BUS M 300 Lecture 17 Outline of Last Lecture I Marketing Channels II Direct vs indirect channels III Choosing a Marketing Channel IV Market Channel Conflicts V Supply Chains Outline of Current Lecture VI What is Pricing and Profitability VII Demand Curve VIII Price Elasticity of Demand IX Demand Oriented Pricing X Cost Plus Pricing Current Lecture What is Pricing and Profitability o Price is the value that customers give up or exchange to obtain a desired product o Payment may be in the form of money service or goods bartering favors votes or anything else of value to the other party o Profitability Profit Total Revenue Total Costs 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 Unit Price x Quantity Sold Total Costs Demand Curve o A demand curve is a graph relating the quantity sold and price which shows the maximum number of units that will be sold at a given price o Three factors effecting demand Consumer tastes These include culture demographics and technology Price and availability of similar products As the price of substitutes fall or their availability increases the demand for a product will fall Consumer income As income increases so will demand for certain products Price Elasticity of Demand effects demand o Marketers are especially interested in how sensitive consumer demand and the firm s revenues are to changes in the product s price o This is measured by price elasticity of demand the percentage change in quantity demanded relative to a percentage change in price o A product with elastic demand is one in which a slight decrease in price results in a relatively large increase in demand or units sold The reverse is also true o A product with inelastic demand is one in which a slight increase in price results in a steady or increased demand or units sold Demand Oriented Pricing o Many firms seek to maximize profits through building sales This approach is called demand oriented pricing o Demand oriented pricing is sensitive to the notion of customer value and setting prices to match the benefits of the product as perceived by customers o Demand Oriented Pricing Approaches Odd Even Pricing involves setting prices a few dollars or cents under an even number 499 99 vs 500 00 Bundle Pricing the marketing of two or more products in a single package price and is based on the idea that consumers value the package more than the individual items Yield Management Pricing the charging of different prices to maximize revenue for a set amount of capacity at any given time Example Hotels and Airline tickets Penetration Pricing Setting a low initial price on a new product to appeal immediately to the mass market is penetration pricing the exact opposite of skimming pricing Skimming Pricing A new or innovative product can use skimming pricing setting the highest initial price that customers really desiring the product are willing to pay Prestige Pricing Setting a high price so that quality or status conscious consumers will the item Price Elasticity of Demand o Understanding the concept of Elasticity of Demand is necessary to successfully apply demand oriented pricing o Elasticity Q2 Q1 P1 P2 X P2 P1 Q1 Q2 P price per unit Q quantity demanded in units 1 2 time periods Numbers above zero are possible but rare Closer to zero means that the product is less price sensitive Cost Plus Pricing o Markup pricing the markup is a specified amount added to the cost of the product to yield a price think of markup as the firm s profit o Price Markup Cost This simple formula can yield information on five unknowns price cost absolute markup and markup on price and markup on cost o The 5 unknowns associated with Price Markup Cost P MU C MU P C C P Markup MU on Price MUP MU P MU on Cost MUC MU C o A natural question is how do firms determine their markups One way is to incorporate the elasticity of the product s demand into the formulation of markups which are then used to develop prices Here s a simple way to do so MUC E 1 E 1 o Price Customization We know from our study of segmentation that the consumer response to marketing stimuli is not uniform Hence it can be argued that consumers in different segments respond to prices on the same product in different ways The marketer s task is to set prices that reflect these differences Here s how it can be done P1 P2 E1 E2 E1 E1 E2 E2 Where the Ps are the prices and the E s are the elasticities o Break Even Analysis