Download CLASS 9 - CHAPTER 19 AND 20 PRICING

Financial aspects of marketing
HOW DO WE DETERMINE THE
PRICE?
PROFIT = $.85
Pricing considerations
Demand
PRICE
Costs
Elements of price
• Price is the value that customers give up or exchange to obtain a desired
good or a service
• Payment may be in the form of money, goods, services, favors, votes, or
anything else that has value to the other party
• Money is most frequently exchanged
• Amount paid not always as listed or quoted price due to
discounts or extra fees.
• Develop price equation
• Price = list price – (incentives + allowances) + extra fees
• Ex. Bugatti
• Price = $1,400,000 – ($100,000+$4,350) + ($98,350 + $1,000 +
$5,000 +$41,974) = $1,441,974
Price indicates value
 Because price has a psychological impact on
customers, marketers can use it symbolically
 Pricing high – emphasizes quality
 Pricing low – emphasizes a bargain
• 84% of people indicate that “higher price means higher quality”
• Value = perceived benefits / Price
• Value Pricing – method of increasing value while keeping the
price consistent or decreasing it.
Price and the Marketing Mix (4Ps)
• Price is the only P which represents revenue rather than an expense
• Price directly effects profits
• PROFIT = TOTAL REVENUE –TOTAL COST
• PROFIT = (Unit price x Quantity sold) – (Fixed cost + Variable cost)
• Price effects quantity sold
• Price indirectly effects costs (since quantity sold effects costs)
• As such, pricing is one of the most important decisions marketer makes.
Objectives





To understand the role of price
To identify the characteristics of price and nonprice competition
To explore demand curves and price elasticity of demand
To examine the relationships among demand, costs and profits
To describe key factors that may influence marketers’ pricing
decisions
 To consider issues affecting the pricing of products for business
markets
Discussion Point – what frequently drives behavior?
Price Competition
Price competition – Emphasizing price as an issue and
matching or beating competitors’ prices:
 To compete effectively on a price basis, a firm should be the
low-cost seller
 Must be willing and able to change prices frequently to
meet competitors’ pricing
 May lead to price wars
Nonprice Competition
Nonprice competition – Emphasizing factors other than price to distinguish a product from
competing brands:
 A major advantage is a firm can build customer loyalty
 Only effective if:
 A company can distinguish its brand from others
 Buyers are able to perceive these distinguishing characteristics and view them as
important
 Distinguishing characteristics should be hard to copy
 The company should promotes distinguishing characteristics to set itself apart from
competition
Price and Nonprice Competition
L’Oréal products compete on the basis of
nonprice competition, which emphasizes product
quality
The Demand Curve
Demand curve – A graph of the quantity of products expected to
be sold at various prices if other factors remain constant – D1
 Demand depends on other factors in the
marketing mix including quality,
promotion and distribution and also:
Consumer tastes - changing taste changes
demand
Price and availability of similar products – if more
people buy our product, less will buy our
competitor’s product
Consumer Income – greater income, greater
demand
 An improvement in any of these factors
may cause a shift to demand curve D2
Estimating Demand for Dog Beds per week
Number of households in market
112,600,000
Average # of dog beds per household per
year
.4
Total annual market demand
45,040,000
Predicted market share
4%
Estimated annual company demand
1,801,600
Estimated weekly demand
34,646
Variety of Demand Curve
 Many types of demand exist and not all conform to the classic
demand curve
 Prestige products tend to sell better at high prices, partly because
the expense makes the buyers feel elite
 For a certain price
range, P1 to P2,
demand goes up
 After a certain point,
raising the price
backfires and
demand goes down
– P2 to P3
Demand Fluctuations
Factors that can influence demand:
 Changes in buyers’ needs
 Variations in the effectiveness of other marketing mix variables
 The presence of substitutes
 Dynamic environment
 Changes in demand for some products is predictable but with other products
demand may be less predictable
 Some organizations anticipate demand fluctuations and develop new
products and prices to meet customers’ changing needs
Assessing Elasticity of Demand
Price elasticity of demand – A measure of the sensitivity of demand to
changes in price
 Demand for electricity is inelastic, when price increases from P1 to P2, demand
decreases a small amount
 Demand for recreational vehicles is elastic, when price goes up from P1 to P2,
quantity demanded decreases a great deal
Assessing Price Elasticity
 If marketers can determine the price elasticity of demand, setting a price is
much easier
 By analyzing total revenues as prices change, marketers can determine
whether a product is price elastic:
 If demand is elastic, a change in price causes and opposite change in
total revenue
 If demand is inelastic, total revenue changes in the same direction
Price elasticity of demand = % change in quantity demanded
%change in price
Discussion Point
 The Chicago White Sox use dynamic pricing when selling
single-game tickets
 They adjust the price according to what team is visiting, the day
of the week, the weather etc,
 This allows them to generate higher ticket sales during slow
times and greater profit during peak times
? How does dynamic pricing allow a team to judge the price elasticity of
demand for a particular game and then use this information in future
pricing decisions?
? What other marketing mix variables must teams consider when using
dynamic pricing? Why?
Demand, Cost and Profit Relationships
Analysis of demand, cost and profit is important
 Customers are becoming less tolerant of price increases,
forcing manufacturers to find new ways to control costs
 Companies must set prices that not only cover its costs but
also meet customers’ expectations
 Two approaches to understanding demand, cost, and profit
relationships are
 Marginal analysis
 Break-even analysis
Marginal Analysis
Marginal analysis examines what happens to a firm’s costs
and revenues when production (or sales volume) changes by
one unit
 Fixed costs – costs that do not vary with changes in the number of
units produced or sold
 Average fixed cost – the fixed cost per unit produced
 Variable cost – costs that vary directly with changes in the number
of units produced or sold
 Average variable cost – the variable cost per unit produced
Marginal Analysis
 Total cost – the sum of average fixed and average variable costs
times the quantity produced
 Average total cost – the sum of the average fixed cost and the
average variable cost
 Marginal cost (MC) – the extra cost incurred by producing one
more unit of a product
 Marginal revenue (MR) – the change in total revenue resulting
from the sale of an additional unit of product
Marginal Cost Analysis
Marginal Analysis
 Any unit for which MR exceeds MC adds to a firm’s profits
 Any unit for which MC exceeds MR subtracts from profits
 The firm should produce at the point where MR equals MC
because that is the most profitable level of production
Marginal Analysis
Marginal Analysis Method for
Determining the Most Profitable Price*
Marginal Analysis
Combining the Marginal Cost and Marginal Revenue
Concepts for Optimal Profit
Break-Even Analysis
Break-even point – the point at which costs of
producing a product equal the revenue made from
selling the product
Determining the Break-Even Point
Break-Even Analysis
Knowing the number of units necessary to breakeven is important in setting the price




If a product priced at $100 per unit
Has an average variable cost of $60 per unit
The contribution to fixed cost is $40
If total fixed costs are $120,000, the break-even point in units
is determined as follows
=
fixed costs
Break-even point
per-unit contribution to fixed costs
=
fixed costs
price – variable costs
= $120,000
$40
= 3,000 units
Break-Even Analysis
 To use break-even analysis effectively, a marketer should
determine the break-even point for each of several alternative
prices
 This makes it possible to compare the effects on total revenue, total costs
and the break-even point for each price
 This approach assumes the quantity demanded is basically
fixed and the major task is to set prices to recover costs
Factors Affecting Pricing Decisions
Pricing decisions can be complex because of the number of factors to
consider:
 There is considerable uncertainty about the reactions to price among
buyers, channel members and competitors
 Price is a major issue when assessing a brand’s position relative to competing
brands
Factors Affecting Pricing Decisions
Most factors that affect pricing decisions can be grouped into one of eight
categories:
Factors Affecting Pricing Decisions
Organizational and Marketing Objectives
 Prices should be consistent with the organization’s goals, mission and
marketing objectives
Pricing Objectives (increase mkt share – prices down!)
 The pricing objectives a marketer uses have considerable bearing on
determination of prices
Costs
 A marketer should analyze all costs so they can be included in the total cost
associated with a product
Other Marketing Mix Variables
 All marketing mix variables are highly interrelated
Factors Affecting Pricing Decisions
Channel Member Expectations
 A marketer must consider what members of the distribution channel
expect such as discounts for large orders and prompt payment
Customers’ Interpretation and Response
 Marketers must consider this question: How will our customers interpret
our prices and respond to them?
 Interpretation refers to what the price means or what it communicates to
customers
 Customer response refers to whether the price will move customers
closer to purchase and the degree that price enhances their satisfaction
with the purchase and after the purchase
Factors Affecting Pricing Decisions
Customers’ Interpretation and Response
 Customers compare prices with internal or external reference prices
 Internal reference price – a price developed in the buyer’s mind through
experience with the product
 External reference price – a comparison price provided by others such as
retailers or manufacturers
 Relative to price, consumers can be characterized according their degree
of:
 Value consciousness – concerned about price and quality of a product
 Price consciousness – striving to pay low prices
 Prestige sensitivity – drawn to products that signify prominence and status
Factors Affecting Pricing Decisions
Competition
 A marketer must know competitors’ prices, adjust their own prices
and assess how competitors will respond
Legal and Regulatory Issues
 Price discrimination is employing price differentials that injure
competition by giving one or more buyers a competitive
advantage, could be prohibited by law
 Price fixing
External Reference Price
Advertisements
provide
information that
customers use to
establish or
change their
reference prices
Pricing for Business Markets
 Establishing prices for business markets sometimes differs
from setting prices for consumers
 Differences in the size of purchases, geographic factors
and transportation considerations require sellers to adjust
prices
 There are several issues unique to pricing business
products
 Discounts
 Geographic pricing
 Transfer pricing
Price Discounting
 Trade (functional) discounts – a reduction off the list price a producer gives to an
intermediary for performing certain functions
 Cash discounts – price reduction given to buyers for prompt payment or cash payment
 Seasonal discounts – price reduction given to buyers for purchasing goods or services
out of season
 Allowances – concession in price to achieve a desired goal
 Quantity discounts – Deductions from the list price for purchasing in large quantities
 Can be either:
 Cumulative discounts which are quantity discounts aggregated over a stated time
period
 Noncumulative discounts which are one-time price reductions based on the number
of units purchased, the dollar value of the order, or the product mix purchased
Geographic Pricing
Geographic pricing – reductions for transportation and other
costs related to the physical distance between buyer and seller
 F.O.B. (free on board) factory – is the price of merchandise at the
factory before shipment
 F.O.B. destination – is a price indicating the producer is absorbing
shipping costs
 Uniform geographic pricing – is charging all customers the same
price, regardless of geographic location
Transfer Pricing
Transfer pricing – Prices charged in sales between an
organization’s units
 Four methods to determine price
 Actual full cost is calculated by dividing all fixed and variable
expenses for a period into the number of units produced
 Standard full cost is calculated based on what it would cost to
produce the goods at full plant capacity
 Cost plus investment is calculated as full cost plus the cost of a
portion of the selling units’ assets used for internal needs
 Market-based cost is calculated at the market price less a small
discount to reflect the lack of sales effort and other expenses
Objectives
 To describe the six major stages of the process used to establish prices
 To explore issues related to developing pricing objectives
 To understand the importance of identifying the target market’s evaluation
of price
 To examine how marketers analyze competitors’ prices
 To describe the bases used for setting prices
 To explain the different types of pricing strategies
Six major stages of the process used to establish
prices
1. Development of Pricing Objectives
 Goals that describe what a firm wants to
achieve through pricing
 Should be consistent with organizational and
marketing objectives
 Can be short- or long-term and marketers
can employ multiple pricing objectives
Pricing Objectives and Typical
Actions Taken to Achieve Them
Discussion Point
Pricing Objective
?What is the pricing
objective for the retailer
in this advertisement?
2. Assessment of the Target
Market’s Evaluation of Price
 Importance of price depends on:
 Type of product (elasticity of demand?)
 Type of target market (adults spend more on shoes
than kids)
 Purchase situation (food price at the airport versus
close to home)
 Value combines a product’s price and quality attributes
 Customers use value to differentiate between
competing brands
Examples of Perceptions of
Product Value
3. Evaluation of Competitors’ Prices
 Marketers should use competitors’ prices to help
them establish their own prices
 Competitors’ prices may be closely guarded
 Pricing above competition creates an exclusive
image
 Pricing below competition can increase market
share
4. Selection of a Basis for Pricing
The three major dimensions on which prices can be based are:
 Cost
 Demand
 Competition
 An organization usually considers multiple dimensions:
 Type of product
 Market structure of the industry
 Brand’s market share position relative to competing brands
 Customer characteristics
Cost-Based Pricing
Cost-Based Pricing
 Adding a dollar amount or percentage to the cost of the product
Cost-Plus Pricing
 Determine the seller’s cost and add a specified dollar to it
 Is used when production costs are difficult to predict
Markup Pricing
 Adding a predetermined percentage of the cost to the price of the
product
Markup Pricing
Markup can be stated as a percentage of cost of
making the product or a percentage of selling
price
Markup as
% of Cost
=
Markup as %
of Selling Price
Markup 15
= 45
Cost
= 33.3%
Markup
15
=
=
Selling Price
60
= 25.0%
Demand-Based Pricing
 Customers pay a
higher price when
demand for the
product is strong
and a lower price
when demand is
weak
 Marketers must be
able to calculate
how much
customers will buy
at different price
points
Demand-Based Pricing
 Car rental companies often engage in
demand-based pricing
? How does
demandbased
pricing
work?
Non-Price Factors Affecting
Demand
 Market
 Degree of competition
 Competitor action/reaction
 General economic conditions
 Product
 Quality
 Range
 Nature-essential/luxury
 Substitutes
 Support
 Service at point of sale and after
 Advertising/promotion
 Distribution Methods
Competition-Based Pricing
 Pricing influenced primarily by competitors’ prices
 Importance of this method increases when:
 Competing products are homogeneous
 Organization is serving markets in which price
is a key consideration
 May necessitate frequent price adjustments
5. Selection of a Pricing Strategy
A pricing strategy is
an approach or
course of action
designed to achieve
pricing and
marketing objectives
Differential Pricing
Differential Pricing
 Charging different prices to different buyers for the same quality and
quantity of product
Negotiated Pricing
 Establishing a final price through bargaining between seller and customer
Secondary-Market Pricing
 One price for primary target market and a different price for another market
Periodic Discounting Pricing
 Temporary reduction of prices on a patterned or systematic basis
Random Discounting Pricing
 Temporary reduction of prices on an unsystematic basis
New-Product Pricing
 Setting the price for new products is one of the
most fundamental decisions in the marketing
mix
Price Skimming
 Charging the highest possible price that
buyers who most desire the product will pay
Penetration Pricing
 Setting the price below those of competing
brands to penetrate a market and gain a
significant market share quickly
21-71
Product-Line Pricing
Product-Line Pricing
 Establishing and adjusting prices of multiple
products within a product line
 The goal is to maximize profits for an entire
product line
Captive Pricing
 Pricing the basic product in a product line low,
while pricing related items higher
Product-Line Pricing
Premium Pricing
 Pricing the highest-quality or most versatile
products higher than other models in the
product line
Bait Pricing
• Pricing an item in a product line low with the
intention of selling a higher-priced item in the
line
Price Lining
• Setting a limited number of prices for selected
groups or lines of merchandise
Psychological Pricing

Psychological Pricing
Techniques
Pricing that attempts to influence a customer’s perception of price to make a product’s price more attractive
Reference Pricing

Pricing a product at a moderate level and displaying it next to a more expensive model or brand
Bundle Pricing

Packaging together two or more complementary products and selling them at a single price
Multiple-Unit Pricing

Packaging together two or more identical products and selling them at a single price
Everyday Low Prices (EDLP)

Pricing products low on a consistent basis
Odd-Even Pricing

Ending the price with certain numbers to influence buyers’ perceptions of the price or product
Customary Pricing

Pricing certain goods on the basis of tradition
Prestige Pricing

Setting prices at an artificially high level to convey prestige or a quality image
Sample Prestige Product Prices
Professional Pricing
 Fees set by people with great skill or experience in a
particular field (doctor or lawyer)

Professional prices do not relate to the time or effort expended

A standard fee
 Professionals have an ethical responsibility not to
overcharge customers
Types of Promotional Pricing
 Price is often coordinated with promotion
Price Leader
 Products priced below the usual markup, near cost, or below cost
 Management hopes sales of regularly priced merchandise will offset the reduced revenues
from the price leaders
Special-Event Pricing
 Advertised sales or price-cutting is used to increase sales volume and is linked to a
holiday, a season, or other event
Comparison Discounting
 The pricing of a product at a specific level and simultaneously comparing it to a higher
price
6. Determination of Price:
Pricing Strategy
 The final step in the price-setting process
 Pricing Strategy:
 Yields a certain price, which may need refining
 Helps in setting final price
 In absence of government controls, pricing remains
flexible and a convenient way to adjust the
marketing mix