[MUSIC] Hi, dear students, welcome back to the Price Module. [MUSIC] After exploring some introductory concepts about pricing and analyzing the impact of the Internet on the price definition. In this blog, we will begin to explore which are the major factors affecting the pricing decisions of the company. We can say that price definitions can be affected by two types of factors. Internal factors and external factors. We will begin by analyzing the internal ones. Among the major internal factors we can mention at least four. Which are the marketing objectives of the company or organization, the marketing mix of the company, the cost structure of the company and some institutional or organizational constraints. We will discuss each of these elements separately. The first internal factors is the marketing objectives of an organization. Before defining a price, we have to understand what are the objectives we want to achieve. Some objectives may be defined on a quantitative basis and we have to be aware that they may end up opposing each other, and you can set up objectives with an offensive purpose or a defensive one. Quantitative offensive objectives could be expressed as one of them. Maximize income of sales. This implies looking for the price that gives them maximum value to their equation price per quantity. Maximize profits on the other side looks for the maximization of the benefit. And this not necessarily implies achieving the maximum possible level of sales. Two offensive objectives that might also put the notion of profit maximization are maximization on market share which means to get the highest percentage of a market in relation to the competitors and maximization of reach or market penetration which implies that our products get as many clients as possible. This last objective is normally the major driver for NGOs or entities with purpose of social marketing. Objectives could also be defensive and therefore the price of a product is defined to defend other products rather than existing product lines or to block the entry of a new competitor into the market. When Airbus announced the introduction of the Airbus 380, Boeing immediately reacted cutting the price of their Boeing 747. The second internal factor affecting price definition is the marketing mix of the company. Prices have to be defined in accordance with the other piece of the marketing mix. And in coherence, with the desired positioning for the product. For instance, if you are Rolls Royce, you cannot price your cars with low prices because it would destroy the brand image of the company. A Rolls Royce has a high price, it is not advertised massively, the company has only a few dealers and only in the best quarters or a few cities and the delivery time expected for a Rolls Royce could take months if not years. All these elements are part of a coherent puzzle which makes a product to be considered an icon or an object of desire. On the other side, middle of the road cast like Skoda must have medium affordable prices, must be advertised heavily on mass media, and in accordance they must have extensive distribution and after the sales networks in order to allow fast reach to the consumers. If not consumers might end up buying the substitute product from a competitor. The same happens in the wine industry Chateau Margaux or Chateau Lafite cannot be priced low because they compete in high quality, high price, small volume markets. Chilean wines on the opposite side of this spectrum are perceived as very good wines in terms of value for money. At least trying to compete in the high-price range of the market precisely because the market perceptions don't identify wines with very high price and it will take time for Chile to change their current position. A third internal factor affecting the definition of price is the cost structure of the company. The cost of the products is the floor on which prices are built, in principle a company cannot sell its products below their cost because this would not be sustainable in the long run. However, as we have mentioned a few moments ago, a company could sell at a loss in order to lure competitors, this is a defensive reason, or to win clients, this is an offensive one. Marketing managers must know and understand what the cost structures of our business and our products are. Costs can be classified into fixed costs, those who don't vary with production or sales levels, and variable costs, those who vary directly with the levels of production. Total cost is the sum or the fixed and variable cost. And the cost per unit results from dividing the total cost among the total units per used. It is important to understand how the cost per unit varies in accordant to different levels of production. If in a room we sit 30 students and one professor, the cost of the professor plus the cost of the room itself should be divided among the 30 students. But if in the same room we can sit 40 students, we should add only 10 additional chairs as variable cost but the cost of both the room and the professor itself could be distributed in a better way. Decreasing the total cost per student. This is what we know as economies of scale which can be defined as the cost advantage that companies gained due to size output or level of operation. There's another way to decrease the cost per unit of a product related to a so called experience curve. These are reductions in the average production costs related to the experience in manufacturing the product. The underlying logic here is that, the more you manufacture the product, the better, the faster, and the more efficient you become in doing it, and this experience should be reflected into lower manufacturing costs. Finally, the fourth internal factor affecting the price definition is related to organizational, institutional considerations. In some cases, prices may define by corporations beyond considering the economic, financial or marketing implications. Even more in some moments prices might to be established without considering strategic implications at all. On the contrary, priorities given to what we call institutional organization reasons which not necessarily can be justified from a strategic report. In many companies at some points, prices are decided on a very simple basis. We want to win the contract. We want to win this order, or we want to steal this order from our competitor. As irrational as it may appear, in this case prices are simply sunk with the only purpose of winning. This is one of the examples I can think of, regarding organizational or institutional reasons. Having described internal factors affecting the pricing policy, in the next block we will touch the external factors that affect unconditioned price definition. This is all for today, thank you very much. See you the next module. Bye, bye. [MUSIC]
