Chapter 13Pricing concepts

Learning objectives

1 Discuss the importance of pricing decisions to the economy and to the individual organisation

2 List and explain a variety of pricing objectives

3 Explain the role of demand in price determination

4 Describe cost-oriented pricing strategies

Learning objectives (cont.)

5 Demonstrate how the product life cycle, competition, distribution and promotion strategies, customer demands, the Internet and extranets, and perceptions of quality can affect price

6 Describe the procedure for setting the right price

7 Identify the legal and ethical constraints on pricing decisions

8 Explain how discounts, geographic pricing and other special pricing tactics can be used to fine-tune the base price

Learning objective 1

Define the term marketingDiscuss the importance of

pricing decisions to the

economy and to the

individual organisation

What is price?

Price is that which is given

up in an exchange to

acquire a good or service.

1

The importance of price

In the broadest sense, price allocates resources in a free-market economy

1

To the seller…Price is revenue and profit source

To the consumer…Price is the cost of something

The importance of priceto marketing managers

Revenue The price charged to customers

multiplied by the number of units sold.

Profit Revenue minus expenses.

1

The importance of price

• Revenue pays for every activity. • What’s left over is profit.

Marketers must select a price that• is not too high• is not too low • equals the perceived value to

target consumers

1

Revenue = Unit price number of units sold

Learning objective 2

Describe four marketing management philosophies.List and explain a variety

of pricing objectives

Trends influencing price setting

2

• High rate of new product introduction

• Increased availability of bargain-priced dealer and generic brands

• Price-cutting as a strategy to maintain or regain market share

• More efficient and better-informed buyers

Pricing objectives2

• Profit-oriented pricing objectives

• Sales-oriented pricing objectives

• Status quo pricing objectives

Profit-oriented pricing objectives

2

• Profit maximisation

• Satisfactory profits

• Target return on investment

Profit maximisation

Setting prices so that total revenue is as large as possible relative to total costs.

2

Return on investment (ROI)

Net profit after taxes divided by total assets.

ROI = net profit after taxtotal assets

2

Sales-oriented pricing objectives

2

• Market share

• Sales maximisation

Market share

A company’s product sales

as a percentage of total

sales for that industry.

2

Sales maximisation2

• Short-term objective to maximise sales

• Ignores profits, competition and the marketing environment

• May be used to sell off excess inventory

Status quo pricing

Advantages

• Simplicity

• Safest route to long-term survival for small firms

Disadvantages

• Strategy may ignore demand or cost

2

Learning objective 3

Explain the role of

demand in price

determination

Demand and supply

Demand The quantity of a product that

will be sold in the market at various prices for a specified period.

Supply

The quantity of a productthat will be offered to the marketby a supplier at various prices

for a specific period.

3

Elasticity of demand

Consumers’

responsiveness or

sensitivity to

changes in price.

3

Elasticity of demand (cont.)

Elastic demand

Consumers buy more or less of a

product when the price changes

Inelastic demand

An increase or decrease in price will

not significantly affect demand

3

Elasticity of demand (cont.)

Price goes… Revenue goes… Demand is…

down up elastic

down down inelastic

up up inelastic

up down elastic

3

Factors that affect elasticity3

• Availability of substitutes

• Price relative to purchasing power

• Product durability

• Product’s other uses

Learning objective 4

Describe cost-oriented pricing strategies

The cost determinant of price

Types of costs

4

Variable costsDeviate with changes in level of output

Fixed costsDo not deviate as level of output changes

The cost determinant of price (cont.)

4

Methods used to set price

• Markup pricing

• Break-even pricing

Markup pricing

Markup pricingThe cost of buying the product from the producer plus amounts for profit and for expenses not otherwise accounted for.

Example: If a pen costs $1.80 and sells for is $2.20, the markup is $0.40 or 22% of cost.

4

Break-even pricing4

Quantity

Pri

ce

2 000

0 1 000 2 000 3 000 4 000 5 000 6 000

4 000

Fixed costs

Loss

ProfitTotal revenueTotal costs

Break-even point

6 000

Learning objective 5

Demonstrate how the product life

cycle, competition, distribution

and promotion strategies,

customer demands, the Internet

and extranets, and perceptions of

quality can affect price

Other determinants of price5

• Stages of the product life cycle

• Competition

• Distribution strategy

• Promotion strategy

• Perceived quality

Stages in the product life cycle

Introductorystage

Growthstage

Declinestage

$ High

$Stable

$Decrease

Maturitystage

$Decrease

Stable

High

5

Distribution strategy5

• Offer a larger profit margin

• Give dealers a large trade

allowance

Convincing distributors to carry product

The impact of the Internet5

• Allows price and product comparisons.

• Prices are coming down.

• Data collection allows sellers to tailor products and prices.

Extranet

A private electronic

network that links a

company with its

suppliers and

customers.

5

Prestige pricing

Charging a high price to

help promote a high-

quality image.

5

Indicators of quality5

• Retailer reputation

• Appearance

• Price

• Brand name

Learning objective 6

Describe the

procedure for setting

the right price

Steps in setting the right price6

Results lead to the right price

Establish pricing goals

Estimate demand, costs and profits

Choose a price strategy

Fine-tune base price with pricing tactics

Pricing objectives6

• Profit-oriented pricing objectives

• Sales-oriented pricing objectives

• Status quo pricing objectives

Price strategy

A basic, long-term pricing framework which establishes the initial price for a product and the intended direction for price movements over the product life cycle.

6

Choosing a price strategy6

Basic strategies for setting prices• Price skimming• Status quo• Penetration pricing

Price skimming6

Situations when price skimming is successful

• Inelastic demand

• Superior product

• Legal protection of product

• Technological breakthrough

• Limited production

Penetration pricing

A pricing policy whereby

a firm charges a relatively

low price for a product

initially as a way to reach

the mass market.

6

Penetration pricing (cont.)

Advantages

• Discourages or blocks competition from market entry

Disadvantages

• Requires gear up for mass production

• Selling large volumes at low prices

• Strategy to gain market share may fail

6

Learning objective 7

Identify the legal and ethical constraints on pricing decisions

The legality and ethics of price strategy

7

Issues that limit pricing decisions

• Unfair trade

• Price fixing

• Price discrimination

• Predatory pricing

Explain how discounts,

geographic pricing and

other special pricing

tactics can be used to

fine-tune the base price

Learning objective 8

Tactics for fine-tuning the base price

8

• Discounts

• Geographic pricing

• Special pricing tactics

Tactics for fine-tuning the base price (cont.)

8

• Quantity discounts• Cash discounts• Functional discounts• Seasonal discounts• Promotional allowances• Rebates• Value-based pricing

Value-based pricing

The price is set at a level that seems to the customer to be a good price compared to the prices of other options.

8

Geographic pricing8

• FOB pricing

• Uniform delivered pricing

• Zone pricing

• Freight absorption pricing

• Basing-point pricing

Special pricing tacticsSingle-price tactic

Flexible pricing

Professional services pricing

Leader pricing

Bait pricing

Odd-even pricing

Price bundling

Two-part pricing

All goods offered at the same price.

Different customers pay different price.

Used by professionals with experience, training or certification.

Sell product at near or below cost.

Lure customers through false or misleading price advertising.Odd-number prices imply bargain.Even-number prices imply quality.Combining two or more products in a single package.Two separate charges to consume a single good.

8