Review Slide for last lecture

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Review Slide for last lecture
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Measuring Price Sensitivity Controlled Conditions
In-Store Purchase Experiments

• Most common method is to use two or more retail
  outlets that have similar characteristics
  (experiment and control).
• Ability to disentangle price and other promotion
  
• -
• Can be extremely expensive.
• Competitors actions can contaminate results
  (special sales promotions, advertising)
• Appropriate for products sold through more
  controlled methods (mail-order)
• Inappropriate for products of great seasonality

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Measuring Price Sensitivity Controlled Conditions
Laboratory Purchase Experiments

• These experiments attempt to simulate the real
  store purchase experience. Mall intercepts an
  example of laboratory experiments.
• Very adaptable.
• Inexpensive.
• High validity
• Control for demographics
• - Artificial (Heightened consumer awareness)
• Appropriate for products that are at
• Inappropriate for products that

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Measuring Price Sensitivity Controlled Conditions

• Difference between laboratory experiment and
  simulated experiment
• Conjoint analysis can be conducted very
  quickly and at a low cost.
• - Validity
• Appropriate for determining what familiar
  attributes to include (and at what levels to
  include them at) during the product/service
  design process.
• Inappropriate for attributes that are less
  familiar to the consumers.

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Conjoint Analysis

• Most methods used to calculate consumer
  preference are compositional. For example,
  consumer ratings of attribute importance
  represent a compositional approach.
• Conjoint analysis is a decompositional approach
  to measuring consumer preferences. Consumers rate
  a product while evaluating several product
  attributes simultaneously.

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Conjoint Analysis

• Consumer preference data is collected for
  several product configurations.
• Product configurations are presented such that
  various trade-offs can be assessed on a monetary
  basis.
• Data can be reported on an individual or
  aggregate basis, which is useful for segmenting a
  market based on price or other product attribute.
• Sensitivity analysis can be conducted with the
  data to assess the impact that changes in
  attributes have on price sensitivity.

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Discussion Questions

• For each scenario below, which method should be
  used to measure price sensitivity?
• You want to determine price sensitivity for an
  existing brand of orange juice.
• You are a long distance telephone company trying
  to determine what causes price sensitivity and
  how price sensitive consumers are in their
  selection of a long distance telephone service.
• You are a hotel chain trying to determine what
  features to include in a room (color TV, free
  toiletries, etc.).
• You are a laundry detergent maker introducing a
  flanking brand and want to see how many sales you
  will take away from your flagship brand as well
  as from competitors' brands. It is important,
  however, that competitors not find out about the
  test. Otherwise, they will be forewarned of the
  new brand's introduction.

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Discussion Questions

• For each scenario below, which method should be
  used to measure price sensitivity?
• You are the editor of a weekly newspaper and are
  considering raising the price of the paper from
  .40 to .50.
• You have developed a new headphone radio with
  built-in ear muffs called "Hot Tunes." You want
  to determine price sensitivity for the product.
• The marketing managers for Advil Pain Relievers
  want to determine the effectiveness of coupons to
  encourage purchase.
• A chain of grocery stores is trying to decide
  which products to feature in price promotions.

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Cost and Cost-Plus Pricing (Chapter 1)

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Tactical Pricing Orientations

• Cost-Driven Pricing
• Customer-Driven Pricing
• Competition-Driven Pricing

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Key Terminologies

• Unit contribution is the difference between the
  price and the variable cost
• Margin
• Markup

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Margin

• Margin refers to profit in terms of revenue,
  expressed as a percent
• Manufacturers margin
• Retailers margin

Manufacturer
Retailer
Consumer
Cost of sales 1.50 Selling price 2.00 Unit
contribution .50 Margin 25
Cost of sales 1 Selling price 1.50 Unit
contribution .50 Margin 33
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Markup

• Markup refers to profit in terms of cost,
  expressed as a percent
• Manufacturers markup
• Retailers markup

Manufacturer
Retailer
Consumer
Cost of sales 1 Unit contribution .50 Markup
50
Cost of sales 1.50 Unit contribution
.50 Markup 33
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Conversion Between Markup and Margin?

• 1/Markup 1/Margin -1
• A 25 markup margin
• A 20 markup margin
• A 25 margin markup
• A 50 margin markup

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Distinction Between Fixed and Variable Costs

• Fixed cost is independent of the number of units
  sold.
• Variable cost is dependent on the number of units
  sold.

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Ask The Right Questions

• Wrong question
• What prices do we need to cover costs and achieve
  our profit objectives?
• Right questions
• What costs can we afford to incur and still earn
  a profit?
• How much sales gain would be required to profit
  from a price cut?
• How much sales loss would be tolerable to profit
  from a price increase?

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Problems with Cost-plus pricing

• Cost-plus pricing will lead to over-pricing in a
  weak market (Death Spiral).

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Example
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Mini Case Study Self-Expedited Death Spiral
Year Stores
1985 1
1987 5
1992 37
1996 850
1999 950
2003 2000
2005 4700

• In 2007 Movie Gallery changed the 7-day rental
  period to 5-day.
• The 7-day option was retained, at an additional
  fee.
• In the same year Movie Gallery filed for
  bankruptcy protection and stocks dropped below
  1.

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What Could Have MG Done?

• Channel Strategy

• Pricing Strategy

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Problems with Cost-plus Pricing

• Cost-plus pricing will also lead to under-pricing
  in a strong market.

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Next Lecture

• Break-Even Analyses (Chapter 9)