SENECA COLLEGE, TORONTO
MRK 200,MARKETING II
SECTION CC
As Taught by Prof. Tim Richardson School of Marketing and e-Business, Faculty of Business, During the July - August  2002 term

.last updated 2002 Aug 6th
. .
for Section TT Tuesday 
morning class
There will be no class on Thursday July 11th
- read in the textbook pages 456-472
for Section SS Thursday 
afternoon class
There will be no class on Tuesday July 9th
- read in the textbook pages 456-472
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Chpt 17

Pricing Objectives
http://www.mcgrawhill.ca/college/shapiro9/olc/olc/bm9_pp17.html
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Chpt 17

Pricing Objectives
page 456
"Price is one of the four major marketing variables that a marketing manager controls"
. When we say "controls" - we mean the marketing manager can do something about it. They can make the price higher, lower, or leave it the same. There are many things about marketing you cannot control - such as the competition, the customer, etc. - but you can control the price... or can you?.

WTGR

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Chpt 17

Pricing Objectives
http://www.mcgrawhill.ca/college/shapiro9/olc/olc/graphics/shapiro9bm_s/ch17/slideshows/sld002.htm
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Chpt 17

Pricing Objectives
http://www.mcgrawhill.ca/college/shapiro9/olc/olc/graphics/shapiro9bm_s/ch17/slideshows/sld003.htm

Pricing objectives should flow from, and fit with the overall company objectives and marketing objectives. If the overall objective is to build a prestige brand, then the pricing objective would have to fit this.
 

  • Profit-oriented Objectives
    • Target Return Objective
    • Profit Maximization Objective
  • Sales-Oriented objectives
  • Status Quo Pricing Objectives
Price Flexibility Policies
One-Price Policy
Flexible-Price Policy
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http://www.witiger.com/internationalbusiness/outlineMGTC44d.htm The subject of 4X or Foreign Exchange rates can be very complicated and its effect in pricing is substantial.

Prof. Richardson teaches another courses in which this topic is discussed in detail.

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"Most price structures are built around list prices" p. 467
- how firms set prices is what we talk about in Chpt 18
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Chpt 17

Pricing Objectives
Skimming Price - good example is DVD's priced in 1999 at $400

Penetration Pricing p. 464
- to make it too intimidating for competition to follow, 
- or to make sure you enter the market in a competitive environment
- or as part of a brand building strategy

Introductory Price Dealing

"The price of money may effect the price level"

Discount Pricing p. 468
- can be seasonal
- can be based on volume or amount bought
- can be used to attract a form of payment eg, CA$H

Allowances
- cutting customers a break due to their cost of advertising

- if they put on an advertising campaign, you will lower your wholesale price to them because it helps your promotion too
- trade-in allowance

Geographic Pricing
- F.O.B. - basically, this is the price out the door at our factory - you come and get it
- C.I.F. - the cost at our factory + the insurance and freight to ship it to you
- ZONE - if you live close, it is cheaper, if you live farther away, we add in shipping costs
ZONE pricing used for everything from Pizza delivery to clothing to grain shipments
- Uniform delivered
 

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2/10 - net 30 - page 469 text
in a business to business (B2B) situation it is common to have to extend credit to customers who are buying parts, materials and supplies.
2 is the % discount
10 is the number of days
30 is the maximum number of days in which you HAVE to pay
2/10 net 30 means if you may before 10 days, you get a 2% discount

5/10 net 60
if I pay in 10 days I get a 5% discount and, I have to pay all of it before 60 days

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Rebates p. 471

Many rebate programs are in response to the Competitive Environment
- competition sets a price lower than your price so you launch a rebate program to maintain customer interest

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Chpt 17
Price Setting in the Real World

"Most price structures are built around list prices"
p. 467

 

click to view larger
In the "Real World", most manufacturers create a cost sheet for each product, then combining the cost sheets leads to a price list for a group of products.

If you click on the screen capture to the left you will see a real cost sheet used by a clothing manufacturing company - it is done in Excel so when various factors change, you can have the final cost calculation easily.

click to view larger
If you click on the screen capture to the left you will see a real price list which has been composed from cost sheets. This Price List is the basics from which all price objectives come from - its is from the numbers on this list that you increase by 10%, 20% or 50% your price
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for Section 
TT
Tuesday 
morning class
July 30th
There will be no class on Thursday Aug 1

- read in the textbook Chpt 18 + check lower on this page
for Section SS Thursday 
afternoon class
August 1st
There will be no class on Tuesday July 30th


read in the textbook Chpt 18 + check lower on this page
..
 
Chpt 18
. One of the things you should know as a student in MRK 200 is that the textbook is widely used in Canada and the American version is used in many U.S. universities and colleges - therefore much of what we talk about in class can be found on many other web pages - not just www.witiger.com.

WTGR

http://cob.isu.edu/mktg325/balsley/outlines/ch18/chapter18ol.htm  To give you an example of how you can "teach yourself" - we have produced below a screen capture to the website of a professor at Idaho State University's College of Business. You are welcome to click on this link and you can see many of the images and descriptions used in the same textbook you have here in Toronto for MRK 200.
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Chpt 18
"More managers are realizing that they should set prices by evaluating the effect of a price decision not only on the profit margin for a given item but also on demand..."
p. 482
 
. The reason for considering the impact of demand is due to the fact that the "Competitive Environment" greatly influences prices. In the REAL WORD it is very rare for you to do a simple math calculation and say "OK, this is our price based on fixed and variable costs" - you must take into consideration that somewhere somebody is selling something similar to what you are selling, and probably for a different price. Globalization is making the world an increasingly small space and as a consequence, the "Competitive Environment" is becoming more intense.

WTGR

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Chpt 18
There are two ways to set list prices (p. 482)
  • cost-oriented pricing
    • the most common
    • most cost-oriented pricing done using a mark-up
    • mark-ups usually stated as a percentage based on the selling price
    • that is by what % did you increase, then add to the cost
  • demand-oriented pricing
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Chpt 18

Markups
"Markup percent is based on selling price"
p. 483

In the clothing industry it is usually 100% - this means if your calculated mfg. cost price of a garment is $20 - it will wholesale at $40, the retailer will mark it up to $80, or even $90 depending on the category.

"Mark-up Chain"
- the sequence of mark ups that a product goes through from producer to retailer.
- in some industries, the amount of increase is small, in some, like clothing, jewelry, the increase is enormous

"High markups don't always mean big profits" p. 484
 

. Sometimes as the product passes from producer, to agent, to wholesaler, to retailer, there has to be a lot of advertising money spent at each level, which has to be recovered by the spender in a higher price passed on - this is particularly true for women's fashions, CD's, certain types of proceed foods and beverages, and specialty consumer products.

Sometimes the mark-up is very low cause there is not a lot of advertising needed and the competitive environment (particular international competition) keeps pressure ot have the final retail price low. This is true for certain types of products like building materials, some unprocessed food products (ie. bags of rice), and non-perishable items that are not sold with a lot of promotion. (ie. windshield washer fluid)

WTGR


It is also important to note that the level of the mark-up depends on whether the product is a consumer product/service or an industrial product/service - BECAUSE,,,, consumer products/services often have more money spent on promotional expenses - therefore the need to recover this in a higher mark-up.

level of the mark-up depends on whether the product is:

  • Consumer Product
    • softdrink 
  • Consumer Service
    • vacation
  • Industrial Product
    • screws, nuts and bolts
  • Industrial Service
    • advertising consulting fees
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Chpt 18
Stockturn rate (p. 485)

If you spend a lot of money to acquire inventory - it will cost you

  • cost you money you have to borrow from the bank to buy the materials to make the product
  • cost you money to pay the warehouse to store it
  • cost you money to pay your employees
which all means that as soon as you have created your inventory of product, you want to sell it as quickly as possible so you get money to pay back the people you borrowed from to get started, and pay your employees, and have some profit for moving forward.

One of the best things you can do is "turn over" your stock quickly. Once or twice a year is bad, four or five times a year is good. Cash flow is sometimes more important that an absolute profit. When you turn over the stock, you get cash flow.

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Chpt 18

Costs
"There are three kinds of total costs"
p. 487
  • Total Fixed Cost

  • - rent, utilities, agent commission, insurance
    - things that do not change no matter how much you produce
  • Total Variable Cost

  • - material, supplies, component parts, wages and salaries, shipping
    - things that increase, when you increase production
  • Total Cost

  • - the sum of Total Cost + Variable Cost
When marketing people sell, they sell based on the individual cost per unit, so this means the person doing this planning for selling must know the Average Cost per Unit. Basically, it is calculated by taking the Total Cost and dividing by the quantity - but in real life - this might often end up with an amount too low cause there is always other costs that did not get factored in to your Total Cost.

"There are Three Kinds of Average Cost" p. 487

  • Average Cost
  • Average Fixed Cost = total fixed cost divided by quantity
  • Average Variable Cost = total variable cost divided by quantity
 
. The problem with Average Cost Pricing is it only works if you do indeed sell all the units. In many cases, this does not happen - so this means that your cost calculation will be incorrect and in fact the true cost will be higher.

If your Average Cost Pricing meant you a cost of $10,000 to produce 2,500 garments then your cost per item would be $4 - so if you sold all 2,500 and, say $5, you would have a profit.

2,500 x $5 would be $12,500 - but, in truth, you may only sell 1,900 at $5 so your sales would be $9,500 - this means you have a loss.

Your cost was $10,000 - but you only sold $9,500, and you have 600 units left sitting in the warehouse.

So it would be better to sell them at $6 cause you have a safer chance of breaking even.

WTGR

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Chpt 18
Target Return Pricing (p. 490)

Text says this has become popular in recent years. Part of the reason for this is that the producer has to provide some of the money from profits to the financiers who ot them going - so the reason for a specific target is so that the objectives of the Business Plan can be met.

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Chpt 18

Break-even
Analysis
"Break-even Analysis can evaluate possible prices"
p. 491
 
. Break-even Analysis may take a little bit of time to understand but you should make an effort to grasp this concept - people really do this in business and if you can tell a potential employer that you are able to do this, it will increase your competitiveness. Break-even Analysis  is used by business to help them arrive at a price that will allow them to make some profit, and, know when that will happen in the future.

The problem with Break-even Analysis in the "REAL WORLD" is that the true costs are difficult to calculate cause there are always so many things that go wrong and mistakes that happen in production - which skew the figures.

WTGR


http://www.mcgrawhill.ca/college/shapiro9/olc/olc/graphics/shapiro9bm_s/ch18/slideshows/sld007.htm
Break-even
Analysis
. Break Even Analysis is one of those things that many Marketing students are afraid of trying to understand because it involves a little bit of math - however the math is simple - so try to grasp the concept cause it is important that you know how to do this. It is done for little businesses and big businesses - the main reason is to have some idea of how much to sell, before you start making a profit - and if that number is too difficult to do - then maybe you can change it by increasing your price, or cutting costs - that is the guts of the  analysis.

Break Even Analysis is explained in the textbook - there are also many good websites that explain it too - and they give some simple examples - as seen below.

WTGR

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Break-even
Analysis
and
the 
effect of
the
Competitive
Environment
. Break Even Analysis is sometimes difficult to calculate precisely in the REAL WORLD - beeeeecause, there is nothing in the mathematics of the calculation that allows for the "COMPETITIVE ENVIRONMENT". This refers to the fact that the competition may cause you to have to lower your price, or demand may change - which in turn means your calculation about WHEN you break even will change.

WTGR

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http://www.bplans.com/g/index.cfm?a=s1&sterm=Break-even%20analysis "One important  disadvantage of the break-even analysis is that it requires estimating a single       per-unit variable cost, and a single per-unit price or revenue, for the entire business. That is a hard concept to estimate in a normal business that has a     collection of products or services to sell."
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http://www.smalltownmarketing.com/breakeven.html
So, assume we have a product we want to sell for $10.00 and we want to sell 1,000 of them. For this example our total fixed costs are going to be $7,700 and our total variable costs are $4.50/unit. Our formula would look like this:

                         P=1,000($10.00-$4.50)-$7,700=$5,500-$7,700= -$2,200
What happened?

Instead of making money we have just lost $2,200. At break even the $2,200 number  should be $0. We can't make money at 1000 units so how many must we really sell to break  even?

We know our fixed costs (F) are $7700, and the price (p) is still $10.00 and our variable costs (V) are $4.50/unit we do this:

                    (p) price minus (V) variable costs divided into (F) fixed costs or

                    $10.00 - $4.50 = $5.50 divided into $7700 = 1400 units.

 If we maintain our price and expenses we need to sell 1400 units of our product to break even. If we raise our price or reduce expenses we can sell less.

- this explanation comes from Eagle Marketing, Bozeman, Montana

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Chpt 18
Finding the most Profitable Price and Quantity to Produce
p. 494

A profit range is helpful
- knowing these numbers allows you to adjust the price within a range , up, or down, as might be appropriate depending on the competitive and economic environment.
 

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Chpt 18
DEMAND-ORIENTED APPROACHES FOR SETTING PRICES p. 497 - 502

· Evaluating the customer's price sensitivity 

· Value in use pricing--how much will the customer save? 

     VALUE IN USE PRICING--setting prices that will capture some of what customers will save by substituting the firm's product for the
     one currently being used.

· Auctions are coming on-line fast 
· Customers may have reference prices 
. Leader pricing - AKA "Lost Leader" pricing
--setting some very low prices--real bargains--to get customers into retail stores.

· Bait pricing--offer a steal, but sell under protest 

     BAIT PRICING--setting some very low prices to attract customers--but trying to sell more expensive models or brands once the  customer is in the store.
· Is bait pricing ethical? 

· Psychological pricing--some prices just seem right 
     PSYCHOLOGICAL PRICING--setting prices that have special appeal to target customers. 
      ODD-EVEN PRICING--setting prices that end in certain numbers.

· Price lining--a few prices cover the field 
     PRICE LINING--setting a few price levels for a product line and then marking all items at these prices.

·· Prestige pricing indicates quality 

     PRESTIGE PRICING--setting a rather high price to suggest high quality or high status. 
. Product Bundling Pricing

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