chapter 10 pricing products: pricing considerations and approaches
TRANSCRIPT
Chapter 10
Pricing Products:
Pricing Considerations and Approaches
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.
More Factors to Consider when Setting Prices
PriceStage of the PLC
MarketingObjectives
SurvivalST Profit MaxMarket ShareQuality Leadership
PsychologicalAspects
Reference PricePrice/Perceived QualityPrice points
Industry Conditio
nsThreat of new entrantsMarket powerSubstitutesCapacityGovernmentSocial Concerns
Decision Maker
Marketing
Objectives
SurvivalLow Prices to Cover Variable Costs
andSome Fixed Costs to Stay in
Business.Current Profit Maximization
Choose the Price that Produces the Maximum Current Profit, Etc.
Market Share LeadershipLow as Possible Prices to Become
the Market Share Leader.
Product Quality LeadershipHigh Prices to Cover Higher
Performance Quality and R & D.
Internal Factors Affecting Pricing Decisions: Marketing Objectives
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.
Price
Product Design
Distribution
Promotion
NonpricePositions
Internal Factors Affecting Pricing Decisions: Marketing Mix
Types of Cost Factors that Affect Pricing Decisions
Total CostsSum of the Fixed and Variable Costs for a Given
Level of Production
Total CostsSum of the Fixed and Variable Costs for a Given
Level of Production
Variable Costs
Costs that do varydirectly with the
level of production.
Raw materials
Fixed Costs(Overhead)
Costs that don’tvary with sales or production levels.
Executive Salaries, Rent
Costs ConsiderationsC
ost
per
un
it 12
3 4SRAC
LRAC
Quantity Produced per Day
1,0
00
2,0
00
3,0
00
4,0
00
Cost Per Unit at Different Levels of Production Per Period
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.
Market andDemand
Competitors’ Costs, Prices, and Offers
Other External FactorsEconomic Conditions
Reseller NeedsGovernment Actions
Social Concerns
External Factors Affecting Pricing Decisions
Competitor Costs
This ad by LCI International accuses its competitors of using unfair practices in pricing, hiding fees incurred by rounding up.
Hidden fees, defined as“cramming” by theFCC, are the numberone source of billingcomplaints amonglong-distancecustomers.
Why is LCI focusing onthis practice?
Pure CompetitionPure CompetitionMany Buyers and Sellers
Who Have Little Effect on the Price
Pure CompetitionPure CompetitionMany Buyers and Sellers
Who Have Little Effect on the Price
Monopolistic Monopolistic CompetitionCompetition
Many Buyers and Sellers Who Trade Over a
Range of Prices
Monopolistic Monopolistic CompetitionCompetition
Many Buyers and Sellers Who Trade Over a
Range of Prices
Pricing in Different Types of Markets
Market and Demand Factors Affecting Pricing Decisions
Oligopolistic Oligopolistic CompetitionCompetition
Few Sellers Who AreSensitive to Each Other’s
Pricing/ Marketing Strategies
Oligopolistic Oligopolistic CompetitionCompetition
Few Sellers Who AreSensitive to Each Other’s
Pricing/ Marketing Strategies
Pure MonopolyPure MonopolySingle Seller
Pure MonopolyPure MonopolySingle Seller
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
Price Elasticity of DemandPri
ce
Quantity Demanded per Period
A. Inelastic Demand - Demand Hardly Changes Witha Small Change in Price.
P2
P1
Q1Q2
Pri
ce
Quantity Demanded per Period
P’2P’1
Q1Q2
B. Elastic Demand -Demand Changes Greatly Witha Small Change in Price.
Cost-Based Pricing
Certainty About Costs
Pricing is Simplified
Price Competition Is Minimized
UnexpectedSituational
Factors
Attitudes of
Others
Ethical
Ignores Current
Demand & Competitio
n
Cost-Plus Pricing is an
Approach That Adds a
Standard Markup to the
Cost of the Product.
Simplest Pricing Method
Much Fairer to Buyers & Sellers
Break-even Chart forDetermining Target Price
T34D
olla
rs (
mill
ion
s)D
olla
rs (
mill
ion
s) 1212
1010
88
66
44
22
00
Total costTotal cost
Fixed costFixed cost
Target profitTarget profit$2 million$2 million
Total revenueTotal revenue
200200 400400 600600 800800 1,0001,000
Sales volume in units (thousands)Sales volume in units (thousands)
ProductProduct
CostCost
PricePrice
ValueValue
CustomersCustomers
CustomerCustomer
ValueValue
PricePrice
CostCost
ProductProduct
Cost-Based Pricing Value-Based Pricing
Cost-Based Versus Value-Based Pricing (Fig. 10.7)
Setting Prices
Sealed-BidCompany Sets Prices Based on What They Think Competitors
Will Charge.
Going-Rate Company Sets Prices Based on What
Competitors Are Charging.
??
Competition-Based Pricing
Chapter 11
Pricing Products:
Pricing Considerations and Strategies
Steps in Price Planning
1. Develop Pricing Objectives
2. Estimate Demand
3. Determine Costs
4. Evaluate the Pricing Environment
5. Choose a Pricing Strategy
6. Develop Pricing Tactics
New Product Pricing Strategies
New Product Pricing Strategies
Market SkimmingMarket Skimming Market PenetrationMarket Penetration
>Setting a High Price for a New Product to Maximize Revenues from the Target Market.
>Results in Fewer, More Profitable Sales.
> Setting a Low Price for a New Product in Order to Attract a Large Number of Buyers.
>Results in a Larger Market Share.
New Product Pricing Strategies
Market Skimming
Setting a High Price for a New Product to “Skim” Maximum Revenues from the Target Market.
Results in Fewer, But More Profitable Sales.
Market Skimming
Setting a High Price for a New Product to “Skim” Maximum Revenues from the Target Market.
Results in Fewer, But More Profitable Sales.
• Use Under These Conditions:– Product’s Quality and Image
Must Support Its Higher Price.
– Costs Can’t be so High that They Cancel the Advantage of Charging More.
– Competitors Shouldn’t be Able to Enter Market Easily and Undercut the High Price.
New Product Pricing Strategies
Market Penetration
Setting a Low Price for a New Product in Order to “Penetrate” the Market Quickly and Deeply.
Attract a Large Number of Buyers and Win a Larger Market Share.
Market Penetration
Setting a Low Price for a New Product in Order to “Penetrate” the Market Quickly and Deeply.
Attract a Large Number of Buyers and Win a Larger Market Share.
• Use Under These Conditions:– Market Must be Highly Price-
Sensitive so a Low Price Produces More Market Growth.
– Production/ Distribution Costs Must Fall as Sales Volume Increases.
– Must Keep Out Competition & Maintain Its Low Price Position or Benefits May Only be Temporary.
Product Line PricingProduct Line PricingSetting Price Steps Between Product Line Items
i.e. $299, $399
Product Line PricingProduct Line PricingSetting Price Steps Between Product Line Items
i.e. $299, $399
Optional-Product PricingOptional-Product PricingPricing Optional or Accessory Products
Sold With The Main Producti.e. Car Options
Optional-Product PricingOptional-Product PricingPricing Optional or Accessory Products
Sold With The Main Producti.e. Car Options
Captive-Product PricingCaptive-Product PricingPricing Products That Must Be Used
With The Main Producti.e. Razor Blades, Film, Software
Captive-Product PricingCaptive-Product PricingPricing Products That Must Be Used
With The Main Producti.e. Razor Blades, Film, Software
By-Product PricingBy-Product PricingPricing Low-Value By-Products To Get Rid
of Themi.e. Lumber Mills, Zoos
By-Product PricingBy-Product PricingPricing Low-Value By-Products To Get Rid
of Themi.e. Lumber Mills, Zoos
Product-Bundle PricingProduct-Bundle PricingPricing Bundles Of Products Sold Together
i.e. Season Tickets, Computer Makers
Product-Bundle PricingProduct-Bundle PricingPricing Bundles Of Products Sold Together
i.e. Season Tickets, Computer Makers
Product Mix Pricing StrategiesProduct Mix Pricing Strategies
ProductMix
PricingStrategies
ProductMix
PricingStrategies
Price-Adjustment Strategies Price-Adjustment Strategies Price Adjustment StrategiesPrice Adjustment Strategies
Discount & AllowanceReducing Prices to Reward
Customer Responses such asPaying Early or Promoting
the Product.
Discount & AllowanceReducing Prices to Reward
Customer Responses such asPaying Early or Promoting
the Product.
SegmentedAdjusting Prices to Allow
for Differences in Customers,Products, or Locations.
SegmentedAdjusting Prices to Allow
for Differences in Customers,Products, or Locations.
Cash DiscountCash Discount
Quantity DiscountQuantity Discount
Functional DiscountFunctional Discount
Seasonal DiscountSeasonal Discount
CustomerCustomer
Product FormProduct Form
LocationLocation
TimeTime
Trade-In AllowanceTrade-In Allowance
Price-Adjustment Strategies Price-Adjustment Strategies
• Adjusting Prices for Psychological Effect.•Price Used as a Quality Indicator.
• Temporarily Reducing Prices to Increase Short-Run Sales.• i.e. Loss Leaders, Special-Events
• Adjusting Prices to Account for the Geographic Location of Customers.• i.e. FOB-Origin, Uniform-Delivered, Zone Pricing, Basing-Point, & Freight-Absorption.
• Adjusting Prices for International Markets.• Price Depends on Costs, Consumers, Economic Conditions & Other Factors.
Psychological Pricing
Promotional Pricing
Geographical Pricing
International Pricing
Being Replaced by Newer Models
Being Replaced by Newer Models
Current Models Are Not Selling Well
Current Models Are Not Selling Well
Company is in Financial TroubleCompany is in
Financial Trouble
Quality Has Been Reduced
Quality Has Been Reduced
Price Comes Down Further
Price Comes Down Further
Price Cuts Are Seen by Buyers As:
Reactions to Price Changes
Number of Firms is Small
Number of Firms is Small
Product is UniformProduct is Uniform
Buyers are Well Informed
Buyers are Well Informed
Competitors Reactions When:
Price-Adjustment Strategies Price-Adjustment Strategies
Hold Current Price;Continue to MonitorCompetitor’s Price.
Hold Current Price;Continue to MonitorCompetitor’s Price.
Reduce PriceReduce Price
Raise PerceivedQuality
Raise PerceivedQuality
Improve Quality& Increase PriceImprove Quality& Increase Price
Launch Low-Price“Fighting Brand”
Launch Low-Price“Fighting Brand”
Has Competitor CutPrice?
Has Competitor CutPrice?
Will Lower Price Negatively Affect Our
Market Share & Profits?
Will Lower Price Negatively Affect Our
Market Share & Profits?
Can/ Should EffectiveAction be Taken?
Can/ Should EffectiveAction be Taken?
Yes
No
No
No
Price FixingPrice Fixing
Pricing Within Channel LevelsPricing Within Channel Levels
Predatory Pricing
Predatory Pricing
Public Policy Issues in Pricing
PriceDiscrimination
Ensure Sellers Offers the Same PriceTerms to a Given Level
Of Trade
PriceDiscrimination
Ensure Sellers Offers the Same PriceTerms to a Given Level
Of Trade
Resale PriceMaintenance
Manufacturer Can’t Require
Dealers to Charge a
Specified RetailPrice for Its
Product
Resale PriceMaintenance
Manufacturer Can’t Require
Dealers to Charge a
Specified RetailPrice for Its
Product
DeceptivePricing
Occurs When a Seller States
Prices or PricesSavings that
Available To Consumers
DeceptivePricing
Occurs When a Seller States
Prices or PricesSavings that
Available To Consumers
Pricing Across Channel Levels
Pricing and the Internet
• The Web enables you to compare prices quickly.
• Some Web sites do bidding and price comparison for you.