Operational Marketing

Marketing mix: Price

 Objectives

1. To understand the concept of pricing

2. To link the price with the concepts of performance

management

3.Being acquainted with ratios & computations pertaining to

pricing

Marketing Mix : Price 2

Introduction
 Several actors influence the price

In order to set a price, companies can rely on :

• Their cost structure.
• The customer's willingness to pay (WTP)
• Competitors' pricing decisions.

Willingness to
pay = the roof
Competitors =

Competitors =
Price
the walls

the walls
Production costs = the floor

Marketing Mix : Price 4

 Factors with an impact on the pricing strategy

1- The consumers = demand

• Perceived value
• Psychological price
• Price elasticity
2- The competitors = supply
• Penetration strategy
• Skimming strategy
• Alignment strategy
3- The company = performance management
• Reminder on margin and VAT calculations
• The total cost
• The break-even point

Marketing Mix : Price 5

Chapter 1
Consumers Influence on Pricing
1. The concept of perceived value
2. The concept of psychological price
3. The concept of price elasticity
 1- The concept of perceived value (cf class on
Product)

Price is an element that impacts consumer behavior

Customers base their buying decisions on perceived

value, regardless of the costs of
• Production

• Transportation

• Marketing / Retailing

They buy only if :

Perceived value >= Product price

Marketing Mix : Price 7

 2- Psychological pricing: A useful tool for product
launches

Psychological price

Survey of 500 BTwin bike buyers

Question 1: Below what price do you consider this bike to be of poor

quality?

Question 2: At what price do you consider this bike to be too

expensive?
Price Poor quality Too expensive
70 150 0
90 220 90
120 80 190
140 50 90
160 0 130
total 500 500

Marketing Mix : Price 8

 In this exercise, we focus on non-buyers

o expensive
To
160€

Non-buyers

Buyers

Buyers
Buyers

Non-buyers
Insufficient quality
70€

Marketing Mix : Price 9

 Exercise: what is the best option?

Below what price would

you consider this bike to
be of poor quality?

Poor Too
Poor Too
Price quality expensive Number of buyers
quality expensive
cumulated cumulated
70 150 0
90 220 90
120 80 190
140 50 90
160 0 130
total 500 500

At what price do you

consider this bike to be too
expensive?

Marketing Mix : Price 10

 3- Price elasticity of demand

It is used to measure the loss or gain of consumers as a

result of price changes.

In the most common case, consumers stop buying a

product when its price increases and vice versa

In this case we speak of negative elasticity =

the values do NOT go in the same direction

(ex: price increases, demand decreases OR price decreases,

demand increases)

Marketing Mix : Price 12

 3- Price elasticity of demand

But there are some special cases :

Positive elasticity = values go in the same

direction

(ex: price increases, demand increases OR price decreases, demand

decreases)

• Giffen goods
• Veblen effect

Marketing Mix : Price 13

 3- Price elasticity of demand

But there are some special cases :

Zero elasticity = When one value moves, the

other does not

Marketing Mix : Price 14

 3- Price elasticity of demand

Price elasticity = D volume/ initial volume

D price/ initial price

(final volume – initial volume) / initial volume (final vol / initial vol) -1
Elasticity = =
(final price–initial price) / initial price (final price / initial price) -1

• Example:
– T1: INITIAL at 2€/tube 50 tubes of toothpaste were sold per day
– T2: CURRENT at 4€/tube only 25 tubes sold
Negative elasticity is the most
(25 – 50)/50
Elasticity = = - 0,5 common case: consumers stop
(4 – 2)/2 buying a product when its
price increases and vice versa.

Marketing Mix : Price 15

 Exercise

Put into practice: A clothing store reports the following

changes in sales. Make the appropriate calculations to fill in
the rest of the table.

Socks T-shirts Diesel Jeans

T1 T2 T1 T2 T1 T2

Selling price €3 €4.5 €39 €47.7 €150 €180

Number of 45 18 35 28 20 30
units sold
Elasticity
Comment

Marketing Mix : Price 16

 Interpreting price elasticity

Elasticity of demand is high if

ïelasticityï >1

HIGH LOW HIGH

-∞ -1 0 +1 +∞

Marketing Mix : Price 18

Chapter 2
Competitors Influence Pricing
1. Penetration strategy
2. Skimming strategy
3. Alignment strategy
 Penetration strategy

The price must be consistent with the other elements of the mix

Penetration pricing - objective: to maximize market share

Low price è high volumes. It is appropriate if:

• Price-sensitive market segments

• Low price does not impact quality perception

• Opportunity to achieve economies of scale

Marketing Mix : Price 20

 Skimming strategy

The price must be consistent with the other elements of the mix

Skimming: brand image objective, leadership for quality products

High pricesè low volumes. It is appropriate if:

• Price insensitive market segments

• High prices are justified

• Low volumes do not impact costs too much

Marketing Mix : Price 21

 Alignment strategy

Objective = to avoid the dangers of a price war (see below)

• Price wars have an impact on consumer behavior

• Only effective if price sensitive

• It increases opportunistic behavior
• Can be misunderstood à not so attractive
• May alter the reference price

• The price war has an impact on competitors

• Price alignment or depreciation

• Price unchanged but ì promotions

Marketing Mix : Price 22

Chapter 3
The Company: Performance Indicators
and Selling Price
1. Reminder: margin calculation and VAT
2. The concept of full cost
3. The break-even point
 Reminder : Margin and VAT

Company Distributor

Selling price after taxes= Final price for the

consumer
VAT
Selling price
before taxes to
the consumer
Margin
Selling price Purchasing price
before taxes for = without taxes for
the manufacturer the distributor

Marketing Mix : Price

 Reminder : Margin and VAT

Gross margin

Selling price before taxes (or BT) – Purchasing price BT

Mark up
It expresses the profitability of each unit sold of a product

(Selling price BT– Purchasing price BT) x 100

Mark up
Purchasing price BT

Marketing Mix : Price 25

 Exercise 1

Value Added Tax or VAT is a general consumption tax that is

charged directly to customers on the goods they consume or the
services they use.

1/ VEJA sneakers : Find the selling price BT for the

distributor Spartoo knowing that the VAT rate is 20%.

2/ Ghibli book : Find the selling price BT for Amazon knowing

that the VAT rate is 5.5%.

Marketing Mix : Price

 Exercise 2

Distributors' margins

1/ VEJA sneakers : the distributor Spartoo realizes a mark up

of 50% on the purchase price, find the purchase price BT of
Spartoo

2/ Ghibli book : Amazon realizes a mark up on the purchase

price of 30%, find the purchase price BT of Amazon

Important
The purchasing price BT for the distributor = Selling price BT
for the manufacturer if there are no other intermediaries

Marketing Mix : Price

 1. Full costing

It is the sum of all costs related to the manufacturing until the sale of a
product.

Full cost = fixed costs + variable costs

Ø Fixed costs = independent of the level of activity or the quantities produced

Ø Variable costs = dependent on the level of activity (on the volume)

Marketing Mix : Price 28

 2- Calculation of the break-even point : Profit = zero

Assumption = we sell what we produce

Selling price BT for the Fixed costs + (Unit variable

=
manufacturer * Quantity costs * Quantity)
2 POSSIBILITIES :

-We try to determine the final consumer's sales price before tax: The
quantities to be produced are fixed by the production (for example,
maximum capacity) and/or by the marketing objectives (Volume
Market share).

-We try to determine the minimum quantity to be produced to cover the

costs: The selling price all taxes included for the consumer is fixed by the
study of psychological price and/or by the study of the competition

Marketing Mix : Price

 Exercise : Students’ gala

The Students’ association expects 700 people at the next gala. Knowing
that the operating costs will be as follows + no VAT in this case.

Room rental = 8100€

Staff on site = 1500€
Rental of chairs and tables = 2000€
Rental of equipment (sound system, microphone, etc.) = 1000€
Decoration = 1100 €
Communication costs = 250€
Drinks = 11€ BT/person
Meal = 8€ BT/person

1/ At what minimum price must the ticket be sold to cover costs?

2/ Knowing that the other Associations sell their tickets for 35 euros, how
many more people will it take to cover the costs?

Marketing Mix : Price

To do for the next session
Prepare all the exercises on price
before class - Case study available
on C@mpus
- Deposit your homework on
C@mpus before next Monday