Price
Price: The sum of all the value(s) the consumer gives up to obtain the product or service.– Money– Time– Effort– Foregoing something else you otherwise would
have purchased– Brand, image, perception– Level of service, warranty, guarantee
Price Price is determined by external market issues:
– Supply versus demand (availability of substitutes)– Consumer value perceptions– Product costs– Competitor prices
Price is determined by internal strategic goals:– New product that needs to penetrate market?– High quality product that requires a high price?– Commodity or me too product requiring low price?– Trying to position the brand in a particular way?– Trying to knock /differentiate from a competitor?
Price Prices are set at
each step of the supply chain
Price is determined by the cost of the materials coming in, plus the value provided by the channel member (labor, branding, convenience, packaging quantity)
Producer
Wholesaler
Retailer
Consumer
Producer purchases raw materials, makes the
product, then charges a price to the Wholesaler
(cost + profit)
Wholesaler pays a price to the Producer, then
charges a price to the Retailer(cost + profit)
Retailer pays a price to the Wholesaler, then
charges a price to the Consumer (cost + profit)
Consumer pays a price to the Retailer based on their
perceived value of the product
Price Terminology
Revenue = Price x Sales Unit– Revenue per unit = $10 x 1 = $10– Total revenue = $10 x 150 units sold = $1500
Profit = Revenue – Costs– Profit per unit = $10 - $7 cost = $3– Total profit = ($10 x 150) – ($7 x 150)
= $1500 - $1050
= $450
Markup Markup: The amount the purchaser increases
the price before selling the product to the next channel member.
– Cost=$15.00– Selling price=$20.00– Differential = $5.00
Markup as % of cost = (Selling $ – Cost ) / Cost= $5/$15= 33%
Markup as % of selling price = (Selling – Cost) / Selling= $5/$20= 25%
Margin
Margin: Percentage of profit received based on the selling price.
Margin % on selling price = (Selling $ – Cost) /(Selling $)= $5/$20 = 25%
Margin and Markup Example (p. 721)
Retailer margin goal: 30% Wholesaler margin goal: 20% Suggested retail price: $600
– Retail price: $600– (Less 30% margin for retailer): ($180)– Retailer’s cost/wholesaler’s price: $420– (Less 20% margin for wholesaler): ($84)– Wholesaler’s cost/manufac. price: $336
Pricing Objectives
Profit Oriented: Setting prices so that total revenue is as large as possible relative to total costs
Sales Oriented: Short-term objective to maximize sales– Ignores profits, competition, and the
marketing environment– May be used to sell off excess inventory
Status Quo: Maintain existing prices, or meet competitors’ prices
Profit Oriented Pricing
Define costs for the product or service, define the targeted profit, and set price based on these components.
Price Skimming: A form of profit oriented pricing where a high price is charged when introducing a product, often due to lack of competition.
• Relies on high profit margins per unit and lower sales volume
• Best when the product has a significant competitive advantage, legal protection, inelastic demand
Profit Oriented Pricing: (Sometimes Called Cost Plus, Markup)
1) Your fixed costs
2) Your variable
costs+
=3) Your profit margin
+
Sales Oriented Pricing
Price is set to maximize the units sold, typically using low profit margin targets.
Penetration Pricing: A low introductory price is set to penetrate the market and generate larger sales volume.
• Relies on high sales volume and lower profit margins per unit.
• Often used when there are many competitors in the market, or the product does not have a significant competitive advantage
Sales-Oriented PricingCompetitive analysis establishes target
price points for your product
Analysis of initial costs establishes floor for your product
Status Quo Pricing
Goal is to maintain existing prices, or meet a competitor’s prices.– Passive pricing policy– Often used by other firms when there
is a dominant product in the market (price leader)
– Used for late-entering, “me-too” products
What is market share?
Market ShareMarket ShareA company’s product sales as a percentage of total sales for that industry in dollars or units.
Setting the Right Price
Choose a price strategy Fine tune with pricing tactics
Choose a price strategy Fine tune with pricing tactics
Understand your market pressuresUnderstand your market pressures
Estimate demand, costs, and profitsEstimate demand, costs, and profits
Establish pricing goalsEstablish pricing goals
Results lead to the right price
Market Pressures: Stage in the Product Life Cycle
IntroductoryStage
GrowthStage
DeclineStage
$
High
$Stable
$Decrease
MaturityStage
$Decrease
Stable
High
UNIQUE PRICING STRATEGIES
These next slides are for your reference, not to know for an exam. You may or may not need this info for your project.
Market Pressure: Selling Against a Brand
Stocking well-known branded items at high prices in order to sell another brand at discounted prices.– Viva paper towels: $1.29– Safeway Brand: $0.99– Increase volume on store brand
Market Pressure: Reference and Prestige Pricing
Regular price: $45
Now Only: $25
Reference Pricing Prestige Pricing
http://www.vivre.com
Market Pressure: Psychological Price Positioning
Most Attractive?
Better Value?– A = 6.8 ¢ per oz.
– B = 7.7 ¢ per oz.
Psychological reason to price this way?
A32 oz.
B26 oz.
$2.19
$1.99
Assume Equal Quality
Product Line Pricing
Involves setting price steps between various products in a product line based on:
– Cost differences between products
– Customer evaluations of different features
– Competitors’ prices
Product Mix Pricing Strategies
Optional-Product– Pricing optional or
accessory products sold with the main product (i.e camera bag) at a high price.
Captive-Product– Pricing products that
must be used with the main product (i.e. film) at a high price.
Other Pricing Strategies
Segmented Pricing: Selling a product at different prices for reasons other than cost.– Customer segments (movie theater tickets)– Location (in-state versus out of state
students)– Time (season, month, time of day (train
tickets))– Product form (soda in large and small
bottles)
Pricing Restrictions
Can price products differently to different purchasers, provided the costs to sell to the purchasers are different.
Cannot price fix, or collude across competitors to set prices in the market.
Cannot require retailers to set prices at a particular level (can have a manufacturer’s suggested retail price, or MSRP)
Segmentation/Yield Management
Yield Management Systems
A technique for adjusting prices
that uses complex mathematical
software to profitably fill unused
capacity.