Chapter 9

ADMS 3220 Prof. Carbonell

1. 2. 3.

4.
5. 6.

Pricing strategies Understand breakeven analysis Impact of elasticity on pricing issues Psychological aspects of price Price discrimination Price changes

ADMS 3220 Applied Marketing Management Prof. Carbonell

Pricing allows the company to obtain value back from customers Not an easy decision. Pricing
Influences your profitability. Is influenced by company cost, competitive pricing and customers willingness to pay. Sends signals to the market. May vary across segments & lifecycle.

ADMS 3220 Applied Marketing Management Prof. Carbonell

The 3 Cs impact pricing

Companys cost Customers sense of products value Competitions price

ADMS 3220 Applied Marketing Management Prof. Carbonell

ADMS 3220 Applied Marketing Management Prof. Carbonell

Profit ()

= (price x demand) (fixed costs) (variable costs x demand) = [(price variable costs)] x demand (fixed costs)

Profit increases as price increases;

However demand decreases when price increases. Calculate demand elasticity (also known as price sensitivity).

ADMS 3220 Applied Marketing Management Prof. Carbonell

Elasticity
How much does demand (units sold) increase (or decrease) with a price change? Inelastic: demand barely changes Elastic: demand changes

ADMS 3220 Applied Marketing Management Prof. Carbonell

Q2 Q1 Q1 P1 Q2 Q1 E P2 P1 Q1 P2 P1 P1

Elasticity

The proportion change in quantity compared to the proportion change in price E>1, demand is elastic If 0<E<1, demand is inelastic If E=1, demand is unitary

ADMS 3220 Applied Marketing Management Prof. Carbonell

If charge $7, sell 10 units = $70 revenue If charge $4, sell 40 units = $160 revenue

ADMS 3220 Applied Marketing Management Prof. Carbonell

If charge $7, sell 35 units = $245 revenue If charge $4, sell 40 units = $160 revenue

ADMS 3220 Applied Marketing Management Prof. Carbonell

Price-sensitivity is greater when

Customers
Dont care much about the purchase Dont have strong preferences Dont have strong brand loyalty Have limited income

The item is a luxury rather than a necessity There are many substitutes The purchase is large relative to income It is easy to compare prices

ADMS 3220 Applied Marketing Management Prof. Carbonell

Firms need to cover costs

Costs set the minimum floor on pricing

Cost-plus pricing
Price= Unit cost/ (1-X%) Where X% is the intended return

If fixed costs are high relative to variable, maximize volume If variable costs are high relative to variable, maximize per unit margins

ADMS 3220 Applied Marketing Management Prof. Carbonell

Number of units needed to sell to cover costs BE (units)= (fixed costs)/[(price-variable costs])

ADMS 3220 Applied Marketing Management Prof. Carbonell

ADMS 3220 Applied Marketing Management Prof. Carbonell

How much would sales drop off in the face of a price increase? Consider price sensitivity (PS)
% change in sales
PS P2 P1 P1

Develop PS estimates using scanner data, survey data and/or conjoint analysis

ADMS 3220 Applied Marketing Management Prof. Carbonell

Scanner data methods

Run experiments by manipulating prices in randomly selected stores and comparing sales to control groups

S PS P

@ 20% off @ 20% off

S benchmark / S benchmark Pbenchmark / Pbenchmark

ADMS 3220 Applied Marketing Management Prof. Carbonell

Conduct a survey to assess willingness to pay (WTP)

$25.00; Definitely would not buy 1 $35.00 Definitely would not buy 1
2 3 4 5 Definitely would buy 2 3 4 5 Definitely would buy

ADMS 3220 Applied Marketing Management Prof. Carbonell

Show product combinations with price; ask Which do you most prefer? Next?
Two segments are represented below

ADMS 3220 Applied Marketing Management Prof. Carbonell

Given the figures, explain the difference between Delta and Southwest.

ADMS 3220 Applied Marketing Management Prof. Carbonell

Profit = revenue expense

Revenue = price x quantity sold

To maximize profits, find a price where any further increase in price would lead to a large falloff in quantity sold.
Profit Maximization: marginal revenue equals marginal cost

ADMS 3220 Applied Marketing Management Prof. Carbonell

There are several psychological aspects associated with how consumers perceive prices that can therefore impact how a product is priced.

ADMS 3220 Applied Marketing Management Prof. Carbonell

For some products and services, higher prices can make a purchase seem more appealing to customers, leading to higher demand. Customers utilize price as a quality signal

ADMS 3220 Applied Marketing Management Prof. Carbonell

Which offer is more attractive?:

$15 off of a $199 item or $15 off of a $49 item

For any given discount, the amount is often compared to the initial or full price. The greater the discount amount to the full price, the more likely it is that a person will act.

ADMS 3220 Applied Marketing Management Prof. Carbonell

A $499 trip is the same as a $599 trip with a $100 discount at booking.
Which choice seems more appealing?
The $599 trip seems like a better deal because of the higher starting price

Price discounts make customers think they are smart shoppers

ADMS 3220 Applied Marketing Management Prof. Carbonell

Prices like $4.99 or $49.99 tend to be more attractive than $5 or $50. People read right to left; thus, the 4 is processed first and leaves an impression

ADMS 3220 Applied Marketing Management Prof. Carbonell

The middle choice between two extremes is more attractive. Given the choice between two prices ($250 and $200), most people will opt for the lower price ($200).
However, had a third price ($300) that is higher than the two original prices and most people will now pick what is now the middle price ($250).

ADMS 3220 Applied Marketing Management Prof. Carbonell

People compare price to some reference, either an externally available price or an internally stored price
External Internal
MSRP is $49.99, now available for $35.99! Our price $34.99, compare at $45.00!
Memory Inferences about store, etc.

ADMS 3220 Applied Marketing Management Prof. Carbonell

Different segments value different things

Price-sensitive, quality seeker, brand-loyals

Quantity Discounts
The more purchased, the more saved

Yield Management
Using price and scheduling to manage demand of services
Go to the movies during the day for less $ Book a flight last minute for less $

ADMS 3220 Applied Marketing Management Prof. Carbonell

Introduction stage
Market Penetration
Seek market share. Price low to stimulate sales, encourage trial, and trigger word-of-mouth. Need capacity and channel presence to succeed.

Market Skimming
Seek profit. Price high initially, then lower to make product more accessible.

ADMS 3220 Applied Marketing Management Prof. Carbonell

Temporary price cuts can increase sales in the short-term but also have negative side effects: Competitors can imitate. Price drops attract disloyal customers. Customers may stock up. May negatively affect brand image.

ADMS 3220 Applied Marketing Management Prof. Carbonell

They are only relevant to coupons clippers.

Thus the concern of reflecting poorly on the brand is less of an issue for coupons.

Good for companies.

Drive sales up and the redemption rate is only about 1%.

Effective at encouraging new (current) customers to try current (new) products.

ADMS 3220 Applied Marketing Management Prof. Carbonell

Given the company positioning, should you price high, medium or low? If price changes, how will demand change in face of the increase or decrease in price? Should you consider occasional price discounts and discounts? How can your clients pricing strategy vary (segments, time, quantity, etc.)? How do consumer perceive different prices and price changes? How can you apply the psychology of price for your clients business?
ADMS 3220 Applied Marketing Management Prof. Carbonell