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CHAPTER
PRICING
PRODUCTS AND
SERVICES
NATURE AND IMPORTANCE OF PRICE
• The Many Names of Price - ???
•
•
•
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Hotel
Doctor
Insurance
apartment
• What Is Price?
To the seller...
Price is revenue
and profit source
To the consumer...
Price is what you give
up to get what you want
THE PRICING EQUATION FOR CONSUMERS
PRICE = LIST PRICE - INCENTIVES & ALLOWANCES + EXTRA FEES
THE PROFIT EQUATION FOR SELLERS
Profit =
Total revenue
or
- Total cost
Profit = (Unit price × Quantity sold) −Total cost
WAYS TO SELECT BASE PRICE LEVELS
Demand oriented – focus on consumer preference
Cost oriented – focus on business’s expenses
Profit oriented – focus on profit
Competition oriented – focus on the marketplace players
DEMAND ORIENTED APPROACHES
 Skimming Pricing – high initial price
 Penetration Pricing – low initial price
 Prestige Pricing – high price = quality and status
 Target Pricing-make product fit price market will pay
 Bundle Pricing- 2 products priced as one. helps poorer seller
 Yield Management Pricing – peak and non peak prices
PROFIT ORIENTED APPROACHES
 Target Profit Pricing-set annual dollar volume or profit
If I need to make $5000, & I can make 5 units,
selling price is $1000.
 Target Return-on-Sales PricingWant to receive 1% of sales as my profit – actors & directors
 Target Return-on-Investment Pricing –
I can make 5 % on my money in the bank. Set price so
I make 6% on my investment if I invest it in my business.
COST ORIENTED APPROACHES
• Cost-Oriented Approaches
 Standard Markup Pricing
add the standard industry fixed % to my costs. Easy
to implement.
 Cost-Plus Pricing
add a standard dollar amount to my costs- like $5.00
for shipping and handling
COMPETITION ORIENTED APPROACHES
 Customary Pricing
Adjust product to fit costs & maintain price
75¢ candy bar in a vending machine
 Above-, At-, or Below-Market Pricing
Use largest competitor as a benchmark to set your price.
Rolex watches (above) or Value City Furniture (below)
 Loss-Leader PricingPrice below cost to lure buyers in
Want buyer purchasing other things you sell at high mark ups
Lots of choices, but when to use which one?
PRICING OBJECTIVES
Profit-Oriented Pricing ObjectivesSales revenue
Sales-Oriented Pricing ObjectivesMarket share, unit volume
Status Quo Pricing ObjectivesSurvival, social responsibility
PRICING CONSTRAINTS
 Demand for the Product Class, Product, & Brand
 Newness of the Product: Stage in the
Product Life Cycle
 Cost of Producing and Marketing the Product
 Competitors’ Prices
ESTIMATING DEMAND
AND REVENUE
Always use price first, but must adjust for:
• Consumer Tastes
• Price and Availability of Similar Products
• Consumer Income levels
• Changes in external environment
demand curve for Newsweek (initial conditions)
demand curve for Newsweek (shift in demand)
HOW MUCH MORE WILL THEY BUY
WHEN I LOWER PRICE?
 Price Elasticity of Demand
Elastic
Demand
Inelastic
Demand
 Consumers buy more or less
of a product when the
price changes
 An increase or decrease in
price will not significantly
affect demand
FUNDAMENTAL REVENUE CONCEPT
Total revenue is the total money received
from the sale of a product
Total Revenue = Price X Quantity
But price set depends on costs, so how to value them?
FUNDAMENTAL COST CONCEPT
Total Costs
Variable
Costs
Fixed Costs
Deviate with changes
in level of output
Do not deviate
as level of output changes
How do you know when you’re making money?
CALCULATING A BREAK EVEN POINT
LEGAL AND ETHICAL
CONSIDERATIONS
Deceptive pricing- can’t bait and switch
Price Fixing-Manufacturer can’t agree
with competitors or resellers to
set price
Issues
That
Limit
Pricing
Decisions
Price Discrimination-can’t set a different
price for the same item for two
different customers
Predatory Pricing-can’t sell an
item at a loss to bankrupt
the competition
SETTING A FINAL PRICE
• Step 1: Set an Approximate Price Level
pick a starting range using demand and
break even analysis
• Step 2: Set the Specific List or Quoted Price
 One-Price Policy – Dollar Store or no haggling
 Flexible-Price Policy- different prices for different
buyers and buying situations
SETTING A FINAL PRICE
• Step 3: Make Special Adjustments to
the List or Quoted Price
 Discounts
• Quantity Discounts
• Seasonal Discounts
• Cash Discounts
• Trade Discounts to resellers
SETTING A FINAL PRICE
Allowances
 Trade-In Allowances - like for cars
 Promotional Allowances – if you sell 12, 13th is free
• Everyday Low Pricing-reduce promotional allowances
but also reduce price of item so reseller sells more
SETTING A FINAL PRICE
Geographical Adjustments
 FOB Origin Pricing – buyer pays shipping
owns goods in transit
 Uniform Delivered Pricing – seller pays shipping
and charges it to all buyers equally,
but holds title during transit
Price (P)
Price (P) is the money or other
considerations (including other goods and
services) exchanged for the ownership or
use of a good or service.
Demand Curve
A demand curve is a graph relating the
quantity sold and price, which shows the
maximum number of units that will be
sold at a given price.
Total Cost (TC)
Total cost (TC) is the total expense
incurred by a firm in producing and
marketing a product. Total cost (TC)
equals the sum of fixed cost (FC) and
variable cost (VC) or TC = FC + VC.
Fixed Cost (FC)
Fixed cost (FC) is the sum of the
expenses of the firm that are stable and do
not change with the quantity of a product
that is produced and sold.
Variable Cost (VC)
Variable cost (VC) is the sum of the
expenses of the firm that vary directly
with the quantity of a product that is
produced and sold.
Break-Even Analysis
Break-even analysis is a technique that
analyzes the relationship between total
revenue and total cost to determine
profitability at various levels of output.
Pricing Objectives
Pricing objectives involve specifying the
role of price in an organization’s
marketing and strategic plans.
Pricing Constraints
Pricing constraints involve factors that
limit the range of prices a firm may set.