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Pricing Objectives and Factors — Transcript

by Matt Wilson · 2,648 words · 457 segments · language en · Watch on YouTube

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0:03Hi everyone. In this video I want to
0:04talk about pricing objectives and
0:06factors.
0:07In previous videos we looked at some
0:09specific pricing strategies that firms
0:11can use.
0:12What I want to do in this video is look
0:14at some of the considerations we must
0:16make in order to determine which of
0:18those strategies makes the most sense.
0:25So specifically in this video I want to
0:27look at price objectives,
0:29costs, we're going to define fixed and
0:31variable costs, revenues, demand, and
0:35finally the pricing environment.
0:40So pricing objectives can be very
0:42different depending on
0:43your firm's objectives, overall
0:45objectives, and what industry you're in.
0:48But some of them may include the
0:49following. You may be in a situation
0:51where you feel pressured to increase
0:53sales or market share. There may be a
0:56drive
0:57for a specific period of time to
0:59increase profit.
1:01This could be [clears throat] based on
1:03stockholders or a change in management.
1:06Whatever it is, you may need to change
1:08your pricing strategy to increase sales.
1:12Often what we see with this is
1:15a price that is dropped in order to
1:17encourage
1:19customers to to buy the product.
1:22Conversely, we may see times where firms
1:25are looking to raise their price, which
1:28relates to image enhancement. So as we
1:32know,
1:33sometimes raising a price actually says
1:37that the price of that good or service
1:39says something to the customer about its
1:41quality or its image. And a higher price
1:45can reflect in the customer's mind
1:47higher quality or a a more luxurious
1:50product. So if a firm is looking to
1:53improve their image, they may in fact
1:56look not to lower price, but to raise
1:59their price.
2:00There's also competitive effects that
2:02must be considered. What is happening
2:05in our industry and what kind of
2:07industry do we have
2:09set up that may allow us to to change
2:12our price. We'll talk more about
2:13different types of
2:15competitive environments later on in
2:18this video.
2:19And finally, there's just basic customer
2:22satisfaction.
2:23We may find that changing the price of
2:25our goods or service might impact
2:30customer satisfaction. So, at a specific
2:32price level, the customer may feel
2:35somewhat satisfied and if that price is
2:38lowered, they may lower their in turn
2:41lower their expectations
2:43and then that will have the effect of
2:45hopefully increasing customer
2:47satisfaction.
2:49So, again, lots of different pricing
2:50objectives to consider. Here are just a
2:52few that may be on top of mind.
2:57Now, when considering factors in actual
3:00price setting, we should look at a few
3:02different things including costs, what
3:04it costs to produce the market offering,
3:07demand,
3:08revenue, and finally the pricing
3:11environment.
3:13Let's start by looking at costs.
3:16So, we have two basic types of costs
3:19when running a business. We have fixed
3:21costs, those do not vary with production
3:23or sales level.
3:25So, you can think of things like capital
3:27assets. So, maybe your rent on the
3:30factory that you that you rent.
3:33Doesn't matter how many products you
3:35produce in that factory, the rent is
3:37going to be a fixed cost.
3:40And then we have variable costs. These
3:43vary directly with the level of
3:44production. So, material goods, that
3:47could be a variable cost because
3:49depending on how many products you make,
3:52it's going to change your inputs or how
3:54much uh of the raw material inputs are
3:57you require.
3:59So, when we add fixed and variable
4:01costs, we get total costs. This is the
4:03total of the fixed and variable costs.
4:08Now, we also need to look at demand when
4:12we consider pricing.
4:14So, different prices result in different
4:16levels of demand as shown by the demand
4:19curve. So, for normal products,
4:22demand will increase as price decreases.
4:26This makes sense to us. This is the
4:28normal situation where
4:30as a product or service becomes cheaper,
4:33more people will uh
4:36in turn want want to purchase that that
4:38product or service.
4:39However, there's a particular type or
4:41category of products known as prestige
4:44prestige products, which actually uh
4:47work in the inverse what manner.
4:50So, this means that demand may actually
4:53increase with an increase in price
4:57and will decrease in response to a very
4:59low price.
5:01Again,
5:02going back to our discussion on the
5:04three levels of uh product,
5:07the core value or the core product uh
5:11for many luxury items or prestige items
5:14is this idea of exclusivity uh
5:17or something that is very rare and only
5:20a certain uh type of customer can afford
5:23it and enjoy it. And so,
5:26what we see with these types of prestige
5:28products is as the price goes up, the
5:31demand actually goes up and as the price
5:33drops, some people may feel that there's
5:36been a drop in this core value.
5:39So, keep this in mind as we talk about
5:42demand. Uh there's there's normal
5:44products and then there's prestige
5:46products.
5:50It's also important when we think of
5:52demand to look at price elasticity of
5:54demand. So, price elastic elasticity of
5:57demand refers to how responsive changes
6:00in demand will be in changes to the
6:03price.
6:04So, a small a small change in demand,
6:08that means if there's a
6:10uh if you change your price and there's
6:12you what you see in the market is that
6:14there's very little change in demand,
6:16uh we call that inelastic demand. So,
6:19for example, we see inelastic um
6:23uh price price inelasticity where with
6:26gasoline.
6:27When the price of gasoline goes up, we
6:30may see small variations, but people
6:33still need to drive to work, they still
6:34need to get around to school, they still
6:36need to um be mobile. And so, they don't
6:40necessarily uh change their uh habits
6:43too much, and we don't see much change
6:46in demand when the price goes up.
6:49Conversely, if you have a product or
6:52service and you change the price and you
6:54see a large change in demand,
6:57we call that elastic demand. So, for
7:00regular products, if the price goes up
7:03significantly, we may see demand drop
7:06off.
7:07That's elastic demand.
7:13Now,
7:14we also want to look at revenue. And
7:16revenue is the total amount of sales
7:18that you make when selling your products
7:20or service.
7:22When we consider revenue versus profit,
7:23profit is revenue minus the costs that
7:28we've incurred to uh develop and sell
7:31our product or service.
7:33A key point to consider um when when
7:36setting a price may be the break-even
7:39point.
7:40And the break-even point occurs costs
7:43are equal to the revenue.
7:46We may not necessarily want to set our
7:48price at the break-even point, but it is
7:50a good piece of information. It's a good
7:52data point for us to have
7:54as a marketer.
7:56So, a very simple Let's go through a
7:57very simple example here. This may be
8:00something that you want to to look at
8:02when when studying for an exam.
8:04What we want to do is just do a very
8:06basic example of calculating the
8:08break-even point given a certain
8:10information. So, for example,
8:13let's say I run a company and what I
8:15produce is sold for $100 each.
8:19I have fixed costs of $200,000
8:24and variable costs per unit
8:26of $50.
8:29What is the break-even point in units?
8:31How many units do I need to sell in
8:34order to break even?
8:36So, let's look at this.
8:38What we have to do is set up an equation
8:40here where costs equal revenue. And if I
8:45look at the information provided, my
8:47costs are the fixed cost, $200,000,
8:51plus my variable costs, which are $50 *
8:54X. This is X is the number of units that
8:58I'm going to produce.
9:00My revenue, on the other hand, is $100
9:04* X again. This is the again the number
9:07of units I sell.
9:09Therefore,
9:11the break-even price occurs when 200,000
9:14+ 50X, my costs, = 100X.
9:20Now, this is a very simple
9:22algebraic equation and we can do a few
9:24steps here to solve for X. What we'll
9:27see is in this situation, the break-even
9:29point is 4,000 units. In other words, if
9:34I produce 4,000 units,
9:36I will break even with my
9:39total costs and my revenue.
9:42This is a very basic example, and
9:43obviously in the real world things are a
9:45little bit more complicated.
9:49>> [snorts]
9:50>> In setting price, there are also several
9:52environmental factors that are going to
9:54come into play.
9:56And these include internal factors to
9:57your company, the economy, competition,
10:01and government regulation. It's
10:02important that we pay attention to these
10:04cuz these will dictate
10:07how how we set prices.
10:10Internal factors include things like the
10:12overall marketing strategy of the
10:14company, the objectives, and the
10:16marketing mix.
10:18And we need to make sure that the price
10:20that we're setting for our products and
10:22services
10:23actually aligns with our overall
10:25marketing strategy and our marketing
10:27mix. So, that means the price makes
10:30sense given A the product that we have,
10:33the place, i.e. where we sell it, and
10:36and how we make it available to
10:37customers,
10:38and finally our promotional strategy as
10:41well.
10:42The price P should make sense given all
10:44those other P's.
10:45So, for example, Mercedes-Benz, who
10:47makes luxury vehicles,
10:49they could probably sell more cars if
10:51they lowered their price, but that's
10:53probably not a good idea for them given
10:57the image that they have and given the
10:59overall marketing strategy of their
11:01company, who their target market is, the
11:03type of product that they produce, etc.
11:06etc.
11:08Another example would be if you were a a
11:10luxury
11:12um product or if you sold a luxury
11:14product, you would not want to make that
11:16product available
11:18um
11:19intensively, meaning you wouldn't want
11:22that product available at grocery stores
11:24and gas stations and drug stores and
11:27convenience places where where people
11:29shop often. That really wouldn't make
11:32sense given the exclusivity and the
11:34prestige of this luxury product.
11:36>> [clears throat]
11:37>> So, that's what we mean when we say the
11:38price of the item needs to make sense
11:41given the other P's in your in your
11:43marketing mix.
11:46Government regulations can also play
11:49a part in setting prices. At times the
11:52government imposes regulations on how
11:53much can be charged for certain products
11:56and there are certain industries where
11:58companies must abide by such
12:00regulations.
12:02So, this doesn't often happen in
12:04consumer goods, but there are certain
12:06products, for example, prescription
12:08drugs where the government has a
12:12yeah, [clears throat] certainly has um
12:15say in what what price can be set.
12:20The economy is also important to factor
12:21in because the economic factors have a
12:23strong impact on our consumers and what
12:27pricing strategies we can use.
12:30So, we see this when we we have uh booms
12:34in the economy as well as uh recessions.
12:37And some of the more recent recessions
12:39have led to more value-conscious
12:41consumers. So, there's been um certainly
12:44some price cutting for a lot of people
12:47uh and and higher competition in
12:51um everyday value pricing retailers.
12:53Think of your Walmarts, Targets, dollar
12:56stores, things like that.
12:58And there's also um
13:00more competition for more affordable
13:02items. So, you see companies who have
13:05engaged in downward line stretching
13:07where they include products in their
13:09product mix that uh are more affordable
13:12to to customers.
13:16Finally, we should look at competition
13:18and we need to consider this uh
13:21as well as the industry structure when
13:22we set our prices.
13:25A firm's flexibility in setting prices
13:28is going to vary depending on the nature
13:30of the market and the nature of the
13:31industry that they're in.
13:33There are four basic types of markets to
13:36consider.
13:37Perfect competition, monopolistic
13:40competition, an oligopoly, and a
13:42monopoly.
13:44On the next slide here, we'll go through
13:45a table describing each of these as well
13:48as some of the price implications for
13:50these markets.
13:53So, starting at the top here,
13:57if we look at the number of firms that
13:59are exist in a perfect competition
14:02um structure, there are many, dozens,
14:04hundreds, sometimes even thousands.
14:07Um similarly, in a monopolistic
14:09competition
14:10um market, there are also many, many
14:13competitors. The number of firms in both
14:15of these markets
14:17uh is very high, and we want that
14:19because that again breeds good
14:21competition.
14:23However, moving over to an oligopoly,
14:26the number of firms in an oligopoly uh
14:28is much lower, and it it may range, but
14:31it's typically in the range from about
14:33two to eight firms. So, that means there
14:36are several large companies that maybe
14:39dominate the market, but there's little
14:41few a few of them, cuz certainly
14:43compared to uh the other competitive
14:45markets,
14:46an oligopoly has many fewer players.
14:50And finally, with a monopoly, we're
14:51dealing with again one um one
14:54corporation that sort of controls that
14:56that market.
14:58Taking a look at what an what offering
15:00is sold, in perfect competition,
15:04excuse me, we're probably dealing with
15:06commodities, or things that can't really
15:09be differentiated. So, agricultural
15:12products are examples of um perfect
15:15competition or commodities.
15:17Similarly, gasoline, right? The gasoline
15:19that comes out of uh one gas station is
15:21going to be
15:23um
15:23undifferentiable to the the gas that
15:26comes out of another station.
15:28So, in perfect competition, we're
15:30dealing with many firms that sell
15:32commodities.
15:34Compare that to monopolistic competition
15:36where we still have many players, but in
15:38this case, we can differentiate our
15:40product or service. And this is going to
15:42have implications later on when setting
15:45a price.
15:47In an oligopoly, we're dealing with any
15:48product or service. It could be a
15:51commodity, it could be something um
15:53differentiated. In a In a monopoly,
15:57again, we're dealing with anything, but
15:58we're typically dealing with something
16:00that is very scarce or requires uh high
16:03investment. And often times uh it is
16:07regulated, controlled by the government
16:08somehow.
16:10Now, now that we have an idea of what
16:12these different market structures look
16:15like, let's take a look at how this
16:17implicate or how this has implications
16:19for for price.
16:22So,
16:23in a in a perfect perfectly competitive
16:25market, um the marketer does actually
16:27not set the price.
16:29The marketer really has to accept the
16:31price set by the market. And if they try
16:34to stray away from this, they're not
16:36going to succeed. The market the supply
16:39and demand uh for commodities is uh
16:42basically set, and there really is no
16:46changing that um
16:47in terms of setting a price strategy.
16:49You set the price that the market uh has
16:51agreed on.
16:53For monopolistic competition,
16:56now we're dealing with a marketer who
16:58can choose which price to set.
17:01They can use competition, cost, or
17:03customer value-based pricing. These are
17:05the our three C's
17:07that we saw in in a previous video.
17:10And they basically have the freedom to,
17:12again, um use any of these strategies
17:15that they see fit.
17:18In an oligopoly, the marketer can set a
17:20price and again they can use
17:22competition, cost, or customer
17:23value-based pricing.
17:26Competition-based pricing here is going
17:28to be very important because there's so
17:30many few players.
17:31Um
17:32it's very important that we have an
17:34understanding of what our competitors
17:36are doing, what price level they are at.
17:40And finally with a monopoly, this is an
17:42example where the marketer sets a price.
17:46But as I mentioned before, government
17:48regulation is [clears throat] common.
17:51They're not going to be using uh
17:52competition-based pricing strategies
17:54because in this situation, there is no
17:57competition. Doesn't make sense for them
17:58to look uh elsewhere or to make that
18:01consideration.
18:02There is no competition in a monopoly.
18:04However, they may be restricted in their
18:07price setting
18:09because they are in a monopolistic
18:11structure.
18:14So, in this video we took a look at some
18:16factors uh when set setting prices. We
18:18looked at different types of costs,
18:21demand, revenue factors, and finally
18:24different pricing environments.

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