BUILDING THE PRICE FOUNDATION
NATURE AND IMPORTANCE OF PRICE What is a Price? Barter
The price of four different purchases
Lamborghini What will this car cost?
NATURE AND IMPORTANCE OF PRICE Price as an Indicator of Value Value-pricing Price in the Marketing Mix Profit Equation
STEPS IN THE SETTING OF PRICE After studying this chapter, you should be able to: • Explain the different constraints that limit the flexibility in setting price • Identify and discuss the various pricing objectives a marketer can choose, to guide the pricing decision • Explain the role of supply and demand in price determination • Discuss the meaning of elasticity and explain the different types • Discuss the factors affecting price sensitivity • Explain how price sensitivity can be measured
STEPS IN THE SETTING OF PRICE After studying this chapter, you should be able to: • Identify and explain the different costs that affect pricing • Explain the concepts of total and marginal revenue • Explain marginal analysis and be able to apply the formulas • Discuss break-even analysis and be able to calculate break-even points
Steps in setting price
STEP 1: IDENTIFY PRICING CONSTRAINTS AND OBJECTIVES Identifying Pricing Constraints These could be internal and external factors that limit the choice as to range of prices to be charged. Obvious ones are demand for the product and nature of competition.
STEP 1: IDENTIFY PRICING CONSTRAINTS AND OBJECTIVES Identifying Pricing Constraints Demand for the Product Class, Product, and Brand – number of potential buyers affect price marketer can charge Critical to understand and estimate dynamics of demand for a Product class: (e.g. shoes) Product: (e.g. running shoes) Brand: (e.g. Nike) Nature of product itself: whether it’s a luxury or necessity - will also affect price.
STEP 1: IDENTIFY PRICING CONSTRAINTS AND OBJECTIVES Identifying Pricing Constraints Newness of the Product: Stage in the Product Life Cycle – A higher price can be charged for a relatively new product, especially if is innovative and not easily copied. Early stages of Product Life Cycle. Kreepy Krauly was the first automatic pool cleaner when it was introduced, there was no direct competitors. Could charge a premium price Competition came in (Baracuda) less flexibility in terms of setting price.
STEP 1: IDENTIFY PRICING CONSTRAINTS AND OBJECTIVES Identifying Pricing Constraints Single Product versus a Product Line - marketer has only one product to price, this leads to greater flexibility than if there is a line of products. Why? Marketer has to keep in mind the differences in terms of features and value for each product within the line, and must try to set pricing for the various products in a consistent manner. Puts more contraints on pricing, why?
STEP 1: IDENTIFY PRICING CONSTRAINTS AND OBJECTIVES Identifying Pricing Constraints Cost of Producing and Marketing the Product – Marketing concept stresses profitability over the long term. This implies that the price set should cover the costs of producing and marketing the product, in order to make a profit At the very least, the price set should cover the costs - the firm makes no profit if the price drops to a level below cost.
STEP 1: IDENTIFY PRICING CONSTRAINTS AND OBJECTIVES Identifying Pricing Constraints Cost of changing prices and time period to which they apply. - Companies have to carefully consider the time period for which new prices will apply. Most companies review and adapt the prices for their major products at least once a year. Why? The number of customers that must be informed of any price change will affect the length of time for which a price can be set. How?
STEP 1: IDENTIFY PRICING CONSTRAINTS AND OBJECTIVES Identifying Pricing Constraints The number of customers that must be informed of any price change will affect the length of time for which a price can be set. How? South African state-owned weapons manufacturer, Denel – supplies South Africa, Namibia and +- 14 other countries.
STEP 1: IDENTIFY PRICING CONSTRAINTS AND OBJECTIVES Identifying Pricing Constraints The type of market in which the firm competes also constraints price. Types of Competitive Markets Pure monopoly Oligopoly Monopolistic competition Pure competition
Pricing, product, and advertising strategies available to firms in four types of competitive markets
STEP 1: IDENTIFY PRICING CONSTRAINTS AND OBJECTIVES You need to know how to discuss the Relationship between: - Costs, Price (Competitor) and Value from a company’s perspective. Factors other, than those discussed that illustrate the complexity of setting price because of a number of constraints. e.g.) Organisational and marketing objectives, channel member expectations, laws, exchange rate, inflation, economic growth etc.
STEP 1: IDENTIFY PRICING CONSTRAINTS AND OBJECTIVES Types of Pricing Objectives Pricing objectives are used to designate the role of price in the organisation's marketing and strategic plans. They help to indicate what the organisation wants to achieve through its pricing. Many categories of pricing objectives exist. Let us look at the major types of marketing objectives that a marketer can consider.
STEP 1: IDENTIFY PRICING CONSTRAINTS AND OBJECTIVES Types of Pricing Objectives Survival Profit Sales Competition Product Quality Leadership Non-profit
STEP 2: ESTIMATE DEMAND AND SERVICE Fundamentals of Estimating Demand The Demand Curve
Illustrative demand curves for Newsweek magazine
STEP 2: ESTIMATE DEMAND AND SERVICE The Demand Curve Demand factors Movement Along versus Shift of a Demand Curve
STEP 2: ESTIMATE DEMAND AND SERVICE Fundamentals of Estimating Revenue Total revenue Average revenue Marginal revenue
Fundamental revenue concepts
How a downward-sloping demand curve affects total, average, and marginal revenue
STEP 2: ESTIMATE DEMAND AND SERVICE Fundamentals of Estimating Revenue Price Elasticity of Demand Price Elasticity for Brands and Product Classes
STEP 3: DETERMINE COST, VOLUME, AND PROFIT RELATIONSHIPS The Importance of Controlling Costs Total cost Fixed cost Variable cost Marginal cost
Fundamental cost concepts
STEP 3: DETERMINE COST, VOLUME, AND PROFIT RELATIONSHIPS Marginal Analysis and Profit Maximization
Profit maximization pricing
STEP 3: DETERMINE COST, VOLUME, AND PROFIT RELATIONSHIPS Break-Even Analysis Break-even point Break-even chart Calculating a Break-Even Point
Calculating a break-even point
Break-even analysis chart