Download 12-Price Determination

Dr Zain Yousafzai
Price Determination
Chapter 12 (page 316-343)
The meaning of price
The significance of price to the firm, and the consumer
How value related to price
Pricing objectives
Factors influencing price
Nature of costs
Approaches to determining price
Break-even analysis
The Meaning of Price
Price is the amount of money and/or other items with utility needed to acquire a product. Utility is an
attribute with the potential to satisfy wants
Starts with monetary terms
Value is important; what does consumer get?
Price often depends on circumstances: yyou pay more to fly when you want to fly
Importance of Price:
In the economy, price allocates production factors
Consumers can be price-sensitive
Often judge quality by price
Value part of consumer perceptions of price
Individual firms need to set price within 4Ps
The Consumer’s View of Price (In customer’s mind)
Some consumers are very interested in getting a low price and pay close attention to price
Many are interested in other elements of the purchase, including brand, quality, etc.
There is a tendency to link quality with price
Consumers are often prepared to pay more if they expect to get excellent service
Adding value doesn’t mean dropping price
The Customer Wants Value
Price is not always an important factor in influencing a sale; the customer wants more than a
low price, may be willing to pay more
The customer considers what he or she gets for the price paid; the seller must offer value
Price of a product or service communicates a message to the consumer about quality
Many firms place considerable emphasis on adding value for their customers
Pricing Objectives
Management should decide on its pricing objective before determining the price itself.
Profit-oriented objectives:
Achieve a target return — pricing product to achieve a specified percentage return on sales
or investment.
Maximize profits — followed by the most companies.
Sales oriented goals:
Increase sales volume.
Maintain or increase market share.
Status quo goals:
Stabilize prices.
Meet competition.
Marketing (Fourteenth Edition)
Etzel, Walker, Stanton.
1
Dr Zain Yousafzai
Price Determination
Chapter 12 (page 316-343)
Factors Affecting Price
Pricing must take the customer into account
How price elastic is demand?
Do customers have an expected price in mind?
For some products, demand is inverse; if price is increased, sales will actually increase
How is the competition likely to respond?
Price must be consistent with and support other elements of the marketing mix
Estimating Demand
Determine if there is an expected market price.
Estimate sales volume at different prices.
Expected price: The price that shows what customers think the product is worth
Pricing a product within the expected price range helps gain support from middlemen
It is possible to set a price too low, thereby losing sales (prestige issues).
Pricing too high also loses potential sales
Inverse demand:
When an increase in price results in
increased sales
More about Demand Estimation
Competitive Reactions:
 Directly similar products affect price
 Available substitutes and generic competition for consumer’s dollars
 Unrelated products seeking same consumer dollar
Other Marketing Mix Issues:
 Product issues, e.g. new vs. established
 Distribution issues-- if using wholesaler, what is wholesaler doing for you?
 Promotion issues-- who does it?
Product Costs
The total unit cost of a product is made up of two basic costs: fixed or variable
 Fixed cost remains constant regardless of the number of units produced.
 Variable cost can be controlled in the long run by changing the level of production.
 Total cost is the sum of fixed and variable costs at a particular level of production.
Marketing (Fourteenth Edition)
Etzel, Walker, Stanton.
2
Dr Zain Yousafzai
Price Determination
Chapter 12 (page 316-343)
Cost-Plus Pricing
Set price based on total cost of the unit plus desired profit.
Total cost plus desired profit
Marginal analysis: a consideration of both market demand and supply
Competitive market conditions
 Easy to apply, but ignores market demand.
 Retailers that offer many services require larger mark-ups than those that offer few.
Pricing by Intermediaries
Different types of retailers require different percentage mark-ups because of the nature of the
products handled and the services offered:
Low-turnover products (jewellery) need much larger mark-ups than high-turnover products
(groceries).
Retailers that offer many services require larger mark-ups than those that offer few.
What seems to be cost-plus pricing for middlemen is usually market-influenced pricing.
Costs and Break-Even Analysis
Cost is viewed as a floor under a firm’s price
Many firms do not have particularly good cost data and may not know what it costs to produce
a product or service
The break-even point is where total revenue equals total costs; will be different for each price
-- lets a firm see what it will need to sell
Break-even analysis is not a pricing strategy, but can offer useful information
Evaluation of Break -even Analysis
Two basic assumptions underlie simple break-even analysis
1. Total fixed costs are constant
2. Variable costs remain constant per unit of output
Fixed costs may change (not in short term) and average variable costs normally fluctuates
These assumptions are unrealistic in most real-world operations.
Marketing (Fourteenth Edition)
Etzel, Walker, Stanton.
3
Dr Zain Yousafzai
Price Determination
Chapter 12 (page 316-343)
Prices based on Marginal Analysis
Marginal analysis takes into account both demand and costs to determine the best price for profit
maximization
Determining the price
To use marginal analysis the price setter must understand the concept of average and marginal cost.
Marginal revenue is the income derived from the sale of the last unit. Average revenue is the unit price
at a given level of unit sales; it is calculated by dividing total revenue by the number of units sold.
Evaluation of Marginal Analysis Pricing
Majority of managers think marginal analysis cannot serve as practical bases for setting prices unless
accurate, reliable data can be obtained
With introduction of technology (computer) computerized data-basis are bringing more complete and
detailed information to management’s attention at all times. Experienced managers can do a fairly
accurate job of estimating marginal and average costs and revenues.
Prices Set Based on Market Alone
Pricing to meet the competition when there is:
Highly competitive market and undifferentiated products
Kinked demand — a price raise above the prevailing market level results in a sharp drop in
revenue.
An oligopoly (a few firms, similar products)
Pricing below competition, commonly used by discount retailers
Pricing above competition, usually only when the product is distinctive or the seller has
acquired prestige.
Marketing (Fourteenth Edition)
Etzel, Walker, Stanton.
4