Marketers generally believe that price promotions damage profitability, but increased price promotions have not led to lower profits while high-profile attempts to discontinue price promotions have suffered.

1
Pricing Paradoxes for Marketers

1. Marketers generally believe that price promotions
   damage profitability, but increased price
   promotions have not led to lower profits while
   high-profile attempts to discontinue price
   promotions have suffered.

2
Marketers Hate Price Promotions, But Use Them to
Raise Prices

• Higher discounts are associated with higher
  prices and margins

5.2 B
3
Paradox 2 Importance of Price

• Price is not important to consumers or B2B buyers
  as mangers believe.
• Studies show that consumers dont know, cant
  remember prices paid (Dickson Sawyer (1990),
  Dickson, Sawyer, Urbany (2000)
• The New Luxury goods are growing and now
  account for as much as 20 of expenditures.

4
Value of Brands Price Premium?

• McDonalds
• Wal-Mart/Aldi/Migros
• Southwest/Ryan Air
• Dell
• Linux

• Starbucks
• Tiffanys
• Swissair/Lufthansa
• IBM
• Microsoft

5
Paradox 3 Marketing Spending, Price Elasticity,
and Relative Prices

• Many (most) studies show that higher advertising
  leads to greater price sensitivity, lower market
  (average) prices.
• Highly advertised and marketed brands have higher
  prices relative to unadvertised brands

6

• Studies of manufacturer price elasticity and
  advertising generally show advertising is
  associated with lower price elasticity.
• Studies of retail price elasticity generally show
  advertising (manufacturer and retailer) is
  associated with higher price elasticity.

7
Example of Promotional Spikes used to estimate
Price Elasticity
8
Price Leadership
9
Low Price Elasticity for Mfg1 versus, High for
Private Label
High Retail Power Low Mfg Power
Mfg 1
Ret 1
Easy to Compare Prices, Margin Pressure on
Retailers High Price Elasticity For Red
Sales between retailers.
Mfg 2
Ret 2
P.L.
Ret 3
10
Annual Operating Profit Margins
"Intel inside"Two Words PC Makers Hate!
11
Paradox 4. Consumer Trust Brands

• Brand Equity is often associated with trust
• The capitalized value of the trust between the
  company and the consumer. CEO, JJ
• Marketers use trust established by brand equity
  to have customers pay more.
• Brands are a tax. CEO, Loblaws
• it is hard to avoid the conclusion that
  consumers are often presented with the
  opportunity to pay higher prices than they need
  to for a given quality and that many probably do
  so (p. 177). Ratchford, et al. (1996)

12
Paradox 4 (or just cynicism?)

• Marketing and brand equity measures emphasize the
  ability to command a price premium in the absence
  of other differences.
• At least some marketers and economists believe
  that advertising is pro-competitive and is
  increasingly permitted, even when costs are of
  great social concern (prescription drugs)

13
Marketing Prices QualityCausal Loop

• Marketing creates/amplifies perceived product
  differentiation, reduces substitutability and
  price elasticity, allows prices to increase.
• Higher prices increase unit profit margins,
  increasing optimal Marketing/Sales ratios
• Establishment of brands increase willingness to
  invest in risky RD to generate new,
  higher-quality products.

14
Price Umbrella or Ceiling?

• Intel announced yet another round of price cuts
  between 11 and 24 for its Celeron line of
  low-end PC chips. That means that Intel chips
  will now sell for as low as 63. In response, AMD
  announced price cuts late Monday on its PC chips
  that bring its lowest-priced chip to 62.