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.

Paul Farris 07/15/23 1

  Higher Phillip Morris 1987 1992
discounts Packs Sold 10.8 B 10.7 B
are Marlboro 6.7 B 6.2 B
associated Prem. Packs 10.5 B 8.6 B
with higher
Discount Packs .3 B 2.1 B
prices and
margins Marlboro Share 23.6% 24.5%

Indust. A & P $2.4 B $4.0 B

Oper. Profits after
Mktg $2.7B $5.2? B

07/15/23 Paul Farris 2

 Price is not important to consumers or
B2B buyers as mangers believe.
◦ Studies show that consumers don’t know,
can’t 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.

Paul Farris 07/15/23 3

 McDonald’s  Starbucks
 Wal-Mart/Aldi/  Tiffany’s

Migros  Swissair/Lufthansa
 Southwest/Ryan Air  IBM
 Dell  Microsoft
 Linux

Paul Farris 07/15/23 4

 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

Paul Farris 07/15/23 5

 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.

Paul Farris 07/15/23 6

Example of Promotional “Spikes” used to estimate
Price Elasticity

Paul Farris 07/15/23 7

Price Leadership

Leader Follower Laggard

Retail Price $1.00 $0.90 $0.80
Retail
Margin $0.10 $0.18 $0.24
Mfg Price $0.90 $0.72 $0.56
Mfg COGS $0.50 $0.50 $0.50
Mfg Profit $0.40 $0.22 $0.06
Paul Farris 07/15/23 8
Low Price Elasticity for Mfg1 versus, High for Private Label

High Retail Power

Low Mfg Power
Mfg 1 Ret 1

Easy to Compare
Mfg 2 Ret 2 Prices, Margin
Pressure on Retailers
High Price Elasticity
P.L. Ret 3
For Red Sales
between retailers.

Paul Farris 07/15/23 9

 Annual Operating Profit Margins
"Intel inside":Two Words PC Makers Hate!

0.5

0.4

0.3

0.2

0.1

0
90 91 92 93 94 95
Intel PC Makers Paul Farris 07/15/23 10
 Brand Equity is often associated with “trust”
◦ The capitalized value of the trust between the
company and the consumer.” CEO, J&J
 Marketers use “trust” established by brand
equity to have customers pay more.
◦ Brands are “a tax.” CEO, Loblaw’s
◦ 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)

Paul Farris 07/15/23 11

 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)

Paul Farris 07/15/23 12

  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 R&D to
generate new, higher-quality products.

07/15/23 Paul Farris 13

 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.

Paul Farris 07/15/23 14