chapter 11 price the product. copyright 2009 pearson education, inc. publishing as prentice hall11-2...

Chapter 11

Price the Product

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-2

Chapter Objectives

Explain the importance of pricing and understand how prices can take both monetary and nonmonetary forms

Understanding the pricing objectives that marketers typically set when they plan pricing strategies

Describe how marketers use costs, demands, and revenue to make pricing decisions


Chapter Objectives

Understand some of the environmental factors that affect pricing

Understand key pricing strategies Explain pricing tactics for single and

multiple products Understand the opportunities for Internet

pricing strategies Describe the psychological, legal, and

ethical aspects of pricing


Real People, Real Choices: Decision Time at Taco Bell

Which pricing option should Taco Bell implement?– Option 1: Price the entire menu at $1.29– Option 2: Use mixed price menu #4, and

price items at $.99 and $1.29– Option 3: Use mixed price menu #1, and

price menu items at $.99, $1.19, and $1.29


“Yes, but what does it cost?”

Price: The assignment of value, or the amount the consumer must exchange to receive the offering– Includes money, goods, services, favors,

votes, or anything else that has value to the other party


Steps in Price PlanningStep 1: Develop Pricing Objectives

Pricing objectives take many forms:– Sales or market share objectives– Profit objectives – Competitive effect objectives – Customer satisfaction objectives– Image enhancement objectives


Steps in Price Planning Step 2: Estimate Demand

Demand: Customers’ desire for a product– How much of a product are customers willing

to buy as its price goes up or down? Law of demand:

– For most products, as price goes up, quantity demanded goes down

– For prestige products, a price increase may actually result in an increase in quantity demanded


Shifts in Demand

Typical demand curves assume that only price changes, but in reality, other factors can shift demand upward or downward– Changes in marketing strategy (improved

product, new advertising) – Non-marketing activities (product recalls,

development of new technologies, etc.)


Estimating Demand

Total demand:– Number of buyers * average amount of each

buyer’s purchase Firm’s demand:

– Total demand * the firm’s estimated share of the market

– Demand estimates should be adjusted if competition, the economy, or other factors change


Price Elasticity of Demand

Elasticity of demand:The percentage change in unit sales that results from a percentage change in price– When changes in price have large effects on

the amount demanded, demand is elastic– When changes in price have little or no effect

on the amount demanded, demand is inelastic


Elastic vs. Inelastic Demand

Elastic Demand– Revenues decrease

as price increases and vice versa

– Non-necessities (pizza) generate elastic demand

– Availability of close substitute products facilitates elastic demand

Inelastic Demand– As price increases,

revenues increase – The demand for

necessities such as food and electricity is generally inelastic


Cross-elasticity of Demand

Changes in the prices of other products affect a product’s demand– If products are substitutes, an increase in the

price of one will increase demand for the other (bananas vs. strawberries)

– If one product is essential for use of second, an increase in the price of one decreases demand for another (Example: increasing price of gas lowers demand for tires)


Steps in Price Planning Step 3: Determine Costs

Variable costs:Costs of production that are tied to and vary depending on the number of units produced – Average variable costs may change as the

number of products produced changes


Steps in Price Planning Step 3: Determine Costs

Fixed costs: Costs of production that don’t change with the number of units produced– Rent, cost of owning/maintaining factory, utilities,

equipment, fixed salaries of a firm’s executives– Average fixed cost per unit will decrease as the

number of units produced increases

Total costs: Total of fixed costs and variable costs for a set number of units produced


Break-Even Analysis

Break-even analysis:– Determines the number of units a firm must

produce/sell at a given price to cover costs Break-even point:

– Point at which total revenue and total cost are equal

– Break-even point (in units)• Contribution per unit

– Break-even point (in dollars)


Marginal Analysis

Analysis that uses cost and demand to find the price that will maximize profits – Marginal cost: Increase in total costs from

producing one additional unit of a product– Marginal revenue: Increase in total income or

revenue from selling one additional unit (decreases with each additional unit sold)

– Profit is maximized where marginal cost is exactly equal to marginal revenue


Steps in Price Planning Step 4: Evaluate the Pricing Environment

The economy– Broad economic trends – Recession

• Consumers become more price sensitive

– Inflation • Accustoms consumers to price increases

Competition Consumer trends


Steps in Price Planning Step 5: Choose a Price Strategy

Pricing strategies based on cost– Simple to calculate and relatively risk free– The drawback of cost-based strategies is that

they do not consider demand, competition, or the nature of the target market

– Cost-plus pricing: Total all product costs and add markup



Pricing strategies based on demand– Based on estimates of the quantity a firm can

sell at different prices– Target costing:

Identify quality and functionality customers need and price they’re willing to pay before designing product

– Yield management pricing: Manages capacity by charging different prices to different customers



Pricing strategies based on the competition– Pricing near, at, above, or below the

competition– Price leadership strategy:

Industry giant announces price, and competitors get in line or drop out

• Typical in oligopolistic industries



Pricing strategies based on customers’ needs– Value pricing or everyday low pricing (EDLP):

Pricing strategy in which a firm sets prices that provide ultimate value to customers



New-product pricing– Skimming price:

A very high premium price is charged – Penetration pricing:

A very low price to encourage more customers to purchase

– Trial pricing: Low price for a limited period of time


Steps in Price Planning Step 6: Develop Pricing Tactics

Pricing for individual products– Two-part pricing– Payment pricing

Pricing for multiple products– Price bundling– Captive pricing



Distribution-based pricing– F.O.B. (free on board) origin pricing– F.O.B delivered pricing– Basing-point pricing– Uniform delivered pricing– Freight absorption pricing



Discounting for channel members– List price (suggested retail price)– Trade or functional discounts

• Price given to channel members

– Quantity discounts– Cash discounts

• Encourages prompt payment

– Seasonal discounts• Available only at certain times

of the year


Pricing and Electronic Commerce

Dynamic pricing strategies are common in e-commerce: – Cost of changing prices on the Internet is

practically zero– Firms can respond quickly and frequently to

changes in costs, supply, and/or demand



Online auctions (eBay.com)– E-commerce allows shoppers to purchase

products through online bidding Pricing advantages for online shoppers

– Consumers gain control– Search engines and “shopbots” make

customers more price-sensitive– Consumers have more negotiating power– Saves gas, time, and hassle associated

with shopping at stores



Freenomics:A business model that encourages giving products away for free because of the increase in profits that can be achieved by getting more people to participate in a market– Example: Comcast gave 9 million subscribers

FREE digital video recorders but made money on installation and monthly DVR usage fees


Psychological Issues in Setting Prices

Buyer’s pricing expectation– Internal reference price– Price/quality inferences

Psychological pricing strategies– Odd-even pricing– Price lining– Prestige pricing


Legal and Ethical Considerations in Pricing

Deceptive pricing practices– Going-out-of-business sale – Bait-and-switch

Unfair sales acts– Loss-leader pricing – Unfair sales acts

Illegal business-to-business price discrimination


Legal and Ethical Considerations in Pricing

Price fixing: Two or more companies conspire to keep prices at a certain level– Horizontal price fixing – Vertical price fixing

Predatory pricing: Firm sets a very low price for purpose of driving competitors out of business


Real People, Real Choices: Decision Made at Taco Bell

Danielle chose option 3– Implementation: Menu items were priced at

$.99, $1.19 and $1.29. Consumers responded well to the Big Bell Value Menu

– Measuring success: Sales lift (overall sales increase due to Big Bell Value Menu) was used. Other metrics include occasion-based analysis of purchase and performance relative to the break-even point


Keeping It Real: Fast-Forward to Next Class Decision Time at NAME

Meet Walter F. Judas, VP of Marketing Communications at Tourism Vancouver

Tourism Vancouver is a not-for-profit business association that promotes tourism

The decision to be made: How to ensure that Tourism Vancouver continues to play a lead role in the 2010 Olympic and Paralympic Winter games


Copyright © 2009 Pearson Education, Inc. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice HallPublishing as Prentice Hall

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic,

mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

chapter 11 price the product. copyright 2009 pearson education, inc. publishing as prentice hall11-2...

Documents

demand demand

price changes

pearson education

prentice hall11

price increase

price items

pricing option

estimating demand total