Download Price

Presentation prepared by Robin Roberts, Griffith University and
Chapter
10
Mike Spark,
Swinburne University
Technology
Copyright Johnof
Wiley
& Sons 2007
Chapter 10
Pricing fundamentals
Chapter 10
Copyright John Wiley & Sons 2007
Chapter Objectives
1. Understand the role of price
2. Identify the characteristics of price and
non-price competition
3. Understand demand curves and the price
elasticity of demand
4. Explain the relationships among demand,
costs and profits
Chapter 10
Copyright John Wiley & Sons 2007
Chapter Objectives (cont.)
5. Describe key factors that may influence
marketers’ pricing decisions
6. Recognise the major issues that affect the
pricing of products for business markets
Chapter 10
Copyright John Wiley & Sons 2007
The role of price
The purpose of marketing is to facilitate
satisfying exchange relationships between
buyer and seller
Price is the value exchanged for products in a
marketing transaction
Price - The value exchanged for products in a
marketing transaction
Barter -The trading of products
This is the oldest form of exchange
Chapter 10
Copyright John Wiley & Sons 2007
The nature of price
Price is the most readily changeable
characteristic of a product
Key element in the marketing mix:
– relates directly to generation of revenues
– quantities sold
Key component of the profit equation:
(Profit = Total Revenue – Total Costs)
– strong effect on product costs
– profitability
Chapter 10
Copyright John Wiley & Sons 2007
How important is pricing to customers in
your B2B marketing environment?
Dial-Up
Broadband
Simon Bottomley, General Manager, HaveStock Manufacturing
Chapter 10
Copyright John Wiley & Sons 2007
Price and non-price competition
Price Competition emphasises price, and
matching or beating competitors’ prices
– Lowest-cost seller will be the most
profitable
– Effective strategy in markets with
standardised products or commodities
– Allows quick response to competitive or
market changes
– Price wars can weaken organisations and
thus should be avoided
Chapter 10
Copyright John Wiley & Sons 2007
Price and non-price competition
(cont.)
Non-price Competition emphasises factors
other than price to distinguish a product from
competing brands
– Can increase brand’s unit sales without
changing the price
– Can build customer loyalty by focusing
on distinctive non-price features
– effective when a product or service’s
features are difficult to imitate
Chapter 10
Copyright John Wiley & Sons 2007
Can Aldi compete effectively on price?
Dial-Up
Broadband
Chapter 10
Copyright John Wiley & Sons 2007
Analysis of demand
The demand curve is a graph of the quantity
of products expected to be sold at various
Prices if other factors remain constant
– Decreases in price create increases in
quantities demanded.
– Increased demand means larger
quantities sold at the same price
– Prestige items sell best in higher price
ranges
Chapter 10
Copyright John Wiley & Sons 2007
Classic demand curve
Figure 10.1
Page 280
Chapter 10
Copyright John Wiley & Sons 2007
Prestige product demand curve
Figure 10.2
Page 281
Chapter 10
Copyright John Wiley & Sons 2007
Demand fluctuations
Influencers of Demand Fluctuations
– Changes in buyers’ needs
– Variations in the effectiveness of the
marketing mix
– The presence of substitutes
– Dynamic environmental/market
factors
Chapter 10
Copyright John Wiley & Sons 2007
Assessing the price
elasticity of demand
Price elasticity of demand is a measure of the
sensitivity of demand to changes in price.
the greater the change in demand for a
specific change in price, the more elastic
demand is.
Price Elasticity of Demand =
% change in quantity demanded
% change in price
Chapter 10
Copyright John Wiley & Sons 2007
Price elasticity of demand
Figure 10.3 Page 281
Chapter 10
Copyright John Wiley & Sons 2007
How does pricing affect the demand for
your product?
Dial-Up
Broadband
Geoff Rollason, Chief Financial Officer,
Story Bridge Adventure Climb
Chapter 10
Copyright John Wiley & Sons 2007
Demand, cost and profit relationships
The analysis of demand, cost and profit is
important because customers are
becoming less tolerant of price increases
forcing manufacturers to find new ways to
control costs
Marginal Analysis
Examines what happens to a firm’s costs and
revenues when it sells one more unit of
product
Chapter 10
Copyright John Wiley & Sons 2007
Demand, cost and profit relationships
Marginal Revenue
The change in total revenue resulting from the
sale of an additional unit of product
Marginal Cost
The additional cost to produce an additional
unit of product
Chapter 10
Copyright John Wiley & Sons 2007
Marginal and total costs
Figure 104 Page 283
Chapter 10
Copyright John Wiley & Sons 2007
Marginal and average revenue
Figure 10.5 Page 283
Chapter 10
Copyright John Wiley & Sons 2007
Marginal revenue and costs
Profit is maximised where marginal costs (MC)
are equal to marginal revenue (MR)
Figure 10.6 Page 284
Demand, cost and profit relationships
There are two types of total costs:
Fixed costs
– costs that do not vary with the changes
in the number of units produced or sold
Variable costs
– costs that vary with the changes in the
number of units produced or sold
Chapter 10
Copyright John Wiley & Sons 2007
Breakeven analysis
Breakeven Point is the point at which the
costs of producing a product equal the
revenue made from selling the product
– The point at which profitability starts
Break-even point =
Fixed costs
Per-unit contribution to fixed costs
(price – variable costs)
Chapter 10
Copyright John Wiley & Sons 2007
Break-even point
Figure 10.7 Page 286
Chapter 10
Copyright John Wiley & Sons 2007
Factors affecting pricing decisions —
Internal (company) factors
Pricing decisions can be complex due to the
number of factors to be considered:
Organisational and marketing objectives
– set prices that are consistent with the
organisation’s goals and mission
– Prices should also be compatible with
marketing objectives
Chapter 10
Copyright John Wiley & Sons 2007
Factors affecting pricing decisions —
Internal (company) factors (cont.)
Types of pricing objectives
– Setting prices low to increase market
share
– Using temporary price reductions to
gain market share
– Lowering prices to raise cash quickly
Chapter 10
Copyright John Wiley & Sons 2007
Factors affecting pricing decisions –
Internal (company) factors (cont.)
Costs
– Set a floor price
– Reducing costs increases productivity and
profitability
– Costs may be shared between products
Other marketing mix variables
– Price/quality image of the product or brand
– Selective or intensive product distribution
– Pricing used as a promotional tool
Chapter 10
Copyright John Wiley & Sons 2007
Factors affecting pricing decisions —
External (market) factors
Channel member expectations are:
– To make a profit at least equivalent to the
potential profit from handling a competitor’s
brand
– To earn a profit commensurate with the time
and resources put in
– To receive discounts for large orders and
prompt payment
– To be supported by the producer with
training, promotion and return policies
Chapter 10
Copyright John Wiley & Sons 2007
Factors affecting pricing decisions —
External (market) factors
Customers’ interpretation and response:
Interpretation: What meaning does the
product’s price have to the customer?
Customer response: Does the customer
respond to the price by moving closer to, or
farther away, from making a purchase?
– 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
Chapter 10
Copyright John Wiley & Sons 2007
Factors affecting pricing decisions —
External (market) factors
Competition: A marketer needs to know
competitors’ prices so it can adjust its own
prices accordingly:
– Pricing to match, exceed or beat
competitors’ prices
– Judging competitors’ responses to
adjusting prices is essential
– Changes in an industry’s market structure
both cause and create pricing
opportunities
Chapter 10
Copyright John Wiley & Sons 2007
Factors affecting pricing decisions —
External (market) factors
Legal and Regulatory Issues – many
regulations and laws affect pricing
decisions:
– Price controls or freezes can be invoked
to curb inflation
– Governments can set and regulate prices
for specific products
– Regulations and laws to prohibit price
fixing, and deceptive and discriminatory
pricing is illegal in some cases
Chapter 10
Copyright John Wiley & Sons 2007
Pricing for business markets
Producers commonly provide intermediaries
with discounts or reductions from list prices
There are many types of discounts:
Trade (or Functional) Discounts: A reduction
off the list price given by a producer to an
intermediary for performing certain functions
Quantity Discounts: Deductions from list
price for purchasing in large quantities
– Cumulative Discounts
– Non-cumulative Discounts
Chapter 10
Copyright John Wiley & Sons 2007
Pricing for business markets (cont.)
Cash Discount: A price reduction given
to buyers for prompt payment or cash
payment
Seasonal Discount: A price reduction
given to buyers for purchasing goods or
services out of season
Allowance: A concession in price to
achieve a desired goal
– Trade-in or promotional allowances
are common
Chapter 10
Copyright John Wiley & Sons 2007
Pricing for business markets (cont.)
Geographic Pricing types – Allows for
costs incurred through the physical
distance between the buyer and seller
– FOB factory
– FOB destination
– Uniform geographic pricing
– Zone pricing
– Freight absorption pricing
Chapter 10
Copyright John Wiley & Sons 2007
Pricing for business markets (cont.)
Transfer pricing — The price of products
that one organisational unit charges when
selling to another unit in the same
organisation
– Actual full cost
– Standard full cost
– Cost plus investment
– Market-based pricing
Chapter 10
Copyright John Wiley & Sons 2007
Chapter 10
Copyright John Wiley & Sons 2007