Download Chapter 1

Chapter 10
Pricing Products:
Pricing Considerations and
Approaches
1
Price
Price is the sum of all the values that consumers
exchange for the benefits of having or using the
product or service.
Price has been the major factor affecting buyer
choice; nonprice factors have become
increasingly important in buyer-choice behavior.
Price is the only element in the marketing mix
that produces revenues; all others represent
costs.
2
Factors Affecting Price
Decisions ( Fig. 10.1)
External Factors
Internal Factors
Marketing Objectives
Marketing Mix Strategy
Costs
Organizational
considerations
Pricing
Decisions
Nature of the market
and demand
Competition
Other environmental
factors (economy,
resellers, government)
3
Internal Factors Affecting Pricing
Decisions: Marketing Objectives
Survival
Low Prices to Cover Variable Costs and
Some Fixed Costs to Stay in Business.
Marketing
Objectives
Current Profit Maximization
Choose the Price that Produces the
Maximum Current Profit, Etc.
Market Share Leadership
Low as Possible Prices to Become
the Market Share Leader.
Product Quality Leadership
High Prices to Cover Higher
Performance Quality and R & D.
4
Internal Factors Affecting Pricing
Decisions: Marketing Objectives
Other specific objectives include:


Set prices low to prevent competition from entering
the market,
Prices might be reduced temporarily to create
excitement or draw more customers.
Nonprofit and public organization may have other
pricing objectives such as:



University aims for partial cost recovery,
Hospital may aim for full cost recovery,
Theater may price to fill maximum number of seats.
5
Internal Factors Affecting Pricing
Decisions: Marketing Mix
Product Design
Nonprice
Positions
Price
Distribution
Promotion
6
Types of Cost Factors that
Affect Pricing Decisions
Fixed Costs
(Overhead)
Variable Costs
Costs that don’t
vary with sales or
production levels.
Costs that do vary
directly with the
level of production.
Executive Salaries, Rent
Raw materials
Total Costs
Sum of the Fixed and Variable Costs for a Given
Level of Production
7
Costs Considerations
Cost Per Unit at Different Levels of Production Per Period
4
SRAC
LRAC
4,000
3
2,000
1,000
Cost per unit
2
3,000
1
Quantity Produced per Day
8
Types of Cost Factors that
Affect Pricing Decisions
As a firm gains experience in production, it
learns how to do it better.
The experience curve (or the learning
curve) indicates that average cost drops
with accumulated production experience.
Strategy: company should price products
low; sales increases; costs continue to
decrease; and then lower prices further.
Risks are present with this strategy.
9
External Factors Affecting
Pricing Decisions
Market and
Demand
Competitors’ Costs,
Prices, and Offers
Other External Factors
Competitor Costs
This ad by LCI International accuses its competitors of using
unfair practices in pricing, hiding fees incurred by rounding up.
Why is LCI focusing on
this practice?
Hidden fees, defined as
“cramming” by the
FCC, are the number
one source of billing
complaints among
long-distance
customers.
Economic Conditions
Reseller Needs
Government Actions
Social Concerns
10
Market and Demand Factors
Affecting Pricing Decisions
Pricing in Different Types of Markets
Pure Competition
Many Buyers and Sellers
Who Have Little
Effect on the Price
Monopolistic
Competition
Many Buyers and Sellers
Who Trade Over a
Range of Prices
Pure Monopoly
Single Seller
Oligopolistic
Competition
Few Sellers Who Are
Sensitive to Each Other’s
Pricing/ Marketing
Strategies
11
Demand Curves and Price
Elasticity of Demand
A Demand Curve is a Curve that Shows the
Number of Units the Market Will Buy in a Given
Time Period at Different Prices that Might be
Charged.
Price Elasticity Refers to How Responsive
Demand Will be to a Change in Price.
Price Elasticity of Demand = % Change in Quantity Demanded
% Change in Price
12
Price
Price Elasticity of Demand
A. Inelastic Demand Demand Hardly Changes With
a Small Change in Price.
P2
P1
Price
Q2 Q1
Quantity Demanded per Period
B. Elastic Demand Demand Changes Greatly With
a Small Change in Price.
P’
2
P’1
Q2
Q1
Quantity Demanded per Period
13
Major Considerations in
Setting Price (Fig. 10.5)
14
Cost-Based Pricing
Certainty About
Costs
Price Competition
Is Minimized
Much Fairer to
Buyers & Sellers
Unexpected
Situational
Factors
Pricing is
Simplified
Cost-Plus
Ethical
Pricing is an
Approach That
Adds a
Standard
Markup
to the
Attitudes
Costofof the
Others
Product.
Simplest
Pricing
Method
Ignores
Current
Demand &
Competition
15
Breakeven Analysis or Target
Profit Pricing
Cost in Dollars (millions)
Tries to Determine the Price at Which a Firm
Will Break Even or Make a Certain Target Profit.
Total Revenue
12
10
Target Profit
($2 million)
8
6
Total Cost
4
Fixed Cost
2
200
400
600
800
1,000
Sales Volume in Units (thousands)
16
Cost-Based Versus ValueBased Pricing (Fig. 10.7)
Cost-Based Pricing
Value-Based Pricing
Product
Customer
Cost
Value
Price
Price
Value
Cost
Customers
Product
17
Discussion Connections
A few years ago, Buick pitched its top-ofthe-line Park Avenue model as “America’s
best car value.”

Does this fit with your understanding of value?
Pick two competing brands from a familiar
product category (watches, perfume, etc) one low priced and the other high priced.
Which, if either, offers the greatest value?
Does “value” mean the same thing as “low
price”? How do these concepts differ? 18
Competition-Based Pricing
Setting Prices
Going-Rate
Company Sets Prices Based on What
Competitors Are Charging.
?
?
Sealed-Bid
Company Sets Prices Based on
What They Think Competitors
Will Charge.
19
Review of Concept
Connections
Identify and define the internal factors
affecting a firm's pricing decisions.
Identify and define the external factors
affecting pricing.
Contrast the three general approaches to
setting prices.
20