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Chapter 11:
Pricing
Fundamentals
Pride/Ferrell
Foundations of Marketing
Fourth Edition
Prepared by Milton Pressley
University of New Orleans
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Objectives
1. Understand the role of price.
2. Identify the characteristics of price and nonprice
competition.
3. Be familiar with demand curves and the price
elasticity of demand.
4. Understand the relationships among demand, costs,
and profits.
5. Describe key factors that may influence marketers’
pricing decisions.
6. Be familiar with the major issues that affect the
pricing of products for business markets.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Price
• Price
– the value paid for a product in a marketing
exchange
• The Nature of Price
– price does not always take the form of
money
– the oldest form of trade is barter
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Importance of Price to
Marketers
• price can be changed quickly in
response to changing demand
• price is related to total revenue and
profit:
– Profit = Total Revenue – Total Costs
– Profits = (Price x Quantity Sold) – Total Costs
• price can determine quantity sold
• price has a psychological dimension
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Terms Used to Describe Price
•
•
•
•
•
•
Tuition
Premium
Fine
Fee
Fare
Toll
•
•
•
•
•
•
Rent
Tips
Deposit
Dues
Interest
Taxes
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Price Competition
 emphasizing price as an issue and matching
or beating competitors’ prices




to compete effectively, firm must be the low cost seller
relies on standardized products
frequent price changes
provides flexibility
Price Competition
Consumer electronics stores compete on the basis of price.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Nonprice Competition
• Emphasizing factors other than price to distinguish a
product from competing brands
– Features
– Quality
– Promotion
– Packaging
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The Demand Curve
• A graph of the quantity of a product taken by buyers in
the market at various prices, given that all other factors
are held constant
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Demand Curve Illustrating the
Relationship Between Price and
Quantity for Prestige Products
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Factors Contributing to Demand
Fluctuations
Changes in
Buyers’ Needs
Variations in
Effectiveness of
Marketing MIS
Seasonality
Demand
Fluctuations
Dynamic
Environmental
Factors
Presence of
Substitutes
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Analysis of Demand
 Price Elasticity of Demand
 a measure of the sensitivity of demand to changes in price
 Assessing the Price Elasticity of Demand
 elastic demand
 a change in price causes an opposite change in total
revenue
 an increase in price will decrease total revenue
 price changes have a big impact on sales
 inelastic demand
 a change in price results in a change in the same
direction as total revenue
 an increase in price will increase total revenue
 price changes have little impact on quantity demanded
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Elasticity of Demand
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Breakeven Analysis
 Break-Even Point
 point at which the costs of producing a product
equal the revenue made from selling the product
Breakeven
Point
=
Fixed Costs
Per-Unit Contribution to Fixed Costs
(Price – Variable Costs)
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Factors That Affect Pricing
Decisions
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Types of Pricing Objectives
• Prices are set consistent with the
organization’s mission and goals.
– Market share
• iPhone
– Lower prices
• Costco
– Raise cash quickly
• early season promotions
– Temporary price reductions
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Price Affects Promotion Decisions
Price Affects Promotion
Decisions
Most fragrance
advertisements do not
include prices.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Factors Affecting Pricing Decisions
• Channel Member Expectations
– channel member expects to receive profit
– compensated with discounts for large orders and prompt payments
– provide support activities such as training, service, and promotions
• Customer Interpretation and Response
- Internal reference price
- developed in the buyer’s mind through experience
- External reference price
- comparison price provided by others
- Value-conscious
- concerned about price and quality
- Price-conscious
- striving to pay low prices
- Prestige-sensitive
- drawn to products that signify prominence and status
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Factors Affecting Pricing
Decisions-Costs
• crucial component of price
• ideally goods are sold above cost,
exceptions:
– match competition
– generate cash flow
– increase market share
• in elastic markets, focus on cost
reduction
• costs shared with others in product line
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Discussion Questions
• Give an example of a situation where you, or
someone you know, acted in a value-conscious
manner when shopping for a product.
• Give an example of a situation where you, or
someone you know, acted in a price-conscious
manner when shopping for a product.
• Give an example of a situation where you, or
someone you know, acted in a prestige-sensitive
manner when shopping for a product.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Impact of Other Marketing Mix
Variables
• All marketing mix variables are highly
interrelated
• Price affects demand
• Perceived price/quality relationships influence
image of products or brands
– be careful not to discount too frequently
• Distribution is linked to price
• Promotions vary by price of goods
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Factors Affecting Pricing Decisions
• Reference Pricing
– Internal - develops in buyer’s mind through experience
with product
– External - a comparison price provided by others
• Competition
• Legal and Regulatory Issues
– Price discrimination (providing price differentials that
injure competition by giving one or more buyers a
competitive advantage)
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Pricing for Business Markets
Unlike selling to consumers, where prices remain fairly
consistent, sellers must sometimes adjust prices in
business markets by using:
• Trade (functional) discounts – given to an intermediary
for performing certain functions
• Quantity discounts – for purchasing large quantities
– Cumulative discounts – aggregated over certain
period
– Noncumulative discounts – one time only
• Cash discounts – for prompt or cash payment
• Seasonal discounts – for purchasing out of season
• Allowances – a concession to achieve a desired goal
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Pricing for Business Markets
• Geographic Pricing – reductions for
transportation
- F.O.B. factory – price of the merchandise at the factory,
before shipment
- F.O.B. destination – indicates the producer is absorbing
the shipping costs
- Uniform geographic pricing – charging all customers the
same price, regardless of shipping
- Zone pricing – based on transportation costs within
major geographic zones
- Base-point pricing – combines factory price and freight
charges from base point nearest the buyer
- Freight absorption pricing - indicates the seller is
absorbing all shipping costs
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
After Reviewing This Chapter
You Should:
1. Understand the role of price.
2. Be able to identify the characteristics of price and
nonprice competition.
3. Be familiar with demand curves and the price
elasticity of demand.
4. Understand the relationships among demand, costs,
and profits.
5. Know how to describe key factors that may
influence marketers’ pricing decisions.
6. Be familiar with the major issues that affect the
pricing of products for business markets.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.