Price Determination

1. Price Determination Principles of Marketing Mrs. Sorrell

2. Pricing Objectives Definition: Pricing objectives are the goals that tell what a marketer wants to achieve through pricing Maximize profit Maximize sales Increase market share Meet competition Return on investment

3. Maximize Profit • Charge the highest price that customers will pay • Make as much money as quickly as possible • Used when a product has a short life cycle • Used when the company has a monopoly for a specific event • Popcorn and drinks at a movie theater • Introduce a new product • Recover large amounts of money spent on R&D • Technology • Maximizing profit is often a short-term objective

4. Reality Check Describe a situation in which you think the prices were set to maximize profit. Describe the products and the prices.

5. Maximize Sales • Offering the lowest price possible to get the largest number of customers to buy the product • Sun Drop citrus soda introduced in 2001 • Original price was $0.49 for a four-pack • Attracted many customers from 7UP, Slice, Squirt, etc. • After building customer loyalty, prices will gradually increase

6. Reality Check Describe a product that you think was priced to maximize sales. Describe the product, its price, and why you think it was priced to maximize sales.

7. Increase Market Share • Goal: increase the company’s market share of a product • Definition: Market share is one competitor’s percentage of the total sales of a specific product • To increase market share, the company must sell more products • They might lower prices or offer premiums • Premiums are strategies to reduce price • BOGO • Cents-off coupons

8. Meet Competition • Companies set their prices in relationship to the prices charged by the competition • Higher (status) • Equal to competitors (match) • Lower (discounts/coupons) • Local competitors start PRICE WARS • Common among gas stations and airline industry

9. Reality Check Have you observed competitors trying to meet or beat each other’s prices? Describe the products and the prices. You are going to shop today for one product of interest. Find the product at three different businesses and record the prices on the WORD document. Include the web address. Search for coupons on the web to further reduce your price.

10. Return on Investment AKA ROI: a ratio that tells how much you earned as a percentage of the investment you made to earn the money Simple ROI = Profit Investment Suppose your company invests $100,000 in a new product. The selling of this product yields $12,000 in profits. $12,000/$100,000 = 0.12 ROI = 12%

11. Return on Marketing Investment ROMI—a metric (measurement) that measures the overall effectiveness and impact of a marketing campaign. Amazon.com spent over $700 million in TV ads, until they realized that half of this money was wasted. They developed affiliate websites that would track when customers click on the Amazon logo from another Web site, if they purchase, and how much they spend

12. ROMI, con’t. New Customer Metrics—measure market share, cost of acquiring new customers, customer awareness levels, and brand awareness Product metrics—may measure ease of use, customer satisfaction, ease of learning a product, and first-time user satisfaction Customer Retention metrics—measure customer retention rate, customer abandonment rate, brand loyalty, return visits, and the likelihood to refer a brand

13. ROMI Formula Simple ROMI = Gross profit- Marketing Investment Marketing Investment Gross profit equals net sales minus cost of goods sold. Marketing investment refers to the amount of money spent on the marketing activity

14. Effect of Price on Revenue Revenue—money a business takes in from selling their products Revenue equals the number of items sold times the price of the item As prices increase, profits increase As costs go down, profits increase Quantity sold refers to the number of items sold As the price of an item goes down, more items are usually sold

15. Possible Effect on Price on Sales of Hypothetical Gadget For this product, lowering the price raises the revenue. The result might be different for a different type of product.

16. Break-Even Point Definition: the point at which revenue from sales equals costs. Expressed as the number of items that must be sold to recover the money spent to buy the items Company is not losing or making money Break-Even = (Cost per Item) x (Number of Items Purchased) Point Selling Price Break-Even Point Handout and Excel

17. Establishing Prices • Too high, might lose customers • Too low, customers might question the quality • Simple method • Price = Cost + Profit Cost Method Pricing Worksheet on Excel

18. Psychological Pricing • Odd pricing—ends in odd numbers like 5 or 9 convey the image of a bargain • $9.99, $6.95, $12,495 • Even pricing—end in zero or an even number convey the image of a quality product • $4, $50, $300 • Promotional Pricing—prices are lowered for running sales (i.e. coupons, BOGO, % reductions, rebates • Prestige pricing—prices set high to convey an image of status and high quality (i.e. Coach, Jaguar, Bose) • Price lining—different levels of prices indicate different quality levels for the same type of product Psychological Pricing Worksheet

19. Other Pricing Techniques • Unit pricing—displaying the price of an item based on a standard unit of measure • Discount pricing—a reduction from the list price of the product • Cash discount—reduction percentage given for paying bills promptly (2/10, n30) • Promotional discount—given to wholesalers and retailers • Quantity discount—an incentive to purchase more product • Seasonal discount—buying goods in advance of the season • Trade discount—manufacturers quote prices to retailers and wholesalers (a percentage off the MSRP) Unit pricing stations & Channel of Distribution on Excel