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4.4 Price
Chapter 27
Price
 Price is the amount
paid by consumers for
a product.
What else does PRICE say?
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Determines the degree of value added to “bought-in”
components.
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Bought-In
Pieces purchased from other
manufacturers to create a whole
product.
Influences the revenue and profit of a business due
to impacting demand for a product.
Reflects the marketing objectives of the business.
Establishes the psychological image and identify of
a product.
Factors in determining price
1.
2.
3.
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5.
Costs of production
Competitive conditions
in the market
Competitors’ prices
Marketing objectives
Price elasticity of demand
What?
(Measures the responsiveness of demand following a change in price.)
6.
Whether it is a new or existing product
Pricing Strategies
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Cost-Based Pricing
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Firms determine the costs of producing and supplying
a product and then ADD money on top of this
calculated costs to determine the selling price.
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Cost-Plus Pricing Adding a fixed mark-up for profit
to the cost of the item.
This method is popular with retailers. They take the
cost of the item and add a mark up percentage to
determine selling price.
Cost of bought-in materials: $40
50% markup on cost = $20 Selling price= $60
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Pricing Strategies
(Cost-Based Continued…)
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Full-Cost Pricing (or absorption-cost pricing)
 This pricing strategy is similar to cost-plus pricing.
 Used in manufacturing companies.
 The fixed and variable costs are allocated to manufactured
products to determine cost, then a markup is added to
determine selling price.
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5000 Training videos are produced
$10,000 fixed costs
$5 variable costs per video
$10,000 + (5000 X $5) = $35,000 total cost of videos
Average unit cost = $35,000 / 5000 = $7 cost per video
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A markup is added to the average video cost to determine
selling price.
Pricing Strategies
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Competition-based pricing
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The company will base its price upon the price set by its
competitors.
Price Leadership One dominant firm in a market
sets a price and the other firms
simply charge a price based upon
the price set by the market leader.
This occurs in markets dominated by a few firms.
Examples: Airlines, Gas stations, cell phone service
Pricing Strategies
(Competition-Based Continued)
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Going-Rate PricingThe price charged is based upon
a study of the conditions that
prevail in a market and the prices
charged by major competitors.
This occurs in markets where pricing information is
easily determined by customers and can be easily
compared.
Examples: Internet
Pricing Strategies
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Market-Based Pricing
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Pricing set based upon the marketing objectives of the
company.
Penetration Pricing
Setting a low price
supported by strong
promotion in order to
achieve high volume
in sales.
This occurs when firms are trying to obtain market
share. If successful, the price can increase later.
Examples: Snack foods
Pricing Strategies
(Market-Based Continued)
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Market Skimming A high price is charged for a new
product that has little or no
competition.
This strategy is used to maximize short-term profits until
competitors enter the market and to project an exclusive
image.
Examples: Pharmaceuticals,
Technology products