Price is the value exchanged for the product.

• Economic (inc. barter)
• Freedom of Choice (lock-in, opportunity cost)
• Privacy

• Chapt. 2 Digital Darwinism.
• Pioneer of fixed pricing: Aaron Montgomery Ward
  

Importance of (the economic aspect of) Price to the Marketer

• Often the only element the marketer can change quickly in response to demand shifts.

• Relates directly to total revenue TR = Price * Qtty
  Profits = TR - TC
  -effects profit directly through price, and indirectly by effecting the qtty sold, and effects total costs through its impact on the qtty sold, (ie economies of scale)

• Can use price symbolically, emphasize quality or bargain (signal value).

• Deflationary pressures, consumers very price conscious.

1. Establish marketing objectives
   • survival (short term)
   • profit max.
   • revenue max. (yield management pricing; dynamic pricing)
   • growth max. (penetration pricing ... "free")
   • market skimming
   • product-quality leadership (signaling effect?)

2. Demand schedule: elastic versus inelastic demand issues (priceline)

   Percent change in quantity demanded relative to the percent change in price.

   % change in Qtty demanded
   -------------------------
   % change in price

   We are now looking at the actual impact on demand as price varies. Elastic demand is more sensitive to price than inelastic demand.
   Elastic demand, greater than1 (-1)
   Inelastic demand, less than 1 (-1)
   Unitary demand, equal to 1
   Always take the absolute values

   Inelastic Demand

   $|*  
    | *
    |  *
    |   *
    |    *
    |-----------Qtty
   $                             
   

   Elastic Demand

   $|*  
    |   *
    |      *
    |          *
    |              *
    |-----------Qtty
   $                             
   

   TR = Price * Qtty
   If demand is elastic then change in price causes an opposite change in the total revenue.
   If demand is inelastic then change in price causes the same change in the total revenue.
   The less elastic the demand, the more beneficial it is for the seller to increase price.

3. Cost issues: different levels of product (learning curve issues), (dis)economies of scale, fixed/variable, breakeven issues, marginal analysis

   Marginal Analysis:
   What happens to the costs and revenues as production increases by one unit. This will determine at which point profit will be maximized. Need to distinguish between:
   Fixed Costs
   Average Fixed Costs, FC/units produced
   Variable Costs (materials labor etc.)
   Average Variable Cost, VC/Unit produced

   Total Cost = (AFC+AVC)*QTTY

   Marginal cost = the extra cost to the firm for producing one more unit.
   Marginal revenue = the extra revenue with the sale of one additional unit.

   MR - MC tells us if it is profitable to produce one more unit.
   Profit maximization at MR = MC

   To produce/sell more units than the point MR = MC the additional cost of producing one more unit is greater than the additional revenue from selling one more unit. At any point prior to MR = MC, MR will be greater than MC, therefore the additional revenue from selling one more unit will be greater than the additional cost of producing one more unit, therefore forgoing the opportunity to generate additional profits. Therefore MR = MC = Profit Maximization; assuming all products are sold.

   Due to the environment it is difficult to predict costs and revenues etc.
   Cost structures can influence pricing objective: high low fixed variable make-up has significant impact on contribution margins.

4. Competitors pricing

5. Pricing method:
   • Cost Plus:
     • Guarantees contribution
     • simple to calculate
     • not optimal

   • Competition
     • par with market
     • price war implications?
     • not optimal

   • Value
     • optimal
     • difficult to determine

6. Final price selection: odd / even etc.

Life-cycle Pricing issues. Especially w/ services,two tier pricing etc.

Price Segmantation/Descrimination: Varying prices due to market conditions, different consumers:

• "cost to serve" are different

• value of product are different

• service demands differ

• Price negotiation (second hand car examples, online auctions)

• Geography

• Price and quantity discounts: seasonal discounts, trade discounts, trade-ins

• Promotion pricing: loss leader (lock-in etc.), special event, rebates, low interest financing, warranties

• Desciminatory pricing: customer segment pricing, product form pricing, time pricing

• Product mix pricing: line pricing, optional feature, two part pricing, product bundling

• Product bundling: office suite etc.

• Customer reactions

• Competitor reactions

• Collaborator reactions

Signal value of price changes to competitors and customers.

Price transparency issues for establishing and changing prices.

Dealing with competitor price changes.

Discussion Topic: What are the potential long run consequences of a price promotion designed to attract competitors customers?

Discussion Topic: Relate examples of products that are "free" ... and if they are free, what is the objective of the company?

Discussion Topic: Access E-bay and describe your experiences as a buyer / seller. What type of products would work well under a dynamic pricing model? Does the life cycle stage of a product impact its attractiveness for dynamic pricing?

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