mom and kid friendly atmosphere and its knowledgeable staff to turn harried moms into loyal patrons It s like shopping with a girlfriend o Should be driven by value not pricing when competing with competitors o Pure competition the market consists of many buyers and sellers trading in a uniform commodity such as wheat copper or financial securities Sellers in these markets do not spend much time on marketing strategy o Monopolistic competition the market consists of many buyers and sellers who trade over a range of prices rather than a single market price A range of prices occurs because sellers can differentiate their offers to buyers In addition to price freely use branding advertising and personal selling to set their offers apart Ex Car companies Honda Each firm is less affected by competitors pricing strategies than in oligopolistic markets o Oligopolistic competition the market consists of only a few large sellers Verizon AT T Sprint and T Mobile control more than 80 of Ex the U S wireless service provider market o Pure monopoly the market is dominated by one seller Examples Government monopoly U S Postal Service Pricing in Different Types of Markets Private regulated monopoly A power company Estimating Demand o Demand refers to customers desire for products How much of a product do consumers want How will this change as the price goes up or down o Demand curves Shows the quantity of a product that customers will buy in a market at various prices if all other factors remain the same Vertical axis represents the different prices a firm might charge Horizontal axis shows the number of units Price Elasticity of Demand o The sensitivity of customers to price changes in terms of the quantities they will buy o Elastic o Inelastic Small percentage changes in price lead to substantial percentage changes in the number of units bought if demand hardly changes with a small change in price Ex Price changes finding substitutes Starbucks Large percentage changes in price lead to small percentage changes in the number of units bought if demand changes greatly Ex a
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