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The Meaning of Price

Price
> What’s charged for something--the cost.
> The cost may be monetary or non-monetary.
» e.g., opportunity cost, inconvenience, discomfort

Other names for price:
> Tuition, interest, rent, fare, fee, toll, retainer,
salary, wage, commission, dues, payment,
barter, contribution, donation, tithe, blackmail,
ransom, and bribery.

Meaningful prices
> A price is meaningful only when enough
customers pay it.

12-1
Value
> Value is the ratio of perceived benefits of the
product to its price and other incurred costs.
McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
The Price/Value Relationship
Consumers and businesses evaluate
monetary and non-monetary attributes of
competing products looking for value.
 Monetary attributes

> Discounts and allowances
> Payment terms

Non-monetary attributes
> Brand image, quality, and style
> Guarantees and service
> Associated stuff (gifts, contests, upgrades, clubs)
12-2
McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
SELECT PRICING OBJECTIVE
Profit, Sales/Market Share, Status Quo
SELECT METHOD OF DETERMINING THE BASE PRICE:
Cost-plus
pricing
Balancing
supply and
demand
Price set in
relation to
competition
DESIGN APPROPRIATE STRATEGIES:
Price vs. nonprice
competition
Skimming vs.
penetration
Discounts and allowances
12-3
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Geographic terms/
freight payments
One price vs.
flexible price
Psychological pricing
Leader pricing
Everyday low vs.
high-low pricing
Resale price
maintenance
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Factors Influencing Price

Other Marketing Mix components
> Product advantages and disadvantages
> Distribution channels (Where it’s sold.)
> Promotion (How much advertising, publicity, sales
promotions, etc.)

Competition:
> directly similar products
> available substitutes
> unrelated products seeking the same consumer dollar

Expected demand:
> The Expected Price Range is the range of prices
customers would be willing to pay for a product in a
particular product class.
> Estimates sales potential/volume at different prices.
12-4
> Inverse demand: A price increase causes increased
sales. Or a price decrease
causes decreased sales.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Fig. 12-1 - Inverse Demand
Price
Normal
deman
d
curve
12-5
McGraw-Hill/Irwin
Inverse
deman
d
curve
Quantity Sold
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Price versus Nonprice
Competition Strategies

In price competition . . .
> sellers regularly offer products priced as low as
possible, accompanied by a minimum of service.
> sellers attempts to move up or down their
individual demand curves by changing prices.

12-6
In nonprice competition . . .
> a seller maintains stable/status quo prices, and
attempts to improve their market positions by
emphasizing other competitive advantages.
> sellers attempt to shift their demand curves to the
right using other marketing techniques and
strategies.
McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Fig. 13-2 -- Shift in Demand Curve for Skis
$380
D’
D
Price per pair
370
360
Y
X
350
340
D’
Z
330
D
0
12-7
McGraw-Hill/Irwin
10
20
30
40
50
60
70
Thousands of pairs of skis
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Market-Entry Pricing Strategies

Market-Skimming
> Start with high price. Then gradually reduce.
> Product has desirable distinctive features
> Demand is fairly inelastic
> Product is protected from competition

12-8
Market-Penetration
> Start with lowest price to capture total market.
> A large mass market exists for the product
> Demand is highly elastic
> Economies of scale are possible
> Fierce competition exists or can be expected
soon
McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Price Setting Techniques

Pricing in relation to competition

Balancing supply and demand

Cost-plus
12-9
McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Pricing in Relation to Competition

Prices below competition -- the low end
of the expected price range.
> Discount Retailers -- Wal-Mart, Target
> Risks
»Product or store may be viewed as an
undifferentiated commodity
»Can prices never be raised again?

Prices above competition -- the high end
of the expected price range.
> Upscale retailers
> Product must be distinctive
> Seller has prestige
> Location may also allow this strategy

12-10
Adjusting to competition
> Being proactive versus reactive
McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Balancing Supply and Demand
$380
D’
D
Price per pair
370
S
Y
360
350
X
340
D’
Z
330
D
0
12-11
McGraw-Hill/Irwin
10
20
30
40
50
60
70
Thousands of pairs of skis
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Cost-Plus Pricing
Cost-plus pricing is setting the price of a
product equal to the cost/unit plus a
mark-up.
 Mark-up is an amount to cover fixed
costs/overhead plus profit.

> It is also called “per unit contribution to
overhead” and “gross margin.”
> It may be expressed in dollars ($5/unit) or as
a percent (34%).
12-12
McGraw-Hill/Irwin
Price
$15
Cost
10
Mark-up $ 5
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Pricing by Middlemen


12-13
Example Fast Food Restaurant Profit Structure
> Price
$2.70 (100%)
> Cost
.90 (33.3%)
> Mark-up
$1.80 (66.7%)
Different types of retailers require different
percentage markups because of the nature of
the products handled and the services offered:
> Low-turnover products (jewelry) need much larger
markups than high-turnover products (groceries).
> Retailers that offer many services require larger
markups than those that offer few.
McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Fig. 12-3 - Examples of Markup
Pricing
Markup
= 40%
= $60
Markup
= 20%
= $18
Cost and
profit
= 100%
= $72
Manufacturer’s Cost
= 80%
selling
price
= $72
= 100%
= $72
MANUFACTURER
Wholesaler’s
selling
price
= 100%
= $90
WHOLESALER
Cost
= 60%
= $90
RETAILER
Retailer’s Cost to
selling consumer
price
= $150
= 100%
= $150
CONSUMER
12-14
McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Break-Even Analysis

Break-even point: That quantity of output at which total
revenue equals total cost, assuming a certain selling
price.
 Mark-up = Unit contribution to fixed costs/overhead =
Selling price - Variable cost

Definitions:
> Variable costs vary with the level of production.
> Fixed costs/overhead remain constant regardless of
the level of production.

Breakeven Formulas:
> B.E. in units
12-15
> B.E. in $
McGraw-Hill/Irwin
=
=
Total fixed costs/overhead
Selling price - Variable cost
B.E. in units x Selling price
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Breakeven Analysis
Assume a store sells bubble gum machines for $100
that cost $75 to make. Monthly overhead is $1000.
B.E. in Units =
Fixed/Overhead Costs
Fixed/Overhead Costs
Price - Variable Cost =
Mark-up
B.E. in $ = B.E. in Units x Selling Price
B.E. in Units =
$1,000
$100 - $75
=
$1,000
$25
= 40 units
B.E. in $ = 40 units x $100 = $4,000
12-16
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Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Profit Analysis
Assume the owner wants to breakeven each
month, and $1000 profit per month to live on.
B.E. in Units =
Fixed/Overhead Costs + Desired Profit
Mark-up
B.E. in $ = B.E. in Units x Selling Price
B.E. in Units =
$2,000
$1,000 + $1 000
$25
=
= 80 units
$25
B.E. in $ = 80 units x $100 = $8,000
12-17
McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
Pricing in Disinflationary Times
• Disinflation means very low levels of inflation. Thus, you
can’t raise prices.
• Dealing with disinflation
12-18
• Reverse Pricing
• First, determine a target price for the product.
• Then decide the desired profit margin.
• Lastly, figure out how to reduce costs.
• Better manufacturing techniques, fewer/more
empowered workers, just-in-time inventory, new
supply channels, pressuring suppliers.
• Value Pricing
• Increase price but increase benefits even more, or
• Reduce price, but less than any reduction in benefits.
McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.