Marketing USC 307 #7 Pricing
1.
Definition. Price is the amount of money buyers are willing to pay and
sellers are willing to sell the product (to achieve the goals of the Plan).
2.
Control over price. Your ability to control the price is directly related to
the quality and execution of the strategies that have come before. In
particular, the brand image building blocks of Positioning and Corporate
Image directly bear on your ability to control the price.
3.
Price Components and Factors physical and psychological.
3-1. Physical components. Cost (cost of sales), Gross Profit Margin,
Amortization of other costs allowed by GAAP accounting principles.
Pricephysicalcomponents
GrossProfit
Amortization
COSorCGS
COS=CostofSales,and
CGS=CostofGoodsSold
GPM=(PriceCOS)/Price
3-2. Physical factors. Quality of the product (including level of service),
Competitor pricing, Supply and Demand.
3-3. Psychological Value perception factors.
3-3-1. Positioning image building block with usually the greatest
influence value and price (upscale, high-end, exotic = higher price).
3-3-2. Corporate Image PIMS study said companies perceived as
leading
in customer service, or other areas, charge on average 9% higher
prices.
3-3-3. Product Quality perception = higher price.
3-3-4. Price The only way to value an unknown product from an unknown
company is by its price. Most significant digit pricing. $9.95 versus $10.
3-3-5. Distribution Buyers will pay more from certain channels because
they trust them (Nordstroms versus Venice Walk).
3-3-6. Promotion Promotion via high-end media = higher prices.
3-3-7. MIS Survey customers after purchase value product higher.
2009 Ira S. Kalb. All rights reserved.
PIMS(ProfitImpactof
MarketingStrategy)studyof
theStrategicPlanning
Institutestudied2,600
companiesover15years.
TheValuePropositionis
createdmainlyfromthe
first4buildingblocksbut
couldalsocomefrom
others.
1
USC Marketing 307 #7 Pricing
4.
Economic Factors How can supply and demand tie psychological
factors to the physical factors?
4-1. Elastic Demand Curve Small changes in price cause large
changes in the quantity demanded. If you are here, you typically
have done a lousy job of positioning your product.
4-2. Inelastic Demand Curve Large changes in price result in only
small changes in the quantity demanded. If you are here, you
typically have gotten to Level 3 (or done a great job) of positioning.
4.
Financial Health. Price is critically important to your ability to succeed as
an organization. Everything on your Balance Sheet and Income
Statement stems from your ability to get the price you need to (1) give
buyers what they want, (2) stay in business, and (3) pay to keep good
employees. Revenues = Price x Quantity
5-1. Balance Sheet Equation: Assets = Liabilities + Owners Equity
5-2. P&L or IS Equation: Profits = Revenues COS Expenses
5-3. Net Worth: Net Worth = Owners Equity = Assets Liabilities
6.
Life Cycle factors. Price may vary over a products life cycle.
6-1. High-tech products: To invent high-tech products, it often takes a
large research & development budget. This needs to be recouped.
6-2. Economies of Scale: New products dont benefit from purchasing,
manufacturing and selling economies of scale.
6-3. Innovators and Early Adopters: Tend to be less price sensitive.
For all these reasons, newly-introduced products are often priced higher.
2009 Ira S. Kalb. All rights reserved.
Profitscanbepaidto
shareholdersasdividendsor
reinvestedinthebusiness
throughyourRetained
Earningsaccount(partof
OwnersEquity).Thisishow
youreallymakemoney.Bill
Gatesbecametherichestman,
andSteveJobsandtheGoogle
cofoundersdonotgetpaida
salarybecauseofthis.
Skimmingpricingstrategyis
whenearlybuyersarecharged
moreforgettingproduct
earlier
2
USC Marketing 307 #7 Pricing
7.
Volume pricing You can and should give price breaks to customer
who buy in volume because of the following:
7-1. Economies of Scale Your costs are lower because it costs you
less to purchase, manufacturer, and sell in volume. Your friction or
overhead costs are less.
7-2. Prevent sales going to competition If they buy in quantity from
you now, they are less likely to buy from competitors later.
7-3. Incentive Because of the above, you want to give them an
incentive to buy from you and in volume.
Pricing Strategies This is critical to your success so try to
understand.
8-1. What the market will bear or Exclusive If Positioning Level 3.
8-2. Gross Profit target Take your costs and apply your GPM target.
8-3. Contribution Margin If you know your demand curve.
8-4. Dynamic Pricing Price goes up as supply goes down or more
people bid for same item in an auction (hotels, airlines, Internet).
8-5. Leader The leader can charge an average of 9% more.
8-6. Follow the leader If you are not the leader with poor positioning.
8-7. Match Competition If non-leader makes first price move.
8-8. Loss Leader Get prospect to visit your store and Web site.
8-9. Volume Discounts based on volume per 7 above.
8-10. Predatory To gain share, technically illegal but hard to prove.
8-11. Most significant digit Retailer in low to mid market..
2009 Ira S. Kalb. All rights reserved.
8-12. Price leader Have to be big and powerful with economies.
Alwaysremembertoposition
volumepricingproperly.
Otherwise,youwillgiveupa
lotofmoney,andyouwill
damageyourabilitytoget
betterpricesinthefuture.If
yougivealowerprice,you
needtohaveagoodreason
andgetsomethinginreturn.
Otherwise,somebuyerswill
thinkthatyoutriedtorip
themoff.
8.
Housingsalesinasellers
marketorsalesofitemsone
Bayoftenstartlowersomore
peoplegetinvolvedinbidding
upthepricehigher.
Anentreatarestaurant
mightbe$12.95or$12.50,
butatanexclusive,highend
restaurant,itwouldbe35.
3
USC Marketing 307 #7 Pricing
9.
Why is using Price alone your weakest strategy?
9-1. Easiest to beat. It is the easiest to beat without much effort because
an executive can change prices with an e-mail in response to
competition, but cannot change other strategies so easily .
9-2. Only room for one low-price leader. The low-price leader is
usually
a big company that has economies of scale that is hard
to beat.
9-3. Razor thin GPM. Can put company in financial jeopardy due to a
mistake or environmental factor outside the companys control.
9-4. Low price leaders rarely compete on price alone. Southwest wins
customer satisfaction awards (Product Quality), and Wal-Mart gives
customer a one-stop shopping place (Distribution - convenience).
Rememberpricehasboth
physicalandpsychological
components.Lowerpricescan
implylowerqualityifthe
productandcompanyarenot
wellknown
Itisriskytosellproductswith
narrowmarginsbecause
environmentalfactorsoutof
yourcontrolthatyoudidnot
expectcancauseyoutolose
money.
9-5. Small segment. Very few only buy on price alone, and they are not
loyal. They will buy from anyone who offers an even lower price.
9-6. Implies low quality. Often the lowest price implies lower quality.
9-7. Hard to sustain. Because of all the above it is hard to sustain.
9.
Price Strategy Objectives. Help to (1) Sell the product, (2) Increase
profits, (3) Increase market share, (4) Sell other products, (5) Achieve
goals of the plan, (6) Move slow-moving, old-version, or (7) outdated
products, Reinforce positioning and corporate image, (8) Get people to
try the product, (9) Motivate resellers, (9) Beat competitors, (10) work with
Sales Promotion to do any of the above.
2009 Ira S. Kalb. All rights reserved.
Salespromotion,whichtakes
theformofsales,discounts,
rebates,coupons,etc.,isa
promotionalstrategythat
incorporatespricebutisnot
pricealone.Itprovidesan
incentiveforbuyerstobuy
andsellerstosellquicker.
4
USC Marketing 307 #7 Pricing
11.
Bundle pricing. Selling multiple products together and giving a discount
to the buyer for buying them together
11-1. Sales economies. Less expensive to sell multiple products at once .
11-2. Locks out competitors. Buyers who buy the bundle will buy all
items from you rather than your competitors.
11-3. Gives buyer an incentive. Provides a special incentive to the
buyer.
Sellingmultipleitemsonone
invoiceisoftenfarless
expensivethanselling
individualitemsonmultiple
invoicesbecauseoftheorder
overhead(sellingtime,
transactionprocessingtime,
storageofthetransaction,etc.)
11-4. Make sure the bundle price is lower. If the bundle price is not
lower, it may cause the buyer to mistrust your company.
12.
Dynamic Pricing. Uses pricing (consumer behavior) psychology and has
been popular on the Internet.
13-1. Hotels and Airlines. Within the same hotel or plane, as places fill
up, the price goes up and frequent flyer miles may get blacked out.
13-2. Search engine key words. Major search engines auction key words
to bid up the price/position of more popular key words.
Dynamicpricingisbased
ongoodoldfundamental
supplyanddemand
principles.
13-3. e-Bay uses auction model. More people bidding bid up the price.
13.
Price can be very tricky. Because of the psychological components,
price can be tricky and not behave the way one would expect. To avoid
being tricked, understand that your pricing strategy has to fit with your
other building blocks especially the ones that come before it in the
Marketing Mix Corporate Image, Positioning, and Product, and it also
has to harmonize with the ones that come after it Distribution,
2009 Iraromotion. reserved.
P S. Kalb. All rights
Pricingistheareawhere
manymistakesaremade.A
commonmistakeistolower
thepricetomatch
competitors.
5
USC Marketing 307 #7 Pricing
14.
Price as a competitive weapon. So many try to use this as a competitive
weapon, but too many fail because they dont know how to do it. To use
price as a competitive weapon over the long run, you typically need the
following:
14-1. Cost advantage. This comes from economies of purchasing,
manufacturing, sales, and a lower overhead structure .
14-2. Established brand identity. If the value of the product is not
established, a lower price typically communicates that your product
is
inferior. A lowered price for Coca Cola will trigger sales, but a lower
price for Ira Cola is unlikely to do so.
14-3. Constant effort to keep costs lower. The problem with the low
price position is that it is hard to sustain since a new competitor
could come along with a new more efficient plant that can beat you
on cost.
14-4. Mature competitors. If you have immature competitors, they could
offer lower prices that cause them to lose money and eventually go
out of business, but before they do, they can do tremendous
damage
to your sales because they will have taken away your
only advantage.
14-5. Stable environment and good luck. If things out of your control,
such as higher fuel prices or Katrina, unexpected costs combined
with your lower gross profit margins could either drive you out of
business or force you to raise your prices thereby losing your
price advantage.
2009 Ira S. Kalb. All rights reserved.
Rememberthattheonlyway
toestablishthevalueofan
unknownproductfroman
unknowncompanyisbuyits
price,andpricealoneisyour
weakeststrategybecauseitis
theeasiesttobeat.
Tohavemostofthese
conditions,youtypically
havetobealarge
companywithalow
overheadandvery
efficientstructure,such
asDellComputer.
In2006,JetBlue,
SouthwestAirlines,and
DellComputerallhad
difficultiessustaining
theirlowpriceposition.
Itishardtostaylean
andmeanasyougrow
olderandbecomeatarget
forcompetitors.
6
USC Marketing 307 #7 Pricing
15.
Price, Positioning, and Value.
15-1. Price value rule. The primary way to establish the value of an
unknown product from an unknown company is by its price.
15-2. Positioning and Corporate Image. The image building blocks are
prerequisites for establishing value and giving you control over price.
The more unique and the greater the added value the product, the
higher the price.
15-3. Product. Product quality also helps you to establish price and value.
15-4. Distribution channel. The distribution channel can help to position
your products and increase the value. Unknown products from
unknown companies can be validated and have a higher value
because Trader Joes or Nordstroms carries them.
15-5. Promotion channel. If your products are promoted via high-end
media, the media can help to validate the product and enable you to
obtain more control over your price.
15-6. MIS. Collecting feedback from customers after your company
delivers goods and services can also add it its value in the minds of
buyers. After you take your car in for service to Lexus dealers, they
always survey your experience, and that contributes to your
perception of the product quality, the image of the company, and the
brand identity of Lexus, and this enables you to charge higher
prices.
2009 Ira S. Kalb. All rights reserved.
IfCocaColaisofferedata
lowerprice,peoplewillrun
outtobuyitsincethey
knowthecompanyandthe
product.IfIraColalowers
theprice,manywillthink
thatitisaninferiorproduct
sincetheydontknowit.
Ifyoufinddesigner
sunglassesattheVenice
Walksoldbyvendorsthat
lookasiftheyjustgotoutof
jail,youmaynotbuythem
sinceyoutypicallydont
trusttheiroriginand
authenticity.
Manyunknownproductsfrom
unknowncompaniesare
marketedusingthelabeland
logoAsseenonTVfor
validation.
7
USC Marketing 307 #7 Pricing
16.
Pricing Services.
16-1. Work Year. There are 2,080 hours in a work year (52 weeks times
40 hours per week). Since 80 hours are vacation with pay, most
companies round that down to 2,000.
Legal,consulting,andother
professionalservicesare
typicallyfiguredthisway.
16-2. Hourly pay. What the employee doing the work is paid on an hourly
basis.
16-3. Annual salary. This is what the employee doing the work is paid
annually.
16-4. Billing rate using hourly pay. This is usually 4X hourly pay, and is
meant to cover salary, overhead, and include a profit margin to the
company. If hourly pay is $25/hour, billing rate is $100/hour.
16-5. Billing rate using annual pay shortcut. Take the amount before
the last 3 zeros of annual pay and multiply it by 2. If annual pay is
$50,000, the billing rate is $100/hour ($50x2).
16-6. Gross profit margin. This method of pricing services (billing rate is
the price) gives a gross profit margin of 50% (typical for a
manufacturer) since the actual COS to the business is the hourly
pay x 2
to cover overhead and benefits. Then you double that
figure, and it
gives you the billing rate, or price of the service provider
since the
price is twice the total cost.
2009 Ira S. Kalb. All rights reserved.
8