Download Essentials of marketing – Chapter 13

Chapter 13
Pricing concepts
Learning objectives
1 Discuss the importance of pricing
decisions to the economy and to the
individual organisation
2 List and explain a variety of pricing
objectives
3 Explain the role of demand in price
determination
4 Describe cost-oriented pricing
strategies
Learning objectives (cont.)
5 Demonstrate how the product life cycle,
competition, distribution and promotion
strategies, customer demands, the Internet
and extranets, and perceptions of quality
can affect price
6 Describe the procedure for setting the right
price
7 Identify the legal and ethical constraints on
pricing decisions
8 Explain how discounts, geographic pricing
and other special pricing tactics can be used
to fine-tune the base price
Learning objective 1
Discuss the importance of
Define
thedecisions
term marketing
pricing
to the
economy and to the
individual organisation
1
What is price?
Price is that which is given
up in an exchange to
acquire a good or service.
1
The importance of price
To the seller…
Price is revenue and profit
source
To the consumer…
Price is the cost of
something
In the broadest sense, price allocates
resources in a free-market economy
1
The importance of price
to marketing managers
Revenue
The price charged to customers
multiplied by the number of units sold.
Profit
Revenue minus expenses.
1
The importance of price
Revenue = Unit price  number of units sold
• Revenue pays for every activity.
• What’s left over is profit.
Marketers must select a price that
• is not too high
• is not too low
• equals the perceived value to
target consumers
Learning objective 2
Describe four marketing
List and explain
a variety
management
philosophies.
of pricing objectives
2
Trends influencing price
setting
•
High rate of new product
introduction
•
Increased availability of bargainpriced dealer and generic brands
•
Price-cutting as a strategy to
maintain or regain market share
•
More efficient and better-informed
buyers
2
Pricing objectives
•
Profit-oriented pricing
objectives
•
Sales-oriented pricing
objectives
•
Status quo pricing
objectives
2
Profit-oriented pricing
objectives
•
Profit maximisation
•
Satisfactory profits
•
Target return on
investment
2
Profit maximisation
Setting prices so that
total revenue is as large
as possible relative
to total costs.
2
Return on investment (ROI)
Net profit after taxes
divided by total assets.
ROI = net profit after tax
total assets
2
Sales-oriented pricing
objectives
•
Market share
•
Sales maximisation
2
Market share
A company’s product sales
as a percentage of total
sales for that industry.
2
Sales maximisation
• Short-term objective to
maximise sales
• Ignores profits, competition
and the marketing
environment
• May be used to sell off
excess inventory
2
Status quo pricing
Advantages
Disadvantages
• Simplicity
• Strategy may
ignore demand
or cost
• Safest route to
long-term survival
for small firms
Learning objective 3
Explain the role of
demand in price
determination
3
Demand and supply
Demand
The quantity of a product that
will be sold in the market at various
prices for a specified period.
Supply
The quantity of a product
that will be offered to the market
by a supplier at various prices
for a specific period.
3
Elasticity of demand
Consumers’
responsiveness or
sensitivity to
changes in price.
3
Elasticity of demand (cont.)
Elastic demand
Consumers buy more or less of a
product when the price changes
Inelastic demand
An increase or decrease in price will
not significantly affect demand
3
Elasticity of demand (cont.)
Price goes…
Revenue goes…
Demand is…
down
up
elastic
down
down
inelastic
up
up
inelastic
up
down
elastic
3
Factors that affect elasticity
•
Availability of substitutes
•
Price relative to
purchasing power
•
Product durability
•
Product’s other uses
Learning objective 4
Describe cost-oriented
pricing strategies
4
The cost determinant of price
Types of costs
Variable costs
Deviate with changes in
level of output
Fixed costs
Do not deviate as level of
output changes
4
The cost determinant
of price (cont.)
Methods used to set price
•
Markup pricing
•
Break-even pricing
4
Markup pricing
Markup pricing
The cost of buying the product
from the producer plus amounts
for profit and for expenses not
otherwise accounted for.
Example:
If a pen costs $1.80 and sells for
is $2.20, the markup is $0.40 or
22% of cost.
4
Break-even pricing
Price
6 000
Total revenue
4 000
Total costs
Break-even point
2 000
Fixed costs
0
1 000
2 000
3 000
Quantity
4 000
5 000
6 000
Learning objective 5
Demonstrate how the product life
cycle, competition, distribution
and promotion strategies,
customer demands, the Internet
and extranets, and perceptions of
quality can affect price
5
Other determinants of price
•
Stages of the product
life cycle
•
Competition
•
Distribution strategy
•
Promotion strategy
•
Perceived quality
5
Stages in the product life
cycle
Introductory
stage
Growth
stage
Maturity
stage
Decline
stage
$
$
$
$
High
Stable
Decrease
Decrease
Stable
High
5
Distribution strategy
Convincing distributors to
carry product
•
Offer a larger profit margin
•
Give dealers a large trade
allowance
5
The impact of the Internet
• Allows price and product
comparisons.
• Prices are coming down.
• Data collection allows sellers
to tailor products and prices.
5
Extranet
A private electronic
network that links a
company with its
suppliers and
customers.
5
Prestige pricing
Charging a high price to
help promote a highquality image.
5
Indicators of quality
•
Retailer reputation
•
Appearance
•
Price
•
Brand name
Learning objective 6
Describe the
procedure for setting
the right price
6
Steps in setting the right price
Establish pricing goals
Estimate demand, costs and profits
Choose a price strategy
Fine-tune base price with pricing tactics
Results lead to the right price
6
Pricing objectives
•
Profit-oriented pricing objectives
•
Sales-oriented pricing objectives
•
Status quo pricing objectives
6
Price strategy
A basic, long-term pricing
framework which
establishes the initial price
for a product and the
intended direction for
price movements over the
product life cycle.
6
Choosing a price strategy
Basic strategies for setting prices
• Price skimming
• Status quo
• Penetration pricing
6
Price skimming
Situations when price skimming
is successful
•
Inelastic demand
•
Superior product
•
Legal protection of product
•
Technological breakthrough
•
Limited production
6
Penetration pricing
A pricing policy whereby
a firm charges a relatively
low price for a product
initially as a way to reach
the mass market.
6
Penetration pricing (cont.)
Advantages
Disadvantages
• Discourages
or blocks
competition
from market
entry
• Requires gear up for
mass production
• Selling large volumes
at low prices
• Strategy to gain
market share may
fail
Learning objective 7
Identify the legal and
ethical constraints on
pricing decisions
7
The legality and ethics of
price strategy
Issues that limit pricing
decisions
•
Unfair trade
•
Price fixing
•
Price discrimination
•
Predatory pricing
Learning objective 8
Explain how discounts,
geographic pricing and
other special pricing
tactics can be used to
fine-tune the base price
8
Tactics for fine-tuning
the base price
•
Discounts
•
Geographic pricing
•
Special pricing tactics
8
Tactics for fine-tuning
the base price (cont.)
•
•
•
•
•
•
•
Quantity discounts
Cash discounts
Functional discounts
Seasonal discounts
Promotional allowances
Rebates
Value-based pricing
8
Value-based pricing
The price is set at a level
that seems to the
customer to be a good
price compared to the
prices of other options.
8
Geographic pricing
•
FOB pricing
•
Uniform delivered pricing
•
Zone pricing
•
Freight absorption pricing
•
Basing-point pricing
8
Special pricing tactics
Single-price
tactic
All goods offered at the same price.
Flexible pricing
Different customers pay different price.
Professional
Used by professionals with experience,
services pricing training or certification.
Leader pricing
Bait pricing
Odd-even
pricing
Price bundling
Two-part
pricing
Sell product at near or below cost.
Lure customers through false or
misleading price advertising.
Odd-number prices imply bargain.
Even-number prices imply quality.
Combining two or more products in a
single package.
Two separate charges to consume a single
good.