Pricing Strategy

BAMA 550: Professor Kirstin Appelt Agenda

1. Assignment Debrief: Situation Analysis 2. Overview of 3. The 5 Cs of Pricing 4. Pricing Strategies and Tactics 5. Pricing Ethics

2 Team: Skills Matrix & Team Charter MARKETING Hand in today, if not already handed in

PLAN Team: Brand Selection due Saturday at 11:59pm (but early bird gets PROJECT the worm) CHECK-IN Team: Jump Start (optional) not handed in, recommended for team use

Team: Situation Analysis due Saturday, Sept. 16 at 11:59pm

Team: Marketing Strategy Analysis due Saturday, October 7 at 11:59pm

Individual: Team Evaluation due Sunday, October 8 at 11:59pm Price = Overall sacrifice consumer is willing to make to acquire product

4 What’s in a Price?

5 Price: the only mix element that generates revenue

6 The most flexible P A highly visible tool

An art, not a science An indicator of quality Costs Considerations • 5 Cs of pricing Customers Competitors Company Channel objectives Value members

8 5Cs: Company Objectives

What drives the company’s overall approach to pricing?

Sales orientation: maximize volume

Profit orientation: maximize profit or return

Competitor orientation: relative to competitors

Customer orientation: maximize value

9 5Cs: Customer

Price elasticity = % change in quantity demanded % change in price

10 5Cs: Customer What factors influence elasticity of demand? • Substitution effect • Income effect – Necessity vs. non- • Proportion-of-budget essential product • (Prestige product) – Type of competition – Brand loyalty • Cross-price elasticity

11 5Cs: Competition

Level of competition often shapes pricing: • Monopoly • Oligopoly • Monopolistic competition • Pure competition

12 Decommoditize through differentiation

13 5Cs: Channel Members Manufacturers, wholesalers, and retailers can have different pricing priorities… …and each layer can add cost. 5Cs: Costs

5Cs: Costs Cost ≠ value, but costs affect profitability Break-even Analysis

“At this price, what level of sales is required to cover costs?” 16 Marketing Math

Total revenue ($) = price x quantity Total cost ($) = fixed cost + variable cost x quantity

Profit ($) = total revenue – total cost Profit ($) = P x Q – (FC + VC x Q) or (P – VC) * Q – FC Break-even: Profit ($) = total revenue – total cost = 0

total revenue = total cost 17 Break-even: total revenue = total cost P x Q = FC + VC x Q

Break-even price: Break-even quantity:

P = FC + VC x Q = Q = FC . Q P - VC

FC + VC. Q Target price: Target quantity:

P= FC + VC x (1 + target return) Q = FC + target profit . Q P - VC 18 Break-even Analysis Limitations

• Price often varies • Costs often change with quantity • Only looks at supply side • Ignores external factors

19 Costs Considerations • 5 Cs of pricing Customers Competitors Company Channel objectives Value members

• Continuum for new products: Skimming ↔ Penetration Strategies • Continuum for existing products: Prestige ↔ High/Low ↔ EDLP

20 Strategy: New Product Pricing

Price skimming (a.k.a. market-plus pricing): setting a relatively high price

Penetration pricing (a.k.a. market-minus pricing): setting a relatively low price

21 Strategy: “Old” Product Pricing

• Prestige pricing • High/low pricing • EDLP pricing

22 Costs Considerations • 5 Cs of pricing Customers Competitors Company Channel objectives Value members

• Continuum for new products: Skimming ↔ Penetration Strategies • Continuum for existing products: Prestige ↔ High/Low ↔ EDLP

• tactics, incl. Tactics promotions, bundling, add-ons, etc.

23 Tactics: Price Discrimination

• Between segments • Between distribution channels • Between geographic areas • By usage – Quantity discounts – Time-based • Markdowns, discounts, coupons, & rebates

24 Tactics: Price Discrimination: Bundling “Basket” of products offered for a single price

25 Tactics: Price Discrimination: Add-ons Base price for main product and pay extra for complementary products

26 When does pricing cross the line? Ethical Unethical

To Consumers: Valid Reference prices Deceptive Leader pricing Loss leader pricing Upselling Bait and switch Valid Price discrimination Invalid To the Marketplace: Predatory pricing To Retailers/Manufacturers: Some vertical Price fixing All horizontal,

some vertical 27 re-cap

• Price is an art, not a science or formula, and depends on corporate objectives, customers, costs, competitors, and channel members. • New products may be introduced with high prices (price skimming) to take advantage of price-insensitive segments and recoup high R&D costs, or with low prices (penetration pricing) to build market share and discourage competition. • Retailers may price high (prestige pricing) to create an image, alternate regular and sale prices (high/low pricing) to create excitement and capture multiple segments, or price low (EDLP) to maximize sales. • Pricing strategies fall along a continuum from ethical to unethical; intent is often a deciding factor in where a strategy falls.

Image credits: SoftIcons.com reminders

• Grades updated on Connect: – Grades and feedback posted for Situation Analysis & SWOT – All marks are up to date (excl. this class session) • Review and complete class preparation • Questions? Come to office hours or email me!

Image credits:addons.mozilla.org today’s links

• What’s in a price? – Kavilanz, P. (2015, Feb. 12). Is this the world’s most expensive chocolate? CNN. Retrieved from http://money.cnn.com/2015/02/12/smallbusiness/most-expensive-chocolate/ • Price as indicator of quality: – College Humor “Second Cheapest Wine”: https://www.youtube.com/watch?v=mlg3H1StHpQ • Pricing strategies: – Prestige pricing: Lamborghini “Are You the Chosen One?”: https://www.youtube.com/watch?v=FeGlghZJKBo – EDLP: Staples “Wow! That’s a Low Price!”: https://www.youtube.com/watch?v=mJYyIBA-rcs – High-low pricing: Overstock “Presidents’ Day Sale”: https://www.youtube.com/watch?v=pZ6rXzBrVxk – High-low pricing: Target “The Two Day Sale”: https://www.youtube.com/watch?v=VFBsxwKHT14 • Pricing in the real world: – Roddan, R. (2015, October 30). Woolworth’s price strategy questioned by analysts. The Australian Business Review. Retrieved from http://www.theaustralian.com.au/business/companies/woolworths- price-strategy-questioned-by-analysts/story-fn91v9q3-1227588174718 – Bull, R. (2015, October 28). Winn-Dixie begins new pricing strategy. Jacksonville.com. Retrieved from http://jacksonville.com/business/2015-10-28/story/winn-dixie-begins-new-pricing-strategy

Image credits: www.businessmarketingblog.org want to know more? • What’s the “right” pricing strategy? – Taco Bell discusses their experience with EDLP and high-low strategies: McGraw-Hill “Pricing featuring Taco Bell”: http://bevideos.mhhe.com/business/video_library/00 77450965/swf/Clip_14.html – Is pricing why Wal-Mart struggles in China? – Trefis Team. (2014, June 18). Why Wal-mart never picked up in China? Forbes. Retrieved from: http://www.forbes.com/sites/greatspeculations/2014 /06/18/why-wal-mart-never-picked-up-in- china/#330dbdeb6b57

Image credits: 1stveritas.com Marketing Math: Your Turn Kits Kebabs’ current data: Sales = Q 6,000 Price = P $6 VC $3 FC $12,000 1) What is Kits Kebabs’ current profit? 2) If Kits Kebabs’ cuts their price by 10% and sales are flat, what will their profit be? 3) How many more units will Kits Kebabs need to sell to make their profits at P higher than at P ? 2 1 32 Marketing Math: Solutions

1) Profit = P x Q – (FC + VC x Q) = $6 x 6,000 – ($12,000 + $3 x 6,000) = $6,000

2) Profit = (.9 x P) x Q – (FC + VC x Q) = (.9 x $6) x 6,000 – ($12,000 + $3 x 6000) = $2,400

3) Target Q = FC + $6,001 . = $12,000 + $6,001 (.9 x P) – VC (.9 x $6) – $3 = 7,501, or 1,501 more units (25% more!) 33