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Integrated Marketing and Communications and Pricing Strategy

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					Integrated Marketing and Communications and Pricing Strategy Chapter 15 Pricing Strategies and Determination Pricing Strategies and Determination  What is “price”? - Some _________________________________________ given up by one party in return for something from another party  Development of effective pricing strategy the ___________________________________ of the 4 Ps  Many different factors involved mean pricing decisions are ___________________________

Overall in a market price is determined by the interaction of _____________________________  Demand for any product by an individual is based on: - __________________________________________________________________ - __________________________________________________________________ - Availability of _____________________________________________________  For the market as a whole, demand is the ________________________ of all the demand amounts for each individual consumer - More consumers with demand for a product means _________________ overall demand  Law of demand says that as price decreases quantity demanded ____________________ (and as price increases quantity demanded _______________________________) - A _____________________________________________ shows the relationship between price and quantity demanded (sold) - Figures 15.4, 15.5, 15.6 show demand schedules and demand curves for wheat, Model-T automobiles and movies GRAPH of Demand curve for wheat

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Overall in a market price is determined by the interaction of supply and demand  Supply for any product by an individual firm is based on - __________________________________________________________________ - __________________________________________________________________ - _______________________________________________ that could be produced  For the market as a whole, supply is the _________________ of all the amounts supplied by each individual firm - More producers supplying a product means __________________ overall supply  Law of supply says that as price decreases quantity supplied ______________________ (and as price increases quantity supplied ________________________________)  ___________________________________ price and quantity exchanged in the market are determined by intersection of supply and demand curves GRAPH of equilibrium price and quantity

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Farmers selling commodities are _____________________________ so the demand curve faced by the farm is a ________________________ line at the market determined price level - Farmers can sell ________________________________________________ at the given price but cannot set their own prices

GRAPH of demand as faced by farmers

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Businesses selling _____________________________ products can set prices (_____________________________) for their products but must take ______________________________________________ into account

Elasticity of demand  Shows the __________________________________ of the relationship between changes in price and changes in quantity demanded (sold)  Elasticity coefficient is the percentage change in ___________________________________ that results from a 1% change in the product’s price - Formula to calculate is absolute value of: ______________________________________  Inelastic demand _________________________________________________________ - P increases by 1%, Q demanded decreases by _______________%  Elastic demand _________________________________________________________ - P increases by 1%, Q demanded decreases by _______________%  Unitary demand _________________________________________________________ - P increases by 1%, Q demanded decreases by _______________%   Relationship between total revenue and elasticities Unitary demand - P increases by 1%, Q demanded (sold) decreases by ________________%, TR _____________________________________________  Inelastic demand _________________ - P increases by 1%, Q demanded (sold) decreases by _________%, TR _______________ - P decreases by 1%, Q demanded (sold) increases by _________%, TR _______________  Elastic demand ________________ - P increases by 1%, Q demanded (sold) decreases by _________%, TR _______________ - P decreases by 1%, Q demanded (sold) increases by _________%, TR _______________ 3 TR = ____________________

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Elasticities for any firm’s specific product may be difficult to determine, but the business should try to get some idea about whether demand is ________________________________ - Products with _________________________________ tend to have more elastic demand   Demand for food is very ____________________ - what can you substitute for food? Demand for bread is ______________________________ because you can substitute crackers, tortillas, muffins, bagels, etc., but none of these are very good substitutes  Demand for Pepperidge Farm bread is ___________________________________ as there are even more substitutes in other brands of bread

Determining base prices  One common method of setting the base price for a product (or service) is to consider the ________________________________________________________________ the product - This is why it is so important for a business to keep good records and understand ________________________________________________________________ Types of costs  _______________________________________ are costs that have no relationship to volume (at least not in the short run)  ______________________________________________ do change with volume – cost per customer, cost per unit produced  _____________________________________________ allocates fixed costs to each unit

average total cost (unit cost) = _________________________________________ average total cost (unit cost) = _________________________________________ 2 methods for ___________________________________________ pricing 1. ___________________________________________________________ For example, mark up costs by _______________________ unit cost selling price (retail price) = ____________________________________ 4

unit cost selling price (retail price) = ____________________________________ Could do markup on retail (markup is a % of the _________________________ price) markup = _________________________________________________________ markup = _________________________________________________________ Could do markup on cost (markup is a % of the _______________________ of the product) markup = _________________________________________________________ markup = _________________________________________________________ 2. _______________________________________________ pricing selling price = unit cost + ___________________________________________________  How to decide desired profit per unit? - _________________________________________, for example, $2 per customer - Desired ___________________________________________________________  ROI is the percentage of the profit generated by each dollar ____________________ in the business ROI = ______________________________________________________ Drawbacks of cost-based pricing   Ignores __________________________________________ Fails to account for _________________________________________________

Break-even analysis – profitable sales  Begin with a break-even analysis – break-even is where total ______________________ is equal to total ____________________ – ___________________________ is equal to zero - Determine the _________________________________ you need for a particular price to be profitable break-even sales = ________________________________________________________ break-even sales = ________________________________________________________ 5

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To determine the level of sales that would include a profit add the desired profit to the ___________________________

profitable sales = _______________________________________________________________ profitable sales = _______________________________________________________________  Can you achieve the level of sales needed to make a profit? - You will need to know something about the relationship between ___________________ and _______________________________________ to answer this question Setting price for profitable sales  One way to set price that takes demand into account would maximize the total contribution towards ___________________________________ total contribution towards fixed costs = _______________________________________ total variable cost = _________________________________________________ Maximizing total contribution to fixed costs  This may be a difficult method to use if you don’t know the effect of ___________________ on _________________________________________ for your product You can try to determine the effect of price on demand by:  Analytical __________________________________ - Develop a statistical model that __________________________________ based on historical prices and variables related to price  _________________________________________________ - Vary your ___________________ in some markets and see what happens  _____________________________________ surveys - Present price scenarios and ask __________________________ how they would respond (but consumers don’t always do what they say they will)

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______________________________________________________________ - Get a consensus from a skilled group of managers who are familiar with particular markets on what demand will be at different ______________________________

Maximizing total contribution to fixed costs   This method does not take into account what the _____________________________ will do Executives interviewed about their _____________________________________ rarely mention using this method Strategic drivers of base price selection   ______________________________________________ and competition How do you use price to ____________________________ your product relative to those of your competition? - ____________________________________ leadership - Unique, __________________________________________________________ product  Suave shampoo is profitable based on a ___________________ price position with high ______________________________________________________  Vidal Sassoon shampoo is profitable based on a relatively _______________ price that returns a higher margin (markup) at a ________________________________________ (Figure 15.11)  Brookings Institute study found 4 pricing objectives for large corporations 1. Achieve a target _______________________________ Study found ____________ targets from 8-20% with mean of ________% 2. __________________________________ price and margin Avoid price ____________________________________ – consumers believe a _________________________ price increase is fair so business can maintain a certain level of profit, but _________________________ price increases that allow an increase in per-unit profit are not fair 7

3. Reach a _________________________________ target 4. ________________________________________________ competition Raise or lower price to _________________________________________ New product pricing – 2 common approaches  _____________________________________________________ – pricing a new product at a relatively high level and gradually lowering it over time  For success - A ________________________ market segment must be willing to buy at the high introductory price - Competitors cannot quickly __________________________________ the market  ___________________________________________ – pricing a new product at a relatively low price in order to obtain market share and expand demand - Hope to obtain ____________ sales volume and ___________________ repeat purchases - Disadvantage of this strategy is that customers may equate low price with ___________________________________________ – this will matter if:  Consumers are uncertain about _____________________________________ prior to purchase because quality is difficult to judge   The risk of a bad decision is ____________________

Because of ________________________________________ made by consumers, it is important for a business pursuing a _________________________________ strategy to maintain relatively high prices to signal their high quality unique products (services)

Adjusting base price over time may occur as objectives change over the _________________________________________________  Introductory phase – price ________________ or price ______________________ strategy

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Growth phase – demand is growing but so is competition – may require ___________________________ pricing if can’t maintain product differentiation

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Maturity phase – may mean ________________________ prices or price ____________ if competition gets aggressive

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Declining phase – may lead to _________________________ prices as demand drops off

___________________________________________ – different prices for different buyers  In B2B sales the Robinson-Patman Act places constraints on the ability of manufacturers to charge business customers different prices – __________________________________  But a firm selling to another business can offer: - __________________________________________ – lowering the price after negotiation or to meet a competitor’s lower price - Cash or __________________________________________________ discounts - __________________________________________________ discounts - Sell for a higher price if more _____________________________ is involved - _________________________________ allowances so that a retailer can put product on sale to consumers and maintain margin - Creative alternatives to price-flexing such as offering:     ________________________________________________ Long-term contracts at _________________________________ prices __________________________________________ services Promises of quality improvements at _________________________________

Price flexing to consumers or a ___________________________________ policy  ________________________ purchases have involved price flexing, but some manufacturers are discouraging this approach 9

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_____________________________________ lowers the price to get customers to try the product but it may be difficult to raise the price later, especially if your competition has lowered its price to match your promotion

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Provide ________________________ that lower the price of products for consumers who use them (1.1% redemption rate for paper – 3.1% redemption rate for online)

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_______________________________________ becoming possible with the internet Price varies across market __________________________________ - _________________________ segments – demand and competition vary geographically - _________________________ segments – lower price for higher volume - ___________________________ segments – student and senior discounts - ____________________ segments – hotels charge less in the off season

Legal and ethical issues of pricing  _____________________________________________ – a conspiracy among competitors to set the price of products is a violation of the Sherman Antitrust Act (1890) - ADM officials went to prison and paid $100 million in fines for fixing the price of the amino acid feed additive lysine  __________________________________________________ – occurs when a firm attempts to drive out rivals by pricing at a level below the rival’s costs - Difficult to prove because have to prove that the firm that engaged in predatory pricing was selling __________________________ - ____________________________ are state laws that require a certain markup above cost to protect small businesses and consumers from predatory pricing  _____________________________________ – state laws that attempt to prevent price increases in special circumstances usually involving a big increase in ___________________

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