10 - rome business school · 2020-05-22 · module 10- slide 28 break-even point for profit...

Module 10 - slide 1

Master in Marketing and Communication

Module 10

Pricing:

Understanding and Capturing

Customer Value

Module 10 - slide 2

Pricing: Understanding and Capturing Customer Value

• What Is a Price?

• Customer Perceptions of

Value

• Company and Product

Costs

• Other Internal and

External Considerations

Affecting Price Decisions

Topic Outline

Module 10 - slide 3

Price is the amount of money charged for a product or service. It is the sum of all the values that consumers give up in order to gain the benefits of having or using a product or service.

What Is a Price?

Module 10 - slide 4

Price is the only element in the marketing mix that produces revenue; all other elements represent costs.

Price is also one of the most flexiblemarketing mix elements.

What Is a Price?

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Factors to Consider When Setting Prices

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Understanding how much

value consumers place

on the benefits they

receive from the

product and setting a

price that captures that

value

Customer Perceptions of Value

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Value-based pricing uses the buyers’ perceptions of value, not the sellers cost, as the key to pricing. Price is considered before the marketing program is set.

• Value-based pricing is customer driven

• Cost-based pricing is product driven



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Module 10 - slide 9

Value-based pricing

Good -value pricing

Value-added pricing



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Good-value pricing offers the right

combination of quality and good service

to fair price

Existing brands are being redesigned to offer

more quality for a given price or the same

quality for less price




Everyday low pricing (EDLP) involves

charging a constant everyday low price

with few or no temporary price discounts

High-low pricing involves charging higher

prices on an everyday basis but running

frequent promotions to lower prices

temporarily on selected items



http://www.walmart.com/


• Value-added pricing attaches value-added

features and services to differentiate

offers, support higher prices, and build

pricing power

• Pricing power is the ability to escape price

competition and to justify higher prices and

margins without losing market share




Cost-based pricing involves setting prices

based on the costs for producing,

distributing, and selling the product plus a

fair rate of return for its effort and risk

Cost-based pricing adds a standard markup

to the cost of the product

Company and Product Costs



Fixed costs

Variable costs

Total costs


Types of costs



Fixed costs are the costs that do not vary

with production or sales level

• Rent

• Heat

• Interest

• Executive salaries




Variable costs are the costs that vary with

the level of production

• Packaging

• Raw materials



http://www.steelonthenet.com/commodity_prices.html


Total costs are the sum of the fixed and

variable costs for any given level of

production

Average cost is the cost associated with a

given level of output




Costs at Different Levels of Production



The experience curve refers to the drop in the average per-unit production cost that comes with accumulated

production experience.

Costs as a Function of Production Experience



• Cost-plus pricing adds a standard markup to

the cost of the product

• Benefits– Sellers are certain about costs

– Prices are similar in industry and price competition is

minimized

– Consumers feel it is fair

• Disadvantages

– Ignores demand and competitor prices

Cost-Plus Pricing


Module 10- slide 21

Markup Price = unit cost / (1 – desired margin on sales)

Example

If:

• unit cost = 16 €

• desired margin on sales = 20%

• Markup price = 16 / (1 – 0,2) = 20 €

Cost-plus pricing


Break-even pricing is the price at which total costs are equal to total revenue and there is no profit

Target profit pricing is the price at which the firm will break even or make the profit it’s seeking

Break-Even Analysis and Target Profit Pricing



Break-Even Analysis and Target Profit Pricing


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Break -even volumes and profits at different price levels


How to calculate the break -even volume

fixed cost

Break-even volume = ————————

price – variable cost

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How to calculate the break -even volume

Suppose you sell mobile phones at a price of $ 76.50. If the unit variable costs for each phone are $ 40 and the manufacturer has fixed costs for a total of $ 200,000, how many phones you have to sell to break even?

Break Even Point (BEP) = Fixed costs/(Unit Price –Variable Costs)

Answer:200.000 $ / $ 76,50 - $ 40 = 5.480 mobile phones.

Module 10- slide 27

Determining breakeven for profit goals

Unit volume = Fixed costs + profit goal

price – variable costs

Module 10- slide 28

Break -even point for profit objectives

Suppose you sell mobile phones at a price of $ 76.50. If the unit variable costs for each phone are $ 40 and the manufacturer has fixed costs for a total of $ 200,000, how many phones you have to sell to make profits for $ 800.000?

Answer:27.398 phones. (200.000 + 800.000 / 76,50 – 40)

Unit volume = (Fixed costs + profit goal) / (price – variable costs)


Target costing starts with an ideal selling

price based on consumer value

considerations and then targets costs that

will ensure that the price is met



Considerations in Setting Price


• Marketing objectives are reflected in the pricing decisions and include

– Survival

– Current profit maximisation

– Market share maximisation

– Product-quality leadership

– Full cost recovery

– Partial cost recover


Marketing Objectives


• Price decisions are coordinated with product design, distribution and promotional decisions to form an effective integrated marketing programme.

• Various strategies can be used depending upon the type of product and the environment in which it is involved.

• Frequently pricing decisions are made first and the marketing mix evolves around that.

• De-emphasis of price by using the other marketing mix tools to create non-price positions based upon differentiation and value.


Marketing Mix Strategies


• Before setting prices,

the marketer must

understand the

relationship between

price and demand for

its products.


The Market and Demand


Pure competition

Monopolistic competition

Oligopolistic competition

Pure monopoly

The Market and Demand



Pricing in different types of market

• Pure competition markets

– Many buyers and sellers trading in a uniform commodity

(i.e. wheat, copper)

– No single buyer or seller has much effect on the market

price because buyers can obtain as much as they need at

the going price.

– Marketing mix has little impact

• Monopolistic competition

– Many buyers and sellers trade over a range of prices

– A range of prices occur because sellers can differentiate

their offers to buyers.

– Emphasis upon differentiation through the marketing mix


Pricing in different types of market

• Oligopolistic competition

– Few sellers highly sensitive to each other’s price and marketing strategies. the product can be uniform (steel, aluminium) or non uniform (cars, computers). There are few sellers because it is difficult for new sellers to enter the market. Each seller is alert to competitor’s strategies and moves. If a steel company slashes its prices by 10% buyers will quickly switch to this supplier.

• Pure monopoly

– Single seller controlling the market. Government (postal); private regulated (a power company); private non regulated (Microsoft Windows).


The demand curve shows the number of units the market will buy in a given period at different prices

• Normally, demand and price are inversely related

• Higher price = lower demand

• For prestige (luxury) goods, higher price can equal higher demand when consumers perceive higher prices as higher quality




Inelastic and elastic demand


Price elasticity of demand illustrates the response of demand to a change in price

Inelastic demand occurs when demand hardly changes when there is a small change in price

Elastic demand occurs when demand changes greatly for a small change in price

Price elasticity of demand = % change in quantity demand

% change in price



• Comparison of offering in

terms of customer value

• Strength of competitors

• Competition pricing strategies

• Customer price sensitivity

Competitor's Strategies



Economic conditions

Reseller’s response to price

Government

Social concerns

Other Internal and External Consideration

Affecting Price Decisions


Module 10- slide 42

Exercise

• The Ferrari is developing a new car model. You are required to determine the price.

• What are the internal and external factors to consider?

• What are the fixed and variable costs to be assessed?

• What can you do to increase the perceived value by your potential customers?

• What general pricing method would you adopt? Cost-based, value-based or competition-based?

10 - rome business school · 2020-05-22 · module 10- slide 28 break-even point for profit...

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