Pricing Strategies ( 3 Pages)
Based on the Pricing Strategies presented in the “Lecture Notes” of this unit as well as links, reading, and your own knowledge, answer the following questions:
1. What pricing strategies have you witnessed retailers using?
2. Why do you think your retailer example applied this pricing strategy?
3. If you have traveled to another country, can you remember how products were priced, and what pricing strategies were used?
4. What pricing strategies does your own employer use?
Branding and Product Decisions
Recall that the marketing mix includes the product, promotion, place, and price. This unit focuses on the product. The term product is often used to denote both goods and services. While goods are tangible, services are intangible. It is important to differentiate a product by its attributes, characteristics, and features (these are synonyms). Branding also helps in this regard. Branding identifies and helps differentiate a product from one seller to another. It consists of a name, sign, symbol, or a combination thereof. Here are some important concepts with respect to branding:
A brand name is the spoken part of a trademark.
It is important for the company to know:
(a) who buys the brand
(b) what they want from it
(c) why they keep coming back
Research suggests people choose a certain brand due to (a) past experiences, (b) price, (c) quality, and (d) recommendations from others.
The inner brand is the tangible asset that no other brand owns. Examples include (a) its package graphics and logo, (b) its history, (c) its founder(s), (d) the company itself, and (e) famous advertising campaigns.
Brand equity is the value of what people think about a brand relative to its competition over a period of time.
Brand loyalty is the degree to which a consumer purchases a certain brand without considering alternatives.
Line extension – uses a brand name to enter a new market segment. Example: Coke, Diet Coke
Brand extension – a brand name is used to enter a completely different product class. Examples: Jello Pudding Pops, Ivory Shampoo
Franchise extension or family branding – The company attaches the corporate name to a product. Example: Honda Lawnmowers
Dual branding or co branding – Two or more products are integrated. Examples: Bacardi Rum and Coca Cola
New Product Development and Considerations
Review the following links at: h ttp://www.npd-solutions.com/portfolio.html (Links to an external site.) http://www.npd-solutions.com/resources.html (Links to an external site.) .
This section focuses on pricing. When deciding what pricing strategy to use for a product, marketing managers need to consider what stage in the product life cycle the product is at. Generally speaking, the earlier the stage for a product, the higher the price the firm can charge. Conversely, products that are in the decline stage are more apt to be priced lower. In addition, price-elasticity demand is important. Price elastic demand represents when demand does change and is responsive to price. Examples include automobiles, computers, airline tickets, etc. This scenario is particularly true when there are multiple competitors in the market place. Price inelastic demand occurs when people don’t care about price and will pay whatever amount the product is priced at. Examples include medicine, fuel, and other necessities. Here are some marketing strategies:
Skim pricing: Setting a high price in order to take advantage of price insensitivity. Typically used early in the product life cycle for new or innovative products. Example: New medicine
Penetration pricing: Setting a low price in order to take advantage of a price sensitive market. Typically used in the mature stage of the product life cycle. Examples: Autos, computers
Image pricing: Setting a high price in order to convey an image of high quality. Example: Hummer
Reference pricing: Pricing a product in line with what consumers think it should be priced at. Example: soft drinks are priced similarly
Odd pricing: Setting the price just below the rounded dollar figure with the idea that a consumer will round down instead of up. Example: $9.99
Value-in-use pricing: Pricing products based on their lifetime operating costs. Example: A refrigerator that is more energy efficient than a competitor will be priced higher. The consumer will save energy costs over the lifetime of the product and therefore the seller can charge more.
Price bundling: Offering two or more of the same or related products as a “package deal.” The price of each unit in a bundle is less than if the consumer purchased separately. Example: Vacation package that includes motel, airfare, car rental.
Captive product pricing: Setting a high price for products that must be used along with its main product. Examples: Razor blades, ink cartridges.
Promotional pricing: Setting low prices on selected items in order to attract customers quickly over a relatively short period.
Cost plus pricing: Commonly used by manufacturers, wholesalers, and retailers. A desired profit margin is added to the firm’s cost (or selling price) for each unit (see “cost plus pricing” below for more information).
The following information will be useful for your MDA#4 and MDA#6 (print this section for reference):
Total costs = total variable costs total fixed costs
Fixed costs = costs such as rent, insurance, property taxes. These costs typically do not change over the course of a year and do not change in direct proportion to a change in production levels.
Variable costs = labor and materials used for product. These costs change directly in proportion to a change in production levels.
Unit contribution margin = unit sales price – unit variable cost
If I sell a widget for $6.00 and my variable cost for each widget is $4.00, what is my contribution margin?
Answer = $2.00 (This figure represents $6.00 – $4.00).
Breakeven point in units (also called breakeven point in volume) = total fixed costs/unit contribution margin
Breakeven point in dollars = breakeven point X unit sales price
Example: Continuing with the same example as above, if my fixed costs for facility, insurance, property taxes is $10 million. What is my Breakeven Point in Units? In other words, how many units do I need to sell to just break even?
Answer for Breakeven Point in Units: $10 million/$2.00 = 5 million widgets
What is my Breakeven Point in Dollars? In other words, how much money do I need to take in to breakeven?
Answer for Breakeven Point in Dollars: 5 million widgets X $6.00 = $30 million.
Cost plus pricing – One of the most common methods used in pricing by manufacturers, wholesalers, and retailers.
First the firm calculates the average total cost (ATC) for each unit.
Average total cost per unit = total variable costs total fixed costs / units produced (or units purchased)
Example 1: My total costs = $100,000 and I produce 2000 units.
Answer: $100,000/2000 = $50. = ATC per unit
I have two options for markup:
Option 1. Markup based on cost = ATC per unit X percentage markup desired
Example: I wish to mark-up my product 50% based on cost = $50. $50 X .5 = $50. $25. = $75.
Option 2. Markup based on selling price. Here is the formula to use for option 2:
· Selling price = ATC per unit
· 1 – mark-up desired
· 1 – .5 = $100.
You can see that a markup based on selling price translates into more revenue.
Sometimes layers of markup will be used through the channel of distribution, and each channel member will add a markup before selling the product to the next member. Here is an example (again based on selling price):
Manufacturer’s ATC per unit = $108. who marks product up 10% = $120. for selling price
Wholesaler’s cost per unit = $120. who marks product up 20% = $150 for selling price
Retailer’s cost per unit = $150. who marks product up 25% = $200. for selling price
Weaknesses of using cost plus pricing:
· This approach ignores price sensitivity of demand. We don’t know how customers will react to price.
· The manager assumes that all products produced or bought will be sold. A shortfall in units sold would mean that fixed costs would have to be spread over fewer units, and the realized markup would be smaller than desired.
· Intermediaries such as wholesalers have to apply a markup large enough to cover overhead and provide a profit. Variations in demand may occur.
Other Pricing Considerations
The final price a customer pays (consumer, retailer, wholesaler, etc.) can be dependent upon:
Use of quantity discounts – the more of an item bought the lower the price per unit
Cash discounts – such as 2/10 net 30 = 2% off sales invoice if paid within 10 days, or full amount paid by 30th day. Interest charged for unpaid bills beyond 30 days.
Legal Pricing Issues
Robinson Patman Act: Outlaws price discrimination among buyers of goods of “like grade and quality” where the effect may be to “injure, destroy, or prevent competition.”
Sherman Act: Competitors cannot agree on a set price, or sell a product at below cost for the purpose of driving out competition.
Read more about predatory pricing, price discrimination, price fixing, dumping, and bait and switch pricing in your text and the following web sites: