The Nature of Price Price The value exchanged

The Nature of Price • Price – The value exchanged for products in a marketing exchange • Barter – The trading of products; the oldest form of exchange • Terms Used to Describe Price – Tuition, premium, fine, fee, fare, toll, rent, commission, dues, deposit, tips, interest, taxes Copyright © Houghton Mifflin Company. All rights reserved. 1

The Nature of Price (cont’d) • The Importance of Price to Marketers – It is the most readily changeable characteristic (under favorable circumstances) of a product. • Have a sale! Lower priced (“value”) menu. – It is a key element in the marketing mix because it relates directly to generation of revenues and quantities sold. – It is a key component of the profit equation, having strong effect on the firm’s profitability. – It has symbolic value to customers—prestige pricing. Profit = Total Revenues - Total Costs Profits = (Price x Quantity Sold) - Total Costs Copyright © Houghton Mifflin Company. All rights reserved. 2

Price and Nonprice Competition • Price Competition – Emphasizing price and matching or beating competitors’ prices • Circuit City – “we’ll pay the difference if competitors have a lower price” • Priceline. com • http: //www. adcritic. com/content/priceline-uncanny. html – An effective strategy in markets with standardized products • Airfare wars – Lowest-cost competitor (seller) will be most profitable. • Southwest Airlines, Walmart • http: //www. adcritic. com/content/southwest-recess. html – Allows marketers to respond quickly to competitors • If one airline cuts prices, competition will match. – Price wars can weaken competing organizations. • Low profit margins…SWA vs. Continental Express Copyright © Houghton Mifflin Company. All rights reserved. 3

Price and Nonprice Competition (cont’d) • Nonprice Competition – Emphasizing factors other than price to distinguish a product from competing brands • Distinctive product features • Service • Product quality • Promotion • Packaging • http: //www. adcritic. com/content/delta-the_seat. html – Is effective when a product or service’s features are difficult to imitate by competitors and customers perceive their value • Can image/product of Nike be imitated? – Builds customer loyalty by focusing on nonprice features • Performance • http: //www. adcritic. com/content/honda-cog. html Copyright © Houghton Mifflin Company. All rights reserved. 4

Analysis of Demand • The Demand Curve – A graph of the quantity of products expected to be sold at various prices – Decreases in price create increases in quantities demanded. – Increased demand means larger quantities sold at the same price. – Must monitor other elements of marketing mix! • Price is not the only influencer of demand. • Quality, promotion, distribution, etc. – Prestige items sell best in higher price ranges. Copyright © Houghton Mifflin Company. All rights reserved. 5

Elasticity of Demand • Price Elasticity – A measure of the sensitivity of demand to changes in price—the greater the change in demand for a specific change in price, the more elastic demand is – In other words: • Heating oil vs. sports cars Copyright © Houghton Mifflin Company. All rights reserved. 6

Elasticity of Demand FIGURE 20. 3 Copyright © Houghton Mifflin Company. All rights reserved. 7

Analysis of Demand (cont’d) • Reasons for Demand Fluctuations – Changes in buyers’ needs – Variations in the effectiveness of the marketing mix – The presence of substitutes – Dynamic environmental/market factors Price Elasticity of Demand Copyright © Houghton Mifflin Company. All rights reserved. = % Change in Quantity Demanded % Change in Price 8

Important Terms • Marginal Revenue – The change in total revenue resulting from the sale of an additional unit of product • Fixed Costs – Costs that do not vary with changes in the units produced or sold • Rental of retail space • Average Fixed Cost – The fixed cost per unit produced • % of rental cost in each unit • Variable Costs – Costs that vary directly with changes in the number of units produced or sold • Hiring extra salespeople for xmas season Copyright © Houghton Mifflin Company. All rights reserved. 9

Determining the Breakeven Point FIGURE 20. 7 Copyright © Houghton Mifflin Company. All rights reserved. 10

Factors That Affect Pricing Decisions FIGURE 20. 8 Copyright © Houghton Mifflin Company. All rights reserved. 11

Factors Affecting Pricing Decisions • Organizational and Marketing Objectives – Prices should be set that are consistent with the organization’s goals and mission. • E. g. , service, quality, etc. – Prices must be compatible with marketing objectives • e. g. , setting premium prices to enhance a product’s quality image. • Types of Pricing Objectives – Setting prices low to increase market share – Using temporary price reductions to gain market share – Lowering prices to raise cash quickly Copyright © Houghton Mifflin Company. All rights reserved. 12

Factors Affecting Pricing Decisions (cont’d) • Costs – Set a floor price—products must be sold above their costs if the firm is to remain in business. • Dealer cost? – Reducing costs increases productivity and profitability. • Using labor-saving technologies • Focusing on quality • Establishing efficient manufacturing processes • Other Marketing Mix Variables – Price/quality image of the product or brand – Selective or intensive product distribution – Product pricing used as a promotional tool Copyright © Houghton Mifflin Company. All rights reserved. 13

Factors Affecting Pricing Decisions (cont’d) • Channel Member Expectations – To make a profit at least equivalent to the potential profit from handling a competitor’s brand • Kraft vs. Wishbone vs. Kens – To receive discounts for volume purchases and prompt payment • Drop shipments – To be supported by the producer with training, advertising, sales promotion, and return policies • In-store displays Copyright © Houghton Mifflin Company. All rights reserved. 14

Factors Affecting Pricing Decisions (cont’d) • Customers’ Interpretation and Response – What meaning does the product’s price have to the customer? • Perceptual pricing: $3. 99 = 4. 00? 2 for $1. 00? – Does the customer respond to the price by moving closer to or farther away from making a purchase? – Internal reference price • A price developed in the buyer’s mind through experience with the product – External reference price • A comparison price provided by others Copyright © Houghton Mifflin Company. All rights reserved. 15

Factors Affecting Pricing Decisions (cont’d) • Buyers’ responses to price – Value consciousness • Concern about price and quality – Price consciousness • Striving to pay low prices – Prestige sensitivity • Being drawn to products that signify prominence and status • Willing to pay higher price Copyright © Houghton Mifflin Company. All rights reserved. 16

Factors Affecting Pricing Decisions (cont’d)Price Discounting (cont’d) • Competition – Pricing to match competitors’ prices • Then compete on nonprice – Judging competitors’ responses to adjusting prices • What will Verizon due if Sprint lowers prices? – Changes in an industry’s market structure cause and create pricing opportunities. • Monopoly vs. perfect competition • Cable vs. athletic shoes • Legal and Regulatory Issues – Price controls intended to curb inflation --- California? Arnold? – Controls that set/regulate prices for specific products – Regulations and laws to prohibit price fixing, and deceptive and discriminatory pricing Copyright © Houghton Mifflin Company. All rights reserved. 17

Extra credit assignment! • 5 points! You NEED these! • Go to blackboard for course (9: 30 = section 2, 1: 00 = section 3) • Take survey posted on “assignments” • When finished, BEFOR clicking “submit”, print out survey, bring to class 10/21. • Print out “Thank you” acknowledgement • Print out e-mail receipt. • http: //www. business. ecu. edu/users/venableb/surv ey/ Copyright © Houghton Mifflin Company. All rights reserved. 18