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Creating value entails adding features to the base product, including greater reliability, better performance, making the product last longer, increasing safety, and creating a better design.

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Price is the most closely related element of the marketing mix as the product, place, and promotion each have a cost associated with them. Price can also be the easiest to change since a price change can literally be implemented over night.

Prices should be aligned with the overall marketing strategy of the brand.

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Monopoly: A single firm has the power to set and control price in a market. Drug manufacturers, due to patent protections, are examples.

Oligopoly: Where several firms share price power by being able to control supply. OPEC is an example.

Monopolistic: Limited number of firms compete and prices are dictated through customer demand for specific brands. Car manufacturers are examples.

Pure Competition: Numerous producers selling undifferentiated products.

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A products contribution per unit is the difference between the selling price and variable costs. The profit margin is product contribution per unit divided by the selling price. Take for example the following product:

Unit selling price - $1.59

Unit variable cost – 1.03

Contribution per unit = 1.59 – 1.03 = $0.56

Profit margin = .56/1.59 = 35.2%

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Cost-Plus pricing is taking the variable cost of a product and adding a fixed percentage to arrive at a selling price. This chart highlights the differences between a markup and a margin. Selling price is calculated by dividing cost by the inverse of the intended markup percent, or cost/(1-markup %). To calculate the selling price of a $12 product, and a desired markup of 10% the formula would be $12 /(1-.10) or $12 / .9, which equals $13.33. The margin is determined by dividing the contribution per unit, $1.33 in this case, by the selling price. In this example the margin is: $1.33 / $12 = 11%

This can be somewhat confusing for students, but things should become clearer in the next few slides. The biggest area of confusion is that these calculations go against most of what they know regarding margins. Students typically will see a cost of $12 and a 10% margin and would sell the product for $13.20. This type of markup is known as markup on costs. The method outlined in the example on the slide uses markup on selling price, which is the most common form of markup.

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The formula to calculate break-even is: fixed cost / contribution per unit; contribution = selling price – variable cost. In the example from the slide, fixed costs = $40,000; selling price = $10; and variable cost = $5. Contribution per unit is: 10 – 5 = $5

So the breakeven volume = $40,000 / $5 = 8,000 units

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•Demand tends to be elastic if consumers can easily find substitutes

•If the price of Coca-Cola rises, consumers can switch to Pepsi or another substitute

•Demand for luxuries exhibit elastic demand, while demand for necessities tend to be inelastic

•Insulin, a necessity for Diabetics, must be purchased regardless of the price

•The larger the portion of a budget an item consumes, the higher the elasticity

•Elasticity is greater for products such as cars and suits, than for matches or iceThe number of units sold for a given product is based, in part, on the price being charged. For most products (i.e., elastic demand), raising prices will lead to lower unit volume, while lowering price leads to higher volume. For products whose demand is inelastic, a change in price will have little impact on the number of units sold.

Example: Gumball economics – The average gumball is priced at $0.25, at this price, the company sells on average 200,000 units. If the price of gumballs were to increase to $0.50, unit sales would fall to 100,000. A price decrease on the other hand would lead to an increase in unit sales to 300,000 units. In this example, gumballs have an elastic demand.

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Legal requirements entail the role that governmental regulations play in setting prices. Firms must ensure that federal antitrust laws are not violated when setting prices (price is the most heavily regulated of the 4 P’s). Antitrust laws fall into three categories: Price fixing (collusion among competitors), Price discrimination (charging different prices to different customers), and predatory pricing (price reduction solely to drive competitors out of business). These pricing issues, along with loss-leader pricing (retailers charging a low price to increase traffic, which harms competitors) deal mainly the B2B market, but federal and state governments also regulate pricing as it relates to consumers. An example here would be deceptive pricing (bait-and-switch).

Competitive Bidding relates to the acquisition of goods/services in the B2B environment. When a major purchase is to be undertaken by a firm they will issue a “request for quote” (RFQ) that identifies the exact specifications of the product they are seeking. Suppliers then submit a bid, which are sealed. All bids are unsealed on a set date and the lowest bidder, in most cases, is awarded the contract. For other types of purchases a firm’s purchasing agents enter into negotiation with the supplier before finally settling on the final price. This can by related to the buying process consumers use for purchasing a house or an automobile.

Managers must understand the implications of various factors when pricing for global markets. Factors to be considered include Quotas (limits on the amount of specific foreign products that are allowed into a country); tariffs (duties or fees imposed by countries to ensure price parity with local producers); and currency exchange rates (which can fluctuate overnight turning small profit into a loss).

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Profitability – setting price to meet a specific profit target.

Volume – If a company can reduce its cost through achieving economies of scale and/or the experience curve they may opt to price its products low in order to generate significant volume. This is similar to “penetration pricing”. There are numerous reasons for using this type of strategy: gain market share to limit competitors from entering; or to have an entry point in a crowded market. Nintendo used volume pricing with its Wii game system and quickly exceeded the sales volume over PlayStation and Xbox.

Meet Competition – Allows a company to position its product close to a competitor, if price is a key differentiator.

Prestige – Many brands enjoy perceptions of high quality or luxury. Since price is often used by buyers as a proxy for quality, high prices can help maintain the desired image.

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Price skimming is where a products price is set high upon its introduction and then lowered over time. This is done so as to generate as much profit as possible before competitors enter the market. Innovators and early adopters are likely to pay a higher price for the latest cool products. The key here is that prices will fall over time as competitors enter the market.

Penetration pricing is pricing a product low so as to gain market share quickly. This could be to take advantage of experience curve, where manufacturing costs are reduced as more units are produced. A way to get this point across to students is to asked them about their skill level the first time they played a particular video game. Most will admit to doing poorly the first time or two. But over time they gain the skills and knowledge needed to become advanced players. It is the same way with employees. The more times they perform as task the quicker they become. As the employees become more skilled they can produce more units in less time, thereby reducing cost.

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When a penetration price is used, the product or service is offered at a lower price compared to its competition. Although the product may be sufficiently appealing to command a higher price, a marketer might prefer to set a low price so as to quickly generate sales volume, market segment penetration, and production scale.

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Storefront pricing – prices being set based on brick and mortar sales. These prices were set based on the required markup to support a physical location. Online retailers do not incur the same expenses and thus can charge lower prices than traditional merchants.

Online pricing refers to setting of prices based on the cost structure of an internet retailer. While online retailer still incurs expenses they are significantly less than a traditional retailer.

Tiered pricing is the practice of offering different products at different price points to appeal to wider market audience. Price tiering is used most noticeably with telecommunications companies through offering various levels of services or plans that cover a wide range of pricing.

Dynamic pricing is where prices are charged based on various elements including market conditions, cost to serve differences, or based on the value of the customer.

Forward auction are where a buyer announces their desire to purchase a certain product and a merchant responses with the price they are willing to sell the product for. Negotiations can take place to finalize the selling price.

Reverse auctions are similar to forward auctions except that the buyer also states the price they are willing to pay. This is the type of auction that can be found with Priceline.com.

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Companies which have multiple brands and multiple lines must consider how to price each specific product so as to gain the total maximum revenue for the company. Within a brand family it is important that each product is priced in similar fashion. For example, Johnson’s offers numerous baby product (shampoos, lotion, powder, etc). Each of these products are connected to each other via their shared brand name (Johnson’s Baby). If prices were inconsistent among the products, that is one being highest priced in category (shampoo) and another being low priced (say baby powder) then the buyers may judge the entire baby product line as being of lower quality.

Company’s with multiple brands in the same product category can be priced at various levels. A company can have three brands in a category and these can be priced at the low end, middle, or high end. Think of the brands (those currently on the market) of GM. The vehicles they offer range from the low-end (Chevrolet) to high-end (Cadillac), and all points in between.

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Cash discounts – receiving a discount for paying with cash (due to the expense associated with credit card payments).

Quantity discount – buying more and paying less.

Trade in – receiving a cash value for trading in an old item for a new purchase. Applies to more than just automobiles.

Rebate – cash payment made to buyer for purchasing a product.

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