Marketing Management Pricing in the Economic and Competitive Environment

1. Marketing ManagementPricingin the Economic and Competitive Environment Paul “J.B.” Dishman, Ph.D. Department of Business Management Marriott School of Management Brigham Young University Lecture 12

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3. Designing Pricing Strategies There ain’t no brand loyalty that two-cents-off can’t overcome. --Anonymous The real issue is value, not price. --Robert T. Lindgren

4. Pricing in the News!! Dell Unveils SmartStep PC,Its Cheapest Computer Ever By GARY MCWILLIAMSStaff Reporter of THE WALL STREET JOURNAL Dell Computer Corp., which rocketed to the top of the personal-computer market on the strength of its custom-made PCs, unveiled Monday a prebuilt PC designed to compete with off-the-shelf models sold in retail stores. The world's largest PC maker said its SmartStep PC, which comes as a one-size-fits-all system complete with monitor, aims to woo U.S. customers that typically shop for PCs in chain stores. Starting at $599, the PC is the lowest-price home PC the Austin, Texas, company has ever sold. Source: www.wsj.com 10/29/01 Chrysler Says Later Entry To Zero Financing Hurt Sales By JOCELYN PARKER Of DOW JONES NEWSWIRES DETROIT -- The Chrysler Group of DaimlerChrysler AG (DCX) said Tuesday sales fell 28% even though it offered deep discounts on many of its vehicles. Gary Dilts, Chrysler's senior vice president of sales, said sales fell, in part, because it offered its 0% financing program a few days after General Motors Corp. (GM) and Ford Motor Co. (F) began the same offer. September was also a tough comparison with last year because there was a big incentive push on many vehicles last September, Dilts said. Source: www.wsj.com 10/2/01 These Licenses May Be a Colossal BlunderMicrosoft faces a serious backlash from customers, especially small and midsize businesses, angry with its XP pricing policiesStodgy old England would hardly seem the place for a revolt against the status quo. But that's precisely what has erupted over the past few months as Britain's corporate powerhouses have squared off against the Colossus of Redmond. At issue are the new software-licensing policies Microsoft has introduced for Windows XP, its new operating system that officially comes to market on Oct. 25. A British trade group called the Infrastructure Forum (known as .tif) claims that the changes constitute price gouging that could increase software costs for its 98 member companies by $1.25 billion over the next four years. SOURCE: www.businessweek.com 10/25/01 U.S., Bayer Reach Deal on Cipro Price;Florida Postal Workers Get Antibiotics A WALL STREET JOURNAL ONLINE News Roundup Federal officials reached agreement Wednesday on a lower price for the antibiotic Cipro, the most popular anti-anthrax drug. Bayer AG, which makes the drug, agreed to sell the government 100 million pills at 95 cents each, representing a savings of $95 million from its original price, the Department of Health and Human Services said. If more pills are needed the price will be reduced further. Source: www.wsj.com 10/24/01

5. Price • Priceis the sum of all the values that consumers exchange for the benefits of having or using the product or service. • Price has been the major factor affecting buyer choice; nonprice factors have become increasingly important in buyer-choice behavior. • Price is the only element in the marketing mix that produces revenues; all others represent costs.

6. External Factors Nature of the market and demand Competition Other environmental factors (economy, resellers, government) Internal Factors Marketing Objectives Marketing Mix Strategy Costs Organizational considerations Factors Affecting Price Decisions( Fig. 10.1) Pricing Decisions

7. Internal Factors Affecting Pricing Decisions: Marketing Objectives Survival Low Prices to Cover Variable Costs and Some Fixed Costs to Stay in Business. Current Profit Maximization Choose the Price that Produces the Maximum Current Profit, Etc. Marketing Objectives Market Share Leadership Low as Possible Prices to Become the Market Share Leader. Product Quality Leadership High Prices to Cover Higher Performance Quality and R & D.

8. Factors Affecting Pricing:Marketing Objectives • Other specific objectives include: • Set prices low to prevent competition from entering the market, • Prices might be reduced temporarily to create excitement or draw more customers. • Nonprofit and public organization may have other pricing objectives such as: • University aims for partial cost recovery, • Hospital may aim for full cost recovery, • Theater may price to fill maximum number of seats.

9. Product Design Nonprice Positions Price Distribution Promotion Internal Factors Affecting Pricing Decisions: Marketing Mix

10. Scenario #1 • Assume the role of President Bateman (or the VP of Finance or some similar role at BYU). Enrollment at BYU has been capped and there is no longer overcapacity. There is pressure to raise tuition to maintain revenue growth now that enrollment is capped. What internal and external pricing factors do you need to consider before making your decision?

11. Fixed Costs (Overhead) Costs that don’t vary with sales or production levels. Executive Salaries, Rent Variable Costs Costs that do vary directly with the level of production. Raw materials Types of Cost Factors that Affect Pricing Decisions • Total Costs • Sum of the Fixed and Variable Costs for a Given • Level of Production

12. Types of Cost Factors that Affect Pricing Decisions • As a firm gains experience in production, it learns how to do it better. • The experience curve (or the learning curve) indicates that average cost drops with accumulated production experience. • Strategy: company should price products low; sales increases; costs continue to decrease; and then lower prices further. • Risks are present with this strategy.

13. Market and Demand External Factors Affecting Pricing Decisions Competitors’ Costs, Prices, and Offers Other External Factors Economic Conditions Reseller Needs Government Actions Social Concerns

14. Market and Demand Factors Affecting Pricing Decisions Pricing in Different Types of Markets Pure Monopoly Single Seller Pure Competition Many Buyers and Sellers Who Have Little Effect on the Price Oligopolistic Competition Few Sellers Who Are Sensitive to Each Other’s Pricing/ Marketing Strategies Monopolistic Competition Many Buyers and Sellers Who Trade Over a Range of Prices

15. Demand Curves andPrice Elasticity of Demand A Demand Curve is a Curve that Shows the Number of Units the Market Will Buy in a Given Time Period at Different Prices that Might be Charged. Price Elasticity Refers to How Responsive Demand Will be to a Change in Price. Price Elasticity of Demand = % Change in Quantity Demanded % Change in Price

16. Price Elasticity of Demand A. Inelastic Demand - Demand Hardly Changes With a Small Change in Price. Price P2 P1 Q2 Q1 Quantity Demanded per Period B. Elastic Demand - Demand Changes Greatly With a Small Change in Price. Price P’2 P’1 Q2 Q1 Quantity Demanded per Period

17. Major Considerations in Setting Price (Fig. 10.5)

18. Certainty About Costs Unexpected Situational Factors Cost-Plus Pricing is an Approach That Adds a Standard Markup to the Cost of the Product. Simplest Pricing Method Ethical Pricing is Simplified Attitudes of Others Price Competition Is Minimized Ignores Current Demand & Competition Much Fairer to Buyers & Sellers Cost-Based Pricing

19. 12 10 8 6 4 2 200 400 600 800 1,000 Breakeven Analysis orTarget Profit Pricing Tries to Determine the Price at Which a Firm Will Break Even or Make a Certain Target Profit. Total Revenue Target Profit ($2 million) Cost in Dollars (millions) Total Cost Fixed Cost Sales Volume in Units (thousands)

20. Setting Prices Competition-Based Pricing Going-Rate Company Sets Prices Based on What Competitors Are Charging. Sealed-Bid Company Sets Prices Based on What They Think Competitors Will Charge. ? ?

21. Scenario #2 • Medtronic AVE, a high-technology medical device company, has developed a new coronary stent. This stent can save lives and prevent patients from needing open-heart surgery. It has been proven that coronary stents save lives, minimize hospital stays and reduces damage to the heart. The new stent was initially priced at ~$2000 per device. What pricing approach does Medtronic AVE appear to be using? Is this approach justified? Is demand for this stent likely to be price elastic?

22. Scenario #3 • The federal government has accused Microsoft of monopolistic practices in tying (or bundling) sales of its popular Windows ’95, ’98, and 2000 operating systems software to its Web browser product. In a controversial ruling, a federal judge has agreed that Microsoft is acting like a monopolist. What pricing strategy does Microsoft seem to be using? Take a side in the monopoly debate and state how you would resolve this ongoing problem.

23. Marketing ManagementPricingwithin the firm Paul Dishman, Ph.D. Department of Business Management Marriott School of Management Brigham Young University Lecture 13

24. Market Skimming Setting a High Price for a New Product to “Skim” Maximum Revenues from the Target Market. Results in Fewer, But More Profitable Sales. Use Under These Conditions: Product’s Quality and Image Must Support Its Higher Price. Costs Can’t be so High that They Cancel the Advantage of Charging More. Competitors Shouldn’t be Able to Enter Market Easily and Undercut the High Price. New Product Pricing Strategies

25. Market Penetration Setting a Low Price for a New Product in Order to “Penetrate” the Market Quickly and Deeply. Attract a Large Number of Buyers and Win a Larger Market Share. Use Under These Conditions: Market Must be Highly Price-Sensitive so a Low Price Produces More Market Growth. Production/ Distribution Costs Must Fall as Sales Volume Increases. Must Keep Out Competition & Maintain Its Low Price Position or Benefits May Only be Temporary. New Product Pricing Strategies

26. Product Mix-Pricing Strategies:Product Line Pricing • Involves setting price steps between various products in a product line based on: • Cost differences between products, • Customer evaluations of different features, and • competitors’ prices.

27. Product Mix- Pricing Strategies • Optional-Product • Pricing optional or accessory products sold with the main product. i.e camera bag. • Captive-Product • Pricing products that must be used with the main product. i.e. film.

28. By-Product Pricing low-value by-products to get rid of them and make the main product’s price more competitive. i.e. sawdust, Zoo Doo Product-Bundling Combining several products and offering the bundle at a reduced price. i.e. theater season tickets. Product Mix- Pricing Strategies

29. Adjusting Basic Price to Reward Customers For Certain Responses Cash Discount Seasonal Discount Quantity Discount Trade-In Allowance Functional Discount Promotional Allowance Discount and Allowance Pricing

30. Psychological Pricing • Considers the psychology of prices and not simply the economics. • Customers use price less when they can judge quality of a product. • Price becomes an important quality signal when customers can’t judge quality; price is used to say something about a product. Value $22.00 Sale $14.99

31. Loss Leaders Special-Event Pricing Cash Rebates Temporarily Pricing Products Below List Price to Increase Short-Term Sales Through: Low-Interest Financing Longer Warranties Free Merchandise Discounts Promotional Pricing

32. Geographical Pricing • Adjusting Prices to Account • for the Geographical Location • of Customers. • i.e. FOB-Origin, Uniform- • Delivery, Zone Pricing, Basing • Point, & Freight-Absorption. • Adjusting Prices for • International Markets. • Price Depends on Costs, • Consumers, Economic • Conditions, Competitive • Situations & Other Factors. International Pricing Other Price Adjustment Strategies

33. Price Increases Price Cuts Why? Excess Capacity Falling Market Share Dominate Market Through Lower Costs Why? Cost Inflation Overdemand: Company Can’t Supply All Customer’s Needs Initiating Price Changes

34. Number of Firms is Small Competitor Reactions When: Product is Uniform Buyers are Well Informed Reactions to Price Changes Being Replaced by Newer Models Price Cuts Are Seen by Buyers As: Current Models Are Not Selling Well Company is in Financial Trouble Quality Has Been Reduced Price Comes Down Further

35. Manufacturer A Price-fixing Predatory pricing Manufacturer B Retailer 1 Price-fixing Predatory Pricing Retailer 2 Retail price maintenance. Discriminatory Pricing Deceptive Pricing Consumers Deceptive Pricing Public Policy Issues in Pricing (Fig. 11.2)

36. Resale Price Maintenance Manufacturer Can’t Require Dealers to Charge a Specified Retail Price for Its Product Price Discrimination Ensure Sellers Offers the Same Price Terms to a Given Level Of Trade Pricing Across Channel Levels Deceptive Pricing Occurs When a Seller States Prices or Prices Savings that Available To Consumers

37. Scenario #4 • Some analysts see predatory pricing by a strong, competitive marketer as extremely damaging to competition and a well-functioning economy. Others view it simply as good, healthy competition. Take a stand on this issue and discuss your view. Consider questions of ethics, long-term survival, the competitive environment, consumer benefits and welfare, and stock-holder profit.

38. Scenario #5 • Formulate rules that might govern (a) initiating a price cut, (b) initiating a price increase, c) a negative reaction on the part of buyers to a price change by your company, (d) a competitor’s response to your price change, and (e) your response to a competitor’s price change. State the assumptions underlying your proposed rule.

39. Remember • All pricing is • psychological • based on internal cost structures vs. market characteristics • All pricing has legal implications