Principles of Marketing

1. Principles of Marketing Price

2. Strategic Objectives • Profit • Positioning and leadership • Social responsibility

3. The Feasible Price Range What is the highest price a consumer will pay? What is the lowest price a seller can charge? What encourages sellers to charge something between the two extremes?

4. Demand • Value analysis (economic value; other values) • Recognition of substitutes • Price sensitivity • Anticipation of price changes

5. Value Analysis of compact fluorescents • Price of typical incandescent bulb=$.75 • They use 100 watts per hour and average 1000 hours. • CF bulbs use 25 watts per hour and average 13,000 hours. • Electricity costs=$.05 per kwh (1000 watts/hour) • What is the economic value of of CF bulb?

6. Value Analysis of compact fluorescents Value of X = (Price of substitute + costs associated with substitute) -costs associated with X Value CF =

7. Costs • Fixed, Variable, Sunk • Average • Sensitivity to volume • Marginal Mark-up calculations Breakeven analysis

8. Mark-up problem • Retailer price of lawnmower=$800 • Mfr. Cost=$312 • Retailer markup=35% • Wholesaler markup=20% • A. What was the cost to the wholesaler? • B. What was the cost to the retailer? • C. What was the mfr’s markup?

9. mu mu mu Retailer: $800= cost cost cost Wholesaler: Manufacturer:

10. Breakeven problem: Davis, Inc. • Fixed costs=$200,000 • Product price-$250 • VC per unit=$200 • Sales estimate=$1,250,000 • A. What is the breakeven point? • B. What is the estimated profit (loss)? • C. If sales are estimated at $875,000, ???

11. Breakeven problem: Davis, Inc.

12. Competition • Substitutability • Aggressiveness • Barriers to entry

13. Market conditions • Elasticity • Scale economies in production • Barriers to competition • Innovativeness of product • Diffusion rate of innovation • Price sensitive segments? • Resources available for production/marketing

14. Price Elasticity • % change in demand per % change in price • Normal: 1% change in price results in 1% change in demand. E=1.0 • Elastic: (extra stretch in response to price change) E>1.0 • Inelastic: (demand does NOT stretch in response to price change) E<1.0 • In response to elastic markets, firms should lower prices. • In response to inelastic markets, firms should raise prices.

15. Price Elasticity Problem • Acme Products had an average price of $800 and sales of 15,000 units • They raise their price to $900 and have sales of 13,000 units • What should they do with price now?

16. Market Skimming Setting a High Price for a New Product to “Skim” Maximum Revenues from the Target Market. Results in Fewer, But More Profitable Sales. Use Under These Conditions: Product’s Quality and Image Must Support Its Higher Price. Costs Can’t be so High that They Cancel the Advantage of Charging More. Competitors Shouldn’t be Able to Enter Market Easily and Undercut the High Price. New Product Pricing Strategies

17. Price Changes • Discounts and Allowances • Promotional Pricing • Changes in list price • Different prices for different customers

18. Discount and Allowance Pricing

19. Initiating Price Changes Price Increases Price Cuts Why? Excess Capacity Falling Market Share Dominate Market Through Lower Costs Why? Cost Inflation Overdemand: Company Can’t Supply All Customer’s Needs

20. Factors determining reactions to price changes • Number of firms in the market • Product differentiation • Level of buyer awareness • Buyers’ perceptions of price cuts as signals that