©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages Chapter 12 Pricing Concepts and Management

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages  To explore issues related to developing pricing objectives  To understand the assessment of the target market’s evaluation of price  To understand demand and the price elasticity of demand  To become familiar with demand cost, and profit relationships  To examine how marketers analyze competitors’ prices Learning Objectives

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages  To describe the bases used for setting prices  To explain the different types of pricing strategies  To understand the selection of a specific price  To explore the pricing of business products Learning Objectives

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages Emphasizes a product’s low price and sets a price that equals or beats the competitors’ prices Price competition Emphasizing factors other than price to distinguish products through their distinctive features from competing brands Nonprice competition Basis for Competition

Discussion Point - Price and Nonprice Competition Generally there is a considerable amount of price competition among brands of hair care products.

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages Figure Stages for Establishing Prices

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages  Pricing objectives: Goals that describe what a firm wants to achieve through pricing  Form the basis for decisions for other stages of the pricing process  Must be stated explicitly and in measurable terms  Should include a time frame for accomplishing them  Influence decisions in many functional areas of a business Development of Pricing Objectives

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages Pricing Objectives SurvivalProfit Return on investment Market shareCash flowStatus quo Product quality

Discussion Point Product Quality Lexus is a high-quality automobile and is priced to reflect this product’s high quality.

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages  Importance of price varies depending on:  Type of product and target market  Purchase situation  Helps marketers decide the emphasis on price in the overall marketing strategy  Manufacturers focus on the value of products in communications with customers as consumers shop more selectively Assessment of the Target Market’s Evaluation of Price

Discussion Point Dollar Shave Club Shaves Shaving Prices Dollar Shave Club delivers fresh blades directly to each customer’s mailbox, month after month, on a subscription basis. Will Dollar Shave Club’s low prices give it the edge it needs to capture market share from Gillette and Schick?

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages  Graphical representation of the quantity of products expected to be sold at different prices holding other factors constant  Demand is inversely related to price for most products  Demand depends on factors in the marketing mix  Quality  Promotion  Distribution  Not all types of demand conform to the demand curve Demand Curve

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages Figure Demand Curve Illustrating the Typical Price/Quantity Relationship

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages  Factors that can influence demand  Changes in buyers’ needs  Variations in the effectiveness of other marketing mix variables  Presence of substitutes  Dynamic environment  Organizations can develop new products and prices anticipating demand fluctuations Demand Fluctuations

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages  Price elasticity of demand: Measure of the sensitivity of consumer demand for a product or product category to changes in price  Elasticity - Percentage change in quantity demanded relative to a given percentage change in price  Setting a price can be easier if marketers can determine the price elasticity of demand Assessing Price Elasticity

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages Figure Elasticity of Demand

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages  Marketers can determine whether a product is price elastic by analyzing total revenues as prices change  Elastic demand - Change in price causes and opposite change in total revenue  Inelastic demand - Total revenue changes in the same direction  Formula determining the price elasticity of demand  Percentage change in demand = % change in quantity demanded % change in price Assessing Price Elasticity

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages  Customers are becoming less tolerant of price increases forcing manufacturers to find new ways to control costs  Companies must set prices that cover costs and meet customers’ expectations  Approaches to understanding demand, cost, and profit relationships  Marginal analysis  Break-even analysis Demand, Cost, and Profit Relationships

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages  Examines what happens to a firm’s costs and revenues when production changes by one unit  Types of potential costs  Fixed costs: Do not vary with changes in the number of units produced or sold  Average fixed cost: Fixed cost per unit produced  Variable cost: Vary directly with changes in the number of units produced or sold  Average variable cost: Variable cost per unit produced Marginal Analysis

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages  Total cost: Sum of average fixed and average variable costs times the quantity produced  Average total cost: Sum of the average fixed cost and the average variable cost  Marginal cost (MC): Extra cost incurred by producing one more unit of a product Marginal Analysis

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages Table Costs and Their Relationships

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages Figure Typical Marginal Cost and Average Total Cost Relationship

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages  Marginal revenue (MR): Change in total revenue resulting from the sale of an additional unit of product  Offers little help in pricing new products  Marketers can benefit by understanding the relationship between marginal cost and marginal revenue in setting prices of existing products Marginal Analysis

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages Figure Typical Marginal Revenue and Average Revenue Relationship

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages Table Marginal Analysis Method for Determining the Most Profitable Price

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages Figure Combining the Marginal Cost and Marginal Revenue Concepts

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages  Break-even point: Point at which costs of producing a product equal the revenue made from selling the product  Knowing the number of units necessary to break even is important in setting the price  Helps a firm to calculate how long it will take to recoup expenses at different price points  Break-even point = fixed costs per-unit contribution to fixed costs = fixed costs price-variable costs Break-Even Analysis

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages Figure Determining the Break- Even Point

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages  Marketers should determine the break-even point for each of several alternative prices  Helps compare the relative effects on total revenue, total costs, and the break-even point  Helps identify highly undesirable prices that should definitely be avoided  Can be used to determine whether and when a product will achieve a break-even volume Break-Even Analysis

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages  Marketers should use competitors’ prices to establish their own prices  Competitors’ prices may be closely guarded  Pricing above competition creates an exclusive image  Pricing below competition can increase market share Evaluation of Competitors’ Prices

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages Selection of a Basis for Pricing  Establishing prices involves selecting a basis for pricing  Cost and demand  Competition  Appropriate pricing basis is affected by:  Type of product  Market structure of the industry  Brand’s market share position relative to competing brands  Customer characteristics

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages  Adding a dollar amount or percentage to the cost of the product  Cost-plus pricing: Seller’s costs are determined and a specified dollar amount or percentage of the cost is added to the seller’s cost  Markup pricing: Product’s price is derived by adding a markup to the cost of the product  Markup - Predetermined percentage of the cost  Markup as percentage of cost = Markup/Cost  Markup as percentage of selling price = Markup/Selling price Cost-Based Pricing

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages  Demand-based pricing: Customers pay a higher price at times when demand for the product is strong and a lower price when demand is weak  Marketers must be able to calculate how much customers will buy at different price points  Competition-based pricing: Organization considers costs to be secondary to competitors’ prices  Importance of this method increases when competing products are homogeneous Demand-Based and Competition- Based Pricing

Discussion Point Demand-Based Pricing Airline companies engage in demand-based pricing. When demand for a specific flight is higher, the fares are higher and when demand is lower, the fares will be lower.

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages  Pricing strategy - Course of action designed to achieve pricing objectives  Helps marketers to solve the practical problems of setting prices  Extent to which a business uses the pricing strategies depends on:  Pricing and marketing objectives  Markets for its products  Degree of product differentiation  Product’s life-cycle stage Selection of a Pricing Strategy

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages Figure Types of Pricing Strategies

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages New-Product Pricing Charging the highest possible price for a product during the introduction stage of its life-cycle Price skimming Setting a low price for a new product Penetration pricing

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages Charging different prices to different buyers for the same quality and quantity of product Final price is established through bargaining between the seller and the customer Negotiated pricing Setting one price for the primary target market and a different price for another market Secondary-market pricing Temporary reduction of prices on a patterned or systematic basis Periodic discounting pricing Reducing prices temporarily on a nonsystematic basis Random discounting pricing Differential Pricing

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages Encourages purchases based on consumers’ emotional responses Setting prices using odd numbers that are slightly below whole-dollar amounts Odd-number pricing Packaging together two or more identical products and selling them at a single price Multiple-unit pricing Psychological Pricing

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages Psychological Pricing Pricing a product at a moderate level and displaying it next to a more expensive model or brand Reference pricing Packaging together two or more complementary products and selling them at a single price Bundle pricing Pricing products low on a consistent basis Everyday low prices (EDLP) Pricing certain goods on the basis of tradition Customary pricing

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages Establishing and adjusting the prices of multiple products within a product line Basic product in a product line is priced low Price on the items required to operate or enhance it are higher Captive pricing Highest-quality product or the most-versatile and most desirable version of a product in a product line is assigned the highest price Premium pricing Selling goods only at certain predetermined prices that reflect explicit price breaks Price lining Product-Line Pricing

Discussion Point Captive Pricing Companies that produce and market razors engage in captive pricing by charging high prices for replacement blade cartridges. To continue using a specific razor, the customer must purchase additional blade cartridges.

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages Price is often coordinated with promotion as a marketing mix Products priced below the usual markup, near cost, or below cost Price leader Advertised sales or price cutting linked to a holiday, season, or event Special-event pricing Pricing of a product at a specific level and simultaneously comparing it to a higher price Comparison discounting Promotional Pricing

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages  Pricing strategy - Yields a certain price that may need refining  Helps in setting final price  Marketers may need to refine this price in order to make it consistent with circumstances  In order to set prices, marketers must:  Establish pricing objectives  Have considerable knowledge about target market customers  Determine demand, price elasticity, costs, and competitive factors Determination of a Specific Price

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages  Establishing prices for business markets differ from setting prices for consumers due to:  Size of purchases  Transportation considerations  Geographic issues  Types of pricing associated with business products  Geographic pricing  Transfer pricing  Discounting Pricing for Business Markets

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages  Deals with delivery costs  F.O.B. origin pricing - Price of merchandise at the factory before shipment  F.O.B. destination - Price indicating the producer is absorbing shipping costs Geographic Pricing

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages  One unit in an organization sells a product to another unit  Determined by calculating the cost of the product which can vary depending on the types of costs included in the calculations  Choice of the costs to include when calculating the transfer price depends on:  Company’s management strategy  Nature of the units’ interaction Transfer Pricing

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©wecand/GettyImages Table Discounts Used for Business Markets