Global Environment

GlobalEnvironment

International Marketing 70-480, Session 9Lloyd Corder, Ph.D.

Pricing

Slide 1

Corder’s Questions

1. Why is pricing such a difficult subject few marketers want to focus on?

2. What tools can be used to determine the potential impact of pricing changes on sales volume, price and other factors?

3. How can we use the psychology of pricing to our advantage?

4. Why does it really matter how you think—and talk—about customers?

Believe in the power of feedback.

9. PricingInternational Marketing 70-480Lloyd Corder, Ph.D.

Slide 2

Amount of goods or services received for money given.

Price Defined“The sum of money or goods asked or

given for something.” - American Heritage Dictionary


Slide 3

Seller

Amount of money received for product, service, brand, etc.

Buyer

Product• Physical product• Service• Assurance of quality• Repair facility• Packaging• Credit• Buyer incentive program

Place of delivery or availability

Buyer

Customer’s View of PriceSlide 4


Price• List price• Less discounts

• Quantity• Seasonal• Cash

• Less allowances• Trade-ins• Damaged goods

Seller

Product• Branded (well-known)• Guaranteed• Warranty• Service-repair facility• Convenient package

Place• Available when & where needed

Price• Price-level guaranteed• Sufficient margin for profit

Promotion• Promotion aimed at customers

Buyer

Price• List price• Less discounts

• Quantity• Seasonal• Cash• Trade

• Less allowances• Damaged goods• Advertising• Special incentives

Seller

Channel Partner’s View of PriceSlide 5


Other Words for Price• Rent/mortgage• Fee• Tariff• Bid• Premium• Dues• Retainer• Salary/wages• Bill• Check/ticket• Bribe

• Tuition• Interest• Fare• Commission• Honorarium• Assessment• Toll• Donation• Wager• Tax• Invoice

Price is the moment of truth. It’s when you get paid for all of your product, service

and marketing efforts.

It’s the value we get for everything we put into the

product, service or idea.

Slide 6


Most firms set prices based on costs or imitate competitors mechanically.

Brief History of Pricing

Source: Business Week

Many firms don’t understand and

capture the value they have created for their

customers.

Slide 7


1950

Survey Date

Only half the practitioners say pricing is important.

Top managers say pricing is the most important issue.

Only 12% of firms do serious pricing research; only 2/3 of those companies use the research results.

1964

1984

1994

Seller Competitors

GovernmentPricing Factors

Profit

Cost

Profit

Cost

Price

Slide 8


Price

Buyer

1.Better accounting2.Less waste (TQM)3.Cut staff4.Negotiate better costs5.Decrease production time

1.Better marketing2.Better selling skills3.Make more sales calls4.Brand products / services5.Raise Prices

Sell More

Spend Less

How to Make More ProfitSlide 9


Revenue Cost

Profit

How To Calculate Profit

( ) ( )• Pricing policy• Product life cycle• Value of brand

image• Discounts/ coupons• Marketing

effectiveness• Competitors’ pricing

• Customer classification— Size (A, B, C)— New/existing— Loyalty

• Production/ service capacity

• Customer demand

• Equipment• Software• Land• Buildings

• Labor• Materials• Energy

Slide 10


Revenue Cost

Price Volume Fixed Variable

Profit

VariableUnit Cost Volume

PowerStar Price• Company background

• Electric power tool manufacturer• Direct to professional customers for

$100• Annual sales volume: 1,000,000 units• Variable unit costs: $60• Total fixed cost: $30,000,000• Assume a linear relationship between

price and sales• You are hired as a consultant by

PowerStar

Slide 11


PowerStar, continued• Questions:

• What is the current profit at $100?• What would be the profit if the cost was reduced by

20%?• What would be the profit if the cost was increased

by 20%?• How can we achieve optimal profit? What is the

optimal price, volume and profit?• Besides the information they’ve already provided,

what questions would you ask management to help them make future pricing decisions?

• Takeaways from this example?

Slide 12


Identifying True Cost

Everything a business spends on everything?

Relevant costs for producing

product, service or

idea?

What gets classified as a “cost” can dramatically influence your price—and your opportunities.

Slide 13


What is considered a “cost?”

Classifying Costs•Salaries and wages•Rent•Utilities•Repairs and maintenance•Insurance•Travel•Telephone•Postage•Printing•Advertising•Marketing/promotion•Professional fees•Training and development•Bank charges•Depreciation•Miscellaneous•Interest income (expense)•Etc.

Relevant?

Costs incurred because a product is sold—or not sold

Asset? Liability?

Slide 14


Fixed? Variable?

Orchestra Example• Performs two Saturday evenings a month during the

season with a new program for each date• Current costs

• Fixed overhead costs $1,500• Rehearsal costs $4,500• Performance costs $2,000• Variable costs (programs, printing tickets, etc.) $1 per

patron• Tickets: $10; Hall capacity: 1,100 seats• Problems:

• Usual attendance: 900• Current revenues: $9,000• Current expenses: $8,900• Current profit: $100

Manager doesn’t believe a simple price increase will work.

Slide 15


Orchestra, continued• Alternative Proposals

• Student rush: Sell the 200 extra tickets for $4 each to students (first come, first served)

• Expects students to be a new audience• Sunday matinee: Repeat Saturday performance next

day for $6• Expects to sell 700 seats, but 150 would come from the

Saturday performance (net 550)• New Series: Performed on alternate Saturdays

• Tickets Priced at $10, expects to sell 800 tickets, but 100 would be from original Saturdays… patronage would increase by 700

• Which approach, if any, should be selected?

Slide 16


Tools for Understanding Pricing• Break Even

• Point at which money coming in equals the money going out

• Contribution margin• How much money you make off of each item

(product, service, etc.)• Elasticity (Price Sensitivity)

• How much business you win/lose when you change your price

• Psychological Pricing• Internet Pricing

Slide 17


1. Breakeven Formula• Simple Example (Store with 1 product)

• Rent: $10,000 per month (fixed cost)• Revenue = Expenses

• Product cost: $3 per unit (variable cost)• Suggested Product Retail Price: $5

• Accounting Formula for Breakeven Sales

Slide 18


Breakeven Sales5,000

Fixed Cost

( )Price Variable

$10,000

( )$5 $3

Breakeven Graphs

Source: Basic Marketing, E.

Jerome McCarthy

Slide 19


Making a Profit• Take breakeven and add profit

• To make a profit of $4,000 at $5 per item, we need to sell 7,000 units

• What happens if we think we can only sell 6,500 units? What price do we need to set our products?

Slide 20


Breakeven Sales7,000

Fixed Cost

( )Price Variable ( )$5 $3

Profit $10,000 $4,000

Working BackwardSlide 21


Breakeven6,500

Fixed Cost

( )Price Variable

Profit

6,500

$10,000

( )$? $3

$4,000

$?$10,000

( )$2.15 $3

$4,000

$10,000

( )$4,000

$? $3

2. Contribution Margin• Few businesses sell only 1 product• Need a “contribution margin”—deduct the money paid to suppliers from the

money received from customers

Slide 22


Contribution Margin Ratio

Sales( )Sales

Variable $5( )$5

$3

Breakeven$35,000

Fixed Cost

( ) ( )Profit $10,000 $4,000

40%

Contribution Margin Ratio

40%

3. Elasticity (Price Sensitivity)Price Sensitivity

What happens if Coke raises its price?• Some consumers buy it, anyway.• Some brand loyal consumers buy less of it.• Some consumers start buying Pepsi, RC Cola or store brand s

Slide 23


Which brand to buy?

Brand choice elasticity

How much product to buy?

Primary demand elasticity

Hotels Raise Rates by 10%

Before After

Occupancydrops 20%

Hotel A Hotel B

Before After

Occupancydrops 5%O

ccup

ancy

(Roo

ms S

old)

Occ

upan

cy(R

oom

s Sol

d)

Need to know which hotelsare A’s and which are B’s

200

160

200 190

Slide 24


Profit Impact on HotelsIt is extremely valuable to segment hotels in this way.

$66

190

$12,540

$8,000

$2,850

$1,690

Price/roomnight

Roomnights sold

Revenue

Revenue increases 4.5%

Fixed cost

Variable cost$15/room

Profit

$60

200

$12,000

$8,000

$3,000

$1,000

Before AfterHotel B

Profit Increases 69%

$66

160

$10,560

$8,000

$2,400

$160

Price/roomnight

Roomnights sold

Revenue

Revenue drops 12%

Fixed cost

Variable cost$15/room

Profit

$60

200

$12,000

$8,000

$3,000

$1,000

Before AfterHotel A

Profit Drops 84%

Slide 25


Need to Know Price Elasticity

Before After

Hotel A Hotel B

Before After

Occ

upan

cy(R

oom

s Sol

d)

Occ

upan

cy(R

oom

s Sol

d)

200

160

200190

Occupancy Drop Rate Increase

20%+10%

Elasticity: = = 2.0

“High Elasticity”

Occupancy Drop Rate Increase

5%+10%

Elasticity: = = 0.5

“Low Elasticity”

How does knowledge of elasticity affect our pricing strategy?

Slide 26


Gene

ral R

ules

Elasticity Summarized

• Usually negative reaction (price increase = less sales; price decrease = more sales)

General Rules:•If <1, raise prices•If <1, don’t lower prices

Miller Beer cut prices by 20%, sales jumped 9%… sales revenue fell 12.8% after cut .80 (price) X 109 (volume) = 87.2, which is 12.8% less than 100

Slide 27


% Change in Unit Sales

% Change in PriceElasticity

210-1-2

Inelastic

Elastic

Elastic

4. Psychological Pricing InfluenceSmall Ticket

Big Ticket

Purchase price $1,000 $20,000

Discover identical product at lower price

$600 $19,600

Unit difference $400 $400

% difference 40% 2%

Should you stick with your initial purchase price or switch to the second?

Slide 28


a. Weber-Fechner Law

• People evaluate price difference based on the percentage difference—not absolute terms

• Price differences seem less important as base price increases

Slide 29


b. Odd Price

• “Odd” is a price just below a full dollar amount ($19.99 vs. $20.00)• For retail, odd prices are perceived as

being significantly lower than the next highest round number

• Recent trend is to shift from .99 to .95• Odd price in consulting practices

often viewed as “low budget” and “low class”• Better to price a survey at $10,000 than

$9,999.95

Find out how competitors in your marketplace are using odd pricing strategies.

Slide 30


c. Reference Price

• Buyers have a general perception of a fair price• Perceptions based on current

prices, past prices, competitors’ prices and purchase context

• Buyers form higher reference prices when they are exposed to prices in descending order (top-down selling)

Be careful what you ask for on the first “purchase” or product entry—past prices will dramatically shape perception of price increases.

Slide 31


Reference Price, continued• Sandwich technique: Present three

prices, sell “high price”, expect “low price” to be scoffed at and win “medium price”• Consulting proposal

• $10,000 (1 day training, individual follow-up, team building facilitation, 10 books, year-long newsletter subscription)

• $7,500 (1 day training, individual follow-up)

• $3,500 (1 day training)

Sell this

Win this

Rule: Never “lower” the price for the same group of items…instead, “take things away” from the offering.

Slide 32


d. Prospect Theory

• Buyers evaluate purchases as gains and losses

• Buyers judge the loss of any given amount as more painful than they judge the gain of an equal amount as pleasurable—no one likes to lose!

• Gains and losses have a diminishing effect as they grow larger

Prospects have a price they think is fair. If the actual price is greater, they feel a loss. If it’s lower, they feel a gain.

Slide 33


Prospect Theory, continued

Loss function is steeper than gain

Source: Negle & Holden, Strategy and Tactics of Pricing

Slide 34


Value Function

5. Internet Pricing• Pricing traditions are transforming pricing

practices in profound ways and the buyer • Set price: Seller simply fixes the price

• Examples: Palm Pilot, Amazon.com, eToys• Strategies/implications:

• Build your brand and your customers’ trust

• Add more web features to enhance the shopping experience

• Use frequent buyer, personalization and other features increase repeat business

Internet explodes traditional “geographic” segments, but also puts more price pressure on manufacturers (because it’s easier to shop around for a better price)

Slide 35


Internet Pricing Options, continued• Dynamic pricing: Update your prices frequently

• Examples: eCOST.com• Strategies/implications

• Track your clicks and instantaneously offer special products or discounts

• Develop an extensive customer database and segment the market based on past purchase habits

• Establish different storefronts• Develop a price-matching system for

customers who enter your store through a price comparison tool/program

Slide 36


Internet Pricing Options, continued• Auctions: A vendor puts items up for sale and

would-be buyers are invited to bid• Examples: eBay• Strategies/implications:

• For sellers: Lowers searching costs• For suppliers: Lowers sales costs (can

eliminate a channel) and inventory costs (can sell it faster)

• For buyers: Lower the cost of getting “hard to find” items

Slide 37


Corder’s Conclusions• Insert Here


Slide 38


http://www.corcom-inc.com/

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