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Marketing: Price
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MGTA02: Managing the Business Organisation
Review: The Marketing Mix
Research to discover consumers’
tastes, preferences and needs:
the “marketing mix”
Review: Product
What a purchaser hopes to get, or believes to be getting, when they enter in a financial transaction
Product: 3 Attributes
Benefits Features
Brand/Package
Review: Product Life Cycle
Extending A Product’s Life
Q. What do you do when:
Everyone knows about your product
Everyone already buys your product
Extending A Product’s Life
Launch a new variation or an update
Re-invigorates sales and extends maturity
Life Cycle Extension
Life Cycle extension
Extending A Product’s Life
…and again
Extending A Product’s Life
…and again
Note the word “new”
Extending A Product’s Life
…and again
Note the word “new”
Extending A Product’s Life
Brand Extension..
Toyota makes Lexus
MGTA02 – Managing the Business Organisation
Read Chapter 4
What the business will charge in exchange for its product- Revenue for business
What a customer pays to acquire a product or service – Cost for the customer
No such thing as “Expensive”
It is about price tag vs perceived value
Price in Competitive Markets
No formula for setting price
Pricing involves judgement and choice
Because a business has two objectives:
Satisfy customers
Make profits
Value Based Pricing
Based on Consumer’s Perception of Value
Cost Based Pricing
Based on Company’s Costs and Profit Margins
Price – Begin with Costs
Whatever the choice
A business MUST cover its costs
To set a price a business must
understand its costs
Price – Begin With Costs
Every pizza costs money to make:
Pizza crust $1.00
Cheese 1.00
Sundried tomatoes 1.00
Red Peppers 0.50
Mushrooms 0.50
Cardboard box 0.50
Setting Price
If pizza costs $5.00 to make
Business must charge at least $5.01
or more… $ 5.02 ?
What the business adds to its “cost of goods sold” to arrive at its price
costs of pizza = $5.00
+ mark-up = + 3.00
= selling price = 8.00
Make for $5 – Sell for $8
“mark-up” ensures that each pizza
not sold at a loss
Pie Crust Cheese Tomatoes Mushrooms Box Margin 1 1 0.5 0.5 0.4 0.4 0.2 2
Contribution Margin
= mark-up as % of price
Markup ensures that each pizza:
makes “contribution” toward profit
Contribution Margin
pizza sold
$3 or 37.5%
goes toward making
Pie Crust Cheese Tomatoes Mushrooms Box Margin 1 1 0.5 0.5 0.4 0.4 0.2 2
Pricing Strategies
Pricing Strategies
NO formula determines “price”
Size of “markup” is a choice
Two possible pricing strategies for new products:
“Skimming” and “Penetration”
Pricing Strategies
A business’ managers can make any choice they like including:
“Skimming” strategy
“Penetration” strategy
“Price Skimming” Strategy
large markup
HIGH price
High price > small market > low sales
But, sales don’t have to be large
Large contribution margin from each sale
“Price Skimming” Strategy
Some well-known successful businesses use “skimming” strategy:
Rolls-Royce cars
Rolex watches
“Penetration Pricing” Strategy
small markup
Low price > large market > high sales
But, sales volume needs to be large
small contribution margin from each sale
“Penetration Pricing” Strategy
Some well known successful businesses use “penetration” strategy:
Honda Civic cars
Casio watches
…..others?
Pricing Strategy
Problem: which pricing strategy to use?
“Skimming”, “Penetration”, in between?
To help answer: “Break-Even Analysis”
Break-Even Analysis
Helps managers understand relationship
between: costs, chosen selling price,
and necessary volume of sales
Answers the question:
“If I choose this price, how many units
must I sell – to make a profit?”
Break-Even Analysis – Costs
Businesses have 2 kinds of costs
Variable increase with
Costs (VC) volume of activity
“Cost of goods sold” is variable cost
“Fixed” or “Operating” Costs
In addition to making pizzas, a business spends money on the activities needed to operate
Rent $20,000
Electricity $10,000
Salaries $50,000
Kitchen supplies $10,000
Advertising $ 5,000
Insurance $ 5,000
Total $ 100,000
Break-Even Analysis – Costs
Fixed Costs (FC) – do not increase with volume of activity
“Operating costs” are fixed
Opportunity Cost
Scarcity and Choice
Selling Price
Remember – NO magic formula
One rule: Cover your cost of goods!!
Cost to make pizza = $5
Selling price MUST be > $5
Setting Price
If pizza costs $5.00 to make
You must charge at least $5.01
Maybe more……$ 6.00 ?
The “mark-up” pays your fixed costs
Selling Price
Because selling price (SP) greater than cost to make pizza (VC)
You make small profit from every sale
There are still the costs of running the business (FC)
Break-Even Analysis
If you know your costs:
you can choose a price
Break-Even Analysis tells you:
the quantity you must sell
in order to make a profit
Break – Even
FC = B/E.
Fixed Costs = # of Units to
Profit from each sale Break Even
Break-Even For Pizza Business
Variable Cost (VC) = $5 per pizza
Fixed Costs (FC) = $100,000 per year
3 Possible Pricing Scenarios:
“Deluxe gourmet” pizza = $15
“Lo-price value” pizza = $ 6
Mid-price pizza = $10
Break – Even: “Deluxe Gourmet”
Fixed Costs ($100,000) = Break
Price ($15) – Vbl. Cost ($5) Even
$100,000 = Break
$10 Even
Must sell: 10,000 “Deluxe Gourmet” pizzas
Break – Even
FC = B/E.
Fixed Costs = # of Units to
Profit from each sale Break Even
Break – Even: “Low-Price Value”
Proposed selling price = $6
FC = B/E.
Fixed Costs = # of Units to
Profit from each sale Break Even
Break – Even: “Low- Price Value”
Fixed Costs ($100,000) = Break
Price ($6) – Vbl. Cost ($5) Even
$100,000 = Break
$1 Even
Must sell: 100,000 “low-price value” pizzas
Break-Even: “Mid-Price” Pizza
Proposed selling price = $10
FC = B/E.
Break – Even: “Mid-Price”
Fixed Costs ($100,000) = Break
Price ($10) – Vbl. Cost ($5) Even
$100,000 = Break
$5 Even
Must sell: 20,000 “mid-price” pizzas
Using Break-Even Analysis
Managers must Budget/ask:
“Can we sell this many pizzas?”
“Should we raise price, sell fewer,
but make more profit on each?”
“Should we cut price, sell more,
but make less profit on each?”
Psychological Pricing Tactics
Marketers must remember:
Consumers aren’t always rational
Odd-Even Pricing: $9.95 not $10.00
Bundle pricing: “combos”
Odd Even Pricing
Setting a price just below the next whole number:
Bundle Pricing
Adding another item to the purchase
Class Activity
Listed below are a series of pricing strategies/polices/products. Place them onto the correct section of the matrix.
Wall-Mart launches a new range of own-label soups.
Cunard launches two new cruise ships.
A cable TV provider moves into a new area and needs to achieve a market share.
Holiday Inns try to fill hotels during winter weekends.
introduces a new range of value meals.
Nokia launch a new videophone.
Apple ipad3
Lexus launched a new car
Dollarama added new products ranging up to $5
BlackBerry PlayBook
Starbucks premium black coffee
Budget Rent A Car
WestJet Airlines
Launch of DVD players in 90s
Here is the ‘Pricing Strategies Matrix’ with the answers overlaid. Here are the more detailed explanations.
Wall-Mart launch a new range of own-label soups. This is an economy brand.
Cunard launch two new cruise ships. The service is high price and high quality with a premium price.
A cable TV provider moves into a new area and needs to achieve a market share. The company uses a penetration approach to gain market share. Prices could be increased at a later date.
Holiday Inns try to fill hotels during winter weekends. This is an example of ‘off peak’ pricing.
introduces a new range of value meals. There is a lot of price competition in the fast food market, hence the value approach.
Nokia launch a new videophone. This is a new, innovative product that can claim a higher price. Skimming is only an option in the short-term since competition will be inevitable.
Price: Summary & Key Points
People won’t buy unless “Price” is right
You must start with / understand costs
“Mark-up” what you add to your costs
Two strategies: skimming & penetration
“Break – even”: cost, price & volume
See you next week…
Thanks. See you next week
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