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PowerPoint Presentation 9-1-43 Pricing Strategy 8 Session (Solomon et al. Ch. 10) Global Marketing BUS124 9-2-43 1. Explain the importance of pricing and how marketers set objectives for their pricing strategies 2. Describe how marketers use costs, demand, revenue and the pricing environment to make pricing decisions 3. Understand key pricing strategies 4. Understand the opportunities for Internet pricing strategies 5. Describe the psychological, legal and ethical aspects of pricing strategies Learning outcomes 9-3-43 Price is the value that customers give up or exchange to obtain a desired product • Monetary prices the exchange involves trading money for the product • Non-monetary prices no money changes hands, but there is some exchange of value – also known as “barter” • Opportunity cost is the value given up to obtain something else Monetary and non-monetary prices 1500s Nordic traders bartering with Russians 9-4-43 • opportunity cost can be assessed in several ways e.g. the cost of obtaining a degree, missed opportunities to socialise with friends, missed income of not working vs. the personal satisfaction of obtaining the degree, family pride, better employment prospects, broader knowledge Monetary and non-monetary prices (cont.) vs 9-5-43 Steps in price planning Fig. 10.1 Steps in price planning 9-6-43 Pricing objectives must support the broader company objectives as well as specific marketing objectives 5 main types of pricing objectives: 1. Sales or market share - reduce prices to gain sales 2. Profit - motivates shareholders to invest 3. Competitive effect - to influence competitors pricing 4. Customer satisfaction - customer focus leads to increased profits in the long term 5. Image enhancement - appeals to status-conscious consumers who will pay higher prices for prestige products Step 1. Develop pricing objectives 9-7-43 • Demand - customers’ desire for a product • Marketers need to know how much consumers will purchase if the price of the product goes up or down • By using a demand curve it shows the quantity of a product that customers will buy if all other market factors remain constant • The law of demand: As price goes up, quantity demanded goes down Step 2. Estimating demand 9-8-43 Normal Demand Curve (Part of Figure 10.4) Step 2. Estimating demand (cont.) 9-9-43 Shift in the Demand Curve (Figure 10.5) Step 2. Estimating demand (cont.) Shifts in the demand curve can be caused by changes in the environment or in company efforts e.g. an effective advertising campaign 9-10-43 Estimated demand Average amount purchased by each buyer Number of potential buyers Likely market share Step 2. Estimating demand (cont.) Table 10.1 Estimating demand for pizza Medium $17.00 Large $21.00 Large $7.00 Large $9.45 Estimating demand based on price 9-12-43 Inelastic demand - changes in price have little or no effect on the amount demanded Elastic demand - changes in price have a large effect on the amount demanded Price elasticity of demand is the % change in unit sales that results from a % change in price (Q2 – Q1) / Q1 (E) = (P2 – P1) / P1 Step 2. Estimating demand (cont.) % change in quantity demanded % change in price 9-13-43 Cross elasticity of demand is when changes in the price of one product affect the demand for another item Step 2. Estimating demand (cont.) Prices increased to $15 kilo due to cyclone Larry in 2006 and cyclone Yasi in 2011 compared to approx. $3 kilo prior to the cyclones – during the high price periods consumers bought other fruit instead of bananas http://www.google.com.au/url?sa=i&source=images&cd=&cad=rja&docid=jilFk_b-NngKPM&tbnid=4427cglrue7peM:&ved=0CAgQjRwwAA&url=http%3A%2F%2Fguardianlv.com%2F2013%2F06%2Fbananas-as-hepatitis-b-oral-vaccine%2F&ei=wxsvUof9KoSvlQXIn4CYCA&psig=AFQjCNHkQNUezvhQJgOrW3vixj3tLiNh2g&ust=1378905411748087 http://www.google.com.au/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&docid=5KRyw1vYhOFIXM&tbnid=lIsbfjawr_AXtM:&ved=0CAUQjRw&url=http%3A%2F%2Fearthsci.org%2Fprocesses%2Fweather%2FLarry_data%2Fbom_larry%2FTropical%2520Cyclone%2520Larry.htm&ei=IB4vUoP7HMTWkAXVnoHYAg&bvm=bv.51773540,d.dGI&psig=AFQjCNGoLWDFCZWIkJQRcFA-Co6mBNEtxQ&ust=1378905907037917 9-14-43 Companies incur costs when producing products 1. Variable costs • The costs of production that are tied to and vary depending on the number of units produced • Includes raw and processed materials, parts and labour 2. Fixed costs • Costs of production that do NOT change with the number of units produced • Includes rent, utilities, head office salaries Step 3. Determine costs 9-15-43 Average fixed costs are the fixed costs per unit produced e.g. Fixed costs = $100,000 10,000 units produced Average fixed cost = $10 Total costs are the total of the fixed costs and variable costs for a set number of units produced Break even analysis is a technique used to determine the number of units that need to be sold to cover all costs Break-even point is where total revenue and total costs are equal Step 3. Determine costs (cont.) 9-16-43 Step 3. Determine costs (cont.) Fig. 10.9 Break-even analysis 9-17-43 A target profit can also be added to total fixed costs in order to calculate volume required to achieve profit goals $200,000 $50 total fixed cost contribution per unit to fixed costs = 4,000 units Break-even point $200,000 + $50,000 $50 = 5,000 units Step 3. Determine costs (cont.) Marginal cost is the change in the total cost that arises when the quantity produced is increased by one unit. That is, the cost of producing one more unit of a good e.g. if producing additional vehicles requires building a new factory, the marginal cost of the extra vehicles includes the cost of the new factory Q $ 9-19-43 Step 3. Determine costs (cont.) Fig. 10.8 Marginal analysis 9-20-43 Markups and Margins: Pricing through the Channel • Markup is an amount added to the cost of the product to create a price at which the channel member will sell the product Gross margin Retailer margin Wholesaler margin List price or manufacturer’s suggested retail price (MSRP) Step 3. Determine costs (cont.) 9-21-43 Step 4. Examine the pricing environment External variables also need to be considered in setting pricing 1. The economy • Economic growth, consumer confidence, inflation e.g. during recessions consumers are more price sensitive and buy generic products 2. The competition • Market structure tends to influence price e.g. oligopoly, monopolistic competition, pure competition 3. Government regulations • Competition and Consumer Act 2010 influences price in Australia https://www.legislation.gov.au/Details/C2018C00437 https://www.legislation.gov.au/Details/C2018C00437 9-22-43 Step 4. Examine the pricing environment 4. Consumer trends • Lifestyle and demographics e.g. older mothers have more money to spend on children 5. International environment • For global products pricing usually varies by country but some products use standardised pricing e.g. Airbus A380 9-23-43 Marketers can choose to vary pricing strategies according to the lifecycle of the product, the particular product and the market conditions There are 5 main pricing strategy based on: 1. Cost 2. Demand 3. Competition 4. Customer needs 5. New product pricing Step 5. Choose a pricing strategy 9-24-43 Step 5. Choose a pricing strategy (cont.) 1. Pricing strategies based on cost Cost pricing is based on the cost of producing the product There are 2 main strategies used for cost based pricing: • Cost plus pricing • A method of setting prices in which the seller totals all the costs for the product and then adds an amount to arrive at the selling price • Mark up the selling price • Mainly used by wholesalers/retailers, their mark-up is known as the seller’s gross margin total cost + x% of the total cost = Selling Price Example: $20 + 50% = $30 total cost / (1- mark-up %) = Selling Price Example: $20 / (1-50%) = $40 9-25-43 Advantages • Simple to calculate • Low risk approach • Price will at least cover all costs Disadvantages • Doesn’t consider competitor prices • Not related to market demand • May not be consistent with brand image • Not related to Product Life Cycle stage Step 5. Choose a pricing strategy (cont.) 1. Pricing strategies based on cost (cont.) 9-26-43 Demand pricing is based on estimates of demand at different prices There are 2 main strategies used for demand based pricing: • Target costing • Tries to match price with demand • Starts with market price (what customer would pay) • Then determines whether the firm can produce at a cost low enough to generate a profit • Yield management • Charges different prices to different customers e.g. airlines, hotels