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CHAPTER 11
Pricing Products
and Services
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 1
After reading this chapter you should
be able to:
• Identify the elements that make up a price.
• Understand demand-oriented, cost-oriented,
profit-oriented, and competition-oriented
approaches to pricing and the major factors
considered in arriving at a final list or quoted
price.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 2
After reading this chapter you
should be able to:
• Explain what a demand curve is and what price
elasticity of demand means.
• Explain the role of revenues (sales) and costs in
pricing decisions.
• Understand the value of break-even analysis.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 3
After reading this chapter you
should be able to:
• Recognise the objectives a firm has in setting
prices and the constraints on the range of prices
a firm can charge.
• Describe the special adjustments made to the
approximate price level on the basis of
geography, discounts, and allowances.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 4
Nature and Importance of Price
• The price paid for goods and services goes by many
names. You pay rent for an apartment, interest on a
bank credit card and a premium for car insurance.
Your dentist or doctor charges you a fee, a
professional or social organisation charges dues, and
airlines charge a fare. And what you pay for clothes
or a haircut is termed a price.
• Price is the only variable in marketing, and in fact in
business, that generates the majority of revenue for
all business and most non-profit organisations.
• Without price, or revenue, no organisation would
exist in a modern economy.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 5
What Is a Price?
• These examples highlight the many varied ways that
price plays a part in our daily lives.
• From a marketing viewpoint, price is the money or
other considerations, including other goods and
services, exchanged for the ownership or use of a
product.
• The practice of exchanging goods and services for
other goods and services rather than for money is
called barter.
• Price can vary due to many internal and external
factors, and therefore price setting can vary.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 6
The price of three different
purchases
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 7
Price As an Indicator of Value
• For some products, price influences consumers’ perception of
overall quality.
• From a consumer’s standpoint, price is often used to indicate
value when price is compared with benefits of the product.
• At a given price, as perceived benefits increase, value
increases. If you’re used to paying $10.99 for a medium pizza,
wouldn’t a large pizza at the same price be more valuable?
• Creative marketers, aware that consumers’ value assessments
are often comparative, engage in value pricing.
• Value pricing is the practice of increasing a product’s benefits
while maintaining or decreasing price.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 8
Price in the Marketing Mix
• Pricing is a critical decision made by a marketing executive
because price has a direct effect on a firm’s profits.
• This is apparent from a firm’s profit equation:
– Profit = Total revenue – Total cost
– = (Unit price × Quantity sold) – Total cost
• What makes this relationship even more complicated is that
price affects the quantity sold, as illustrated with demand curves.
• Since the quantity sold sometimes affects a firm’s costs because
of efficiency of production, price also indirectly affects costs.
• Thus, pricing decisions influence both total revenue (sales) and
total cost, which makes pricing one of the most important
decisions marketing executives face.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 9
General Pricing Approaches
•
•
A key to a marketing manager’s setting a final price
for a product is to find an ‘approximate price level’ to
use as a reasonable starting point.
Four common approaches to helping find this
approximate price level are:
1.
2.
3.
4.
•
demand-oriented.
cost-oriented.
profit-oriented.
competition-oriented approaches.
Some of these methods do overlap.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 10
Four approaches for selecting an
approximate price level
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 11
Demand-Oriented Approaches
• Demand-oriented
approaches emphasise
factors underlying expected
customer tastes and
preferences more than such
factors as cost, profit and
competition when selecting a
price level.
• Plasma TV manufacturers
used skimming pricing to
enter the market
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 12
Demand-Oriented Approaches
• Some of the demand oriented approaches used in
pricing are:
–
–
–
–
–
–
–
–
Price Skimming
Penetration Pricing
Prestige Pricing
Odd-Even Pricing
Target Pricing
Bundle Pricing
Yield Management Pricing
Economic Value Pricing
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 13
Concept Check
1. What is the profit equation?
1. The profit equation is:
Profit = Total Revenue - Total Cost
= (Unit Price x Quantity Sold) - Total Cost
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 14
Concept Check
2. What is the difference between skimming and
penetration pricing?
A firm introducing a new product can use either
skimming pricing to set the highest initial price
that customers desiring the product are willing
to pay or penetration pricing to set a low initial
price to appeal immediately to the mass market.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 15
Concept Check
3. What is odd-even pricing?
3. Odd-even pricing involves setting prices a few
dollars or cents under an even number ($599.99
vs. $600.00).
Psychologically, the $599.99 price feels lower
than $600.00, even though the difference is 1
cent.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 16
Cost-Oriented Approaches
• With cost-oriented approaches a price setter stresses
the cost side of the pricing problem, not the demand
side.
• Price is set by looking at the production and
marketing costs and then adding enough to cover
direct expenses, overheads and profit.
• Some of the pricing methods used with this approach
are:
– Standard Markup Pricing
– Cost-Plus Pricing
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 17
Profit-Oriented Approaches
• A price setter may choose to balance both revenues
and costs to set price using profit oriented
approaches.
• These might involve either setting a target of a
specific dollar volume of profit or expressing this
target profit as a percentage of sales or investment.
• Some of the pricing methods used with this approach
are:
– Target Profit Pricing
– Target Return-on-Sales Pricing
– Target Return-on-Investment Pricing
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 18
Competition-Oriented Approaches
• Rather than emphasise demand, cost or profit
factors, a price setter can stress what competitors or
‘the market’ is doing.
• Some of the pricing methods used with this approach
are:
– Customary Pricing
– Above-, At- or Below-Market Pricing
– Loss-Leader Pricing
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 19
Estimating Demand and Revenue
• Basic to setting a product’s price is the extent of
customer demand for it.
• Marketing executives must also translate this
estimate of customer demand into estimates of
revenues the firm expects to receive.
• Ten years after it arrived in Australia, pay TV has
penetrated only 26 per cent of Australian homes
despite a $1.5 billion investment.
• If you don’t have pay TV ask yourself the reasons.
• For example, since price is only part of the value
equation, how much is price a factor compared to
content? At what price would you decide to
subscribe?
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 20
The Demand Curve
• A demand curve shows the number of products that
will be sold at a given price.
• But price is not the complete story in estimating
demand.
• Economists emphasise three other key factors:
– Consumer tastes.
– Price and availability of similar products.
– Consumer income.
• Movement along versus shift of a Demand Curve:
– Different factors can cause either a shift or a movement in
the demand curve for a product.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 21
Demand Curve in Practice
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 22
Price Elasticity of Demand
• Marketing managers are especially interested in price
elasticity—a key consideration related to the product’s demand
curve.
• Price elasticity refers to how sensitive consumer demand and
the firm’s revenues are to changes in the product’s price.
• A product with elastic demand is one in which a slight decrease
in price results in a relatively large increase in demand, or units
sold. The reverse is also true: with elastic demand, a slight
increase in price results in a relatively large decrease in
demand.
• A product with inelastic demand means that slight increases or
decreases in price will not significantly affect the demand, or
units sold, for the product.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 23
Concept Check
1. What is loss-leader pricing?
1. For a special promotion, retail stores deliberately
sell a product below its customary price to
attract customers in hopes they will buy other
products as well, particularly the discretionary
items with large markups.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 24
Concept Check
2. What are the four demand factors that determine
consumers’ willingness and ability to pay for
goods and services?
2. They are price, consumer tastes, price and
availability of similar products, and consumer
income.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 25
Concept Check
3. What is the difference between movement along a
demand curve and a shift in a demand curve?
A movement along a demand curve occurs when
the price is lowered and the quantity demanded
increases (and vice versa), assuming that other
factors remain unchanged. However, if these
factors change, then the demand curve will shift.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11- 26
Fundamental revenue concept
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PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 27
Fundamentals of Estimating Revenue
• While economists may talk about ‘demand curves’,
marketing executives are more likely to speak in
terms of ‘revenues generated’.
• Demand curves lead directly to an essential revenue
concept critical to pricing decisions: total revenue.
• As summarised in the previous slide total revenue
(TR) equals the unit price (P) times the quantity sold
(Q).
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 28
Determining Cost, Volume and Profit
Relationships
• While revenues are the moneys received by the firm
from selling its products or services to customers,
costs or expenses are the moneys the firm pays out
to its employees and suppliers.
• Marketing managers often use break-even analysis
to relate revenues and costs, topics covered in this
section.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 29
The Importance of Controlling Costs
• Understanding the role and behaviour of costs is critical for all
marketing decisions, particularly pricing decisions.
• Many firms go bankrupt because their costs get out of control,
causing their total costs to exceed their total revenues over an
extended period of time.
• This is why sophisticated marketing managers make pricing
decisions that balance both their revenues and their costs.
• Three cost concepts are important in pricing decisions:
– total cost,
– fixed cost,
– variable cost.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 30
Fundamental cost concepts
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PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 31
Break-Even Analysis
• Marketing managers often employ an approach that
considers cost, volume and profit relationships,
based on the profit equation.
• Break-even analysis is a technique that analyses the
relationship between total revenue and total cost to
determine profitability at various levels of output.
• The break-even point (BEP) is the quantity at which
total revenue and total cost are equal.
• Profit comes from any units sold beyond the BEP.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 32
Calculating a Break-Even Point
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PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 33
Break-even analysis graph for a picture
frame store
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 34
Applications of Break-Even Analysis
• Because of its simplicity, break-even analysis is used
extensively in marketing, most frequently to study the
impact on profit of changes in price, fixed cost and
variable cost.
• The mechanics of break-even analysis are the basis
of the widely used electronic spreadsheets offered by
computer programs such as Microsoft Excel that
permit managers to answer hypothetical ‘what if ’
questions about the effect of changes in price and
cost on their profit.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 35
Concept Check
1. What is the difference between fixed costs and
variable costs?
1. Fixed cost is the sum of the expenses of the firm
that are stable and do not change with the
quantity of the product that is produced and
sold.
Variable cost is the sum of the expenses of the
firm that vary directly with the quantity of the
product that is produced and sold.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 36
Concept Check
2. What is a break-even point?
2. A break-even point (BEP) is the quantity at which
total revenue and total cost are equal.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 37
Pricing Objectives and Constraints
• With such a variety of alternative pricing strategies
available, a marketing manager must consider the
pricing objectives and constraints that will narrow the
range of choices.
• While pricing objectives frequently reflect corporate
goals, pricing constraints often relate to conditions
existing in the marketplace.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 38
Identifying Pricing Objectives
• Pricing objectives specify the role of price in an
organisation’s marketing and strategic plans.
• To the extent possible, these pricing objectives are
carried to lower levels in the organisation, such as in
setting objectives for marketing managers
responsible for an individual brand.
• These objectives may change depending on the
financial position of the company as a whole, the
success of its products, or the segments in which it is
doing business.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 39
Identifying Pricing Objectives
• Pricing objectives that are used in marketing are:
–
–
–
–
–
–
Profit
Sales
Market Share
Unit Volume
Survival
Social Responsibility
• These objectives can be used individually or in any
combination that the organisation believes will help it
achieve its overall marketing and corporate
objectives.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 40
Identifying Pricing Constraints
• Factors that limit the range of price a firm may set are
pricing constraints.
• Consumer demand for the product clearly affects the
price that can be charged.
• Other constraints on price vary from factors within the
organisation to competitive factors outside it.
• Pricing constraints include:
–
–
–
–
–
Demand for the Product Class, Product and Brand
Newness of the Product: Stage in the Product Life Cycle
Cost of Producing and Marketing the Product
Competitors’ Prices
Legal and Ethical Considerations
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 41
Concept Check
1. What is the difference between pricing
objectives and pricing constraints?
1. Pricing objectives specify the role of price in an
organisation’s marketing and strategic plans.
Pricing constraints are factors that limit the
range of price a firm may set.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 42
Concept Check
2. Explain what bait and switch is and why it is an
example of deceptive pricing.
2. This occurs when a firm offers a very low price on
a product (the bait) to attract customers to a
store, who then are persuaded to purchase a
higher-priced item (the switch). Misleading
consumers is both illegal and unethical.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 43
Setting A Final Price
• The final price set by the marketing manager serves
many functions.
• It must be high enough to cover the cost of providing
the product and meet the objectives of the company.
• Yet it must be low enough that customers are willing
to pay it. But not too low, or customers may think
they’re purchasing an inferior product.
• Dizzy yet?
• Setting price is one of the most difficult tasks the
marketing manager faces, but three generalised
steps are useful to follow.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 44
Step 1: Select an Approximate Price
Level
• Before setting a final price, the marketing manager must
understand the market environment, the features and customer
benefits of the particular product, and the goals of the firm.
• A balance must be struck between factors that might drive a
price higher (such as a profit-oriented approach) and other
forces (such as increased competition from substitutes) that may
drive a price down.
• Marketing managers consider pricing objectives and constraints
first, then choose among the general pricing approaches—
demand-, cost-, profit- or competition - oriented— to arrive at an
approximate price level.
• This price is then analysed in terms of cost, volume and profit
relationships.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 45
Step 2: Set the List or Quoted Price
• A seller must decide whether to follow a one-price or
flexible-price policy.
• A one-price policy involves setting one price for all
buyers of a product or service.
• In contrast, a flexible-price policy involves setting
different prices for products and services depending
on individual buyers and purchase situation in light of
demand, cost and competitive factors.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 46
Step 3: Make Special Adjustments to
the List or Quoted Price
• Three special adjustments to the list or quoted price are:
1. Discounts:
–
Discounts are reductions from list price that a seller gives a buyer
as a reward for some activity of the buyer that is favourable to the
seller. Four kinds of discounts are especially important in
marketing strategy: (1) quantity, (2) seasonal, (3) trade (functional)
and (4) cash
2. Allowances
–
Allowances—like discounts—are reductions from list or quoted
prices to buyers for performing some activity.
3. Geographical adjustments.
–
–
Geographical adjustments are made by manufacturers or even
wholesalers to list or quoted prices to reflect the cost of
transportation of the products from seller to buyer.
The two general methods for quoting prices related to
transportation costs are (1) FOB origin pricing and (2) uniform
delivered pricing.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 47
Concept Check
1. Why would a seller choose a flexible-price policy over a
one-price policy?
2. What is the purpose of (a) quantity discounts and (b)
promotional allowances?
1. A flexible-price policy involves setting different prices for
products and services depending on individual buyers and
purchasing situations in light of demand, cost, and
competitive factors instead of setting one price for all
buyers.
2. Quantity discounts encourage customers to buy larger
quantities of a product. (b) Promotional allowances are
used to encourage sellers to undertake certain advertising
or selling activities to promote a product.
Copyright  2008 McGraw-Hill Australia Pty Ltd
PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 48
Finish
• Questions?
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PPTs t/a Marketing: The Core by Kerin et al
Slides prepared by Andrew Hughes, Australian National University
11 - 49