Part 7 Pricing Decisions MARKETING 17e Hult • Pride • Ferrell © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

19: Strategic Pricing Management 20: Pricing Decisions © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Objectives To understand the role of price To identify the characteristics of price and nonprice competition To explore demand curves and price elasticity of demand To examine the relationships among demand, costs and profits To describe key factors that may influence marketers’ pricing decisions To consider issues affecting the pricing of products for business markets © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

The Nature of Price The purpose of marketing is to facilitate satisfying exchange relationships between buyer and seller Price – The value paid for a product in a marketing exchange Barter – The trading of products The oldest form of exchange Corporate barter still occurs and amounts to an estimated $12 billion in annual U.S. sales © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Nature of Price Price is a key element in the marketing mix because it relates directly to the generation of total revenue Profit = Total Revenue – Total Costs Profit = (Price x Quantity Sold) – Total Costs Because price has a psychological impact on customers, marketers can use it symbolically Pricing high – emphasizes quality Pricing low – emphasizes a bargain © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Discussion Point © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Price Competition Price competition – Emphasizing price as an issue and matching or beating competitors’ prices To compete effectively on a price basis, a firm should be the low-cost seller Must be willing and able to change prices frequently to meet competitors’ pricing May lead to price wars © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Nonprice Competition Nonprice competition – Emphasizing factors other than price to distinguish a product from competing brands A major advantage is a firm can build customer loyalty Only effective if A company can distinguish its brand from others Buyers are able to perceive these distinguishing characteristics and view them as important The company promotes the brand to establish its superiority © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Price and Nonprice Competition L’Oréal products compete on the basis of nonprice competition, which emphasizes product quality © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

The Demand Curve Demand curve – A graph of the quantity of products expected to be sold at various prices if other factors remain constant – D1 Demand depends on other factors in the marketing mix including quality, promotion and distribution An improvement in any of these factors may cause a shift to demand curve D2 © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

The Demand Curve Many types of demand exist and not all conform to the classic demand curve Prestige products tend to sell better at high prices, partly because the expense makes the buyers feel elite For a certain price range, P1 to P2, demand goes up After a certain point, raising the price backfires and demand goes down – P2 to P3 © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Prestige Demand Many beauty products have a prestige-based demand curve Can you think of other products that would have a prestige-based demand curve? © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Demand Fluctuations Factors that can influence demand Changes in buyers’ needs Variations in the effectiveness of other marketing mix variables The presence of substitutes Dynamic environment Changes in demand for some products is predictable but with other products demand may be less predictable Some organizations anticipate demand fluctuations and develop new products and prices to meet customers’ changing needs © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Assessing Price Elasticity Price elasticity of demand – A measure of the sensitivity of demand to changes in price Demand for electricity is inelastic, when price increases from P1 to P2, demand decreases a small amount Demand for recreational vehicles is elastic, when price goes up from P1 to P2, quantity demanded decreases a great deal © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Assessing Price Elasticity If marketers can determine the price elasticity of demand, setting a price is much easier By analyzing total revenues as prices change, marketers can determine whether a product is price elastic If demand is elastic, a change in price causes and opposite change in total revenue If demand is inelastic, total revenue changes in the same direction Price elasticity of demand = % change in quantity demanded %change in price © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Discussion Point The Chicago White Sox use dynamic pricing when selling single-game tickets They adjust the price according to what team is visiting, the day of the week, the weather etc, This allows them to generate higher ticket sales during slow times and greater profit during peak times How does dynamic pricing allow a team to judge the price elasticity of demand for a particular game and then use this information in future pricing decisions? What other marketing mix variables must teams consider when using dynamic pricing? Why? © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Demand, Cost and Profit Relationships Analysis of demand, cost and profit is important Customers are becoming less tolerant of price increases, forcing manufacturers to find new ways to control costs Companies must set prices that not only cover its costs but also meet customers’ expectations Two approaches to understanding demand, cost and profit relationships are Marginal analysis Break-even analysis © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Marginal Analysis Marginal analysis examines what happens to a firm’s costs and revenues when production (or sales volume) changes by one unit Fixed costs – costs that do not vary with changes in the number of units produced or sold Average fixed cost – the fixed cost per unit produced Variable cost – costs that vary directly with changes in the number of units produced or sold Average variable cost – the variable cost per unit produced © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Marginal Analysis Total cost – the sum of average fixed and average variable costs times the quantity produced Average total cost – the sum of the average fixed cost and the average variable cost Marginal cost (MC) – the extra cost incurred by producing one more unit of a product Marginal revenue (MR) – the change in total revenue resulting from the sale of an additional unit of product © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Marginal Analysis Any unit for which MR exceeds MC adds to a firm’s profits Any unit for which MC exceeds MR subtracts from profits The firm should produce at the point where MR equals MC because that is the most profitable level of production However, marginal analysis is only a model Marginal analysis offers little help in pricing new products © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Marginal Analysis © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Typical Marginal Cost and Average Total Cost Relationship Marginal Analysis Typical Marginal Cost and Average Total Cost Relationship © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Typical Marginal Revenue and Average Revenue Relationship Marginal Analysis Typical Marginal Revenue and Average Revenue Relationship © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Marginal Analysis Method for Determining the Most Profitable Price* © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Marginal Analysis Combining the Marginal Cost and Marginal Revenue Concepts for Optimal Profit © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Determining the Break-Even Point Break-Even Analysis Break-even point – the point at which costs of producing a product equal the revenue made from selling the product Determining the Break-Even Point © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Break-Even Analysis Knowing the number of units necessary to break- even is important in setting the price If a product priced at $100 per unit Has an average variable cost of $60 per unit The contribution to fixed cost is $40 If total fixed costs are $120,000, the break-even point in units is determined as follows = fixed costs Break-even point per-unit contribution to fixed costs = fixed costs price – variable costs = $120,000 $40 = 3,000 units © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Break-Even Analysis To use break-even analysis effectively, a marketer should determine the break-even point for each of several alternative prices This makes it possible to compare the effects on total revenue, total costs and the break-even point for each price This approach assumes the quantity demanded is basically fixed and the major task is to set prices to recover costs © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Factors Affecting Pricing Decisions Pricing decisions can be complex because of the number of factors to consider There is considerable uncertainty about the reactions to price among buyers, channel members and competitors Price is an important consideration in marketing planning, market analysis and sales forecasting Price is a major issue when assessing a brand’s position relative to competing brands Most factors that affect pricing decisions can be grouped into one of eight categories © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Factors Affecting Pricing Decisions © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Factors Affecting Pricing Decisions Organizational and Marketing Objectives Prices should be consistent with the organization’s goals, mission and marketing objectives Pricing Objectives The pricing objectives a marketer uses have considerable bearing on determination of prices Costs A marketer should analyze all costs so they can be included in the total cost associated with a product Other Marketing Mix Variables All marketing mix variables are highly interrelated © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Factors Affecting Pricing Decisions Channel Member Expectations A marketer must consider what members of the distribution channel expect such as discounts for large orders and prompt payment Customers’ Interpretation and Response Marketers must consider this question: How will our customers interpret our prices and respond to them? Interpretation refers to what the price means or what it communicates to customers Customer response refers to whether the price will move customers closer to purchase and the degree that price enhances their satisfaction with the purchase and after the purchase © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Factors Affecting Pricing Decisions Customers’ Interpretation and Response Customers compare prices with internal or external reference prices Internal reference price – a price developed in the buyer’s mind through experience with the product External reference price – a comparison price provided by others Relative to price, consumers can be characterized according their degree of Value consciousness – concerned about price and quality of a product Price consciousness – striving to pay low prices Prestige sensitivity – drawn to products that signify prominence and status © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Factors Affecting Pricing Decisions Competition A marketer must know competitors’ prices, adjust their own prices and assess how competitors will respond Legal and Regulatory Issues Price discrimination is employing price differentials that injure competition by giving one or more buyers a competitive advantage, is prohibited by law © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Discussion Point Customers’ interpretations and responses regarding a product and its price are important influences on pricing decisions Discuss how value consciousness, price consciousness and prestige sensitivity influence the buying decision process for the following products A new house Weekly groceries for a family of five An airline ticket A soft drink from a vending machine © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

External Reference Price Advertisements provide information that customers use to establish or change their reference prices © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Should Cash and Credit Prices Differ? Discussion Point Should Cash and Credit Prices Differ? Many gas stations set one price for credit purchases and a lower price for cash purchases Retailers pay fees to have credit transactions processed, usually about 2-3% of the amount charged Many customers feel cash discounts are unfair on purchases of necessities Should cash and credit prices differ? © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Pricing for Business Markets Establishing prices for business markets sometimes differs from setting prices for consumers Differences in the size of purchases, geographic factors and transportation considerations require sellers to adjust prices There are several issues unique to pricing business products Discounts Geographic pricing Transfer pricing © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Price Discounting Trade (functional) discounts – a reduction off the list price a producer gives to an intermediary for performing certain functions Quantity discounts – Deductions from the list price for purchasing in large quantities Can be either: Cumulative discounts which are quantity discounts aggregated over a stated time period Noncumulative discounts which are one-time price reductions based on the number of units purchased, the dollar value of the order, or the product mix purchased © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Price Discounting Cash discounts – price reduction given to buyers for prompt payment or cash payment Seasonal discounts – price reduction given to buyers for purchasing goods or services out of season Allowances – concession in price to achieve a desired goal © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Geographic Pricing Geographic pricing – reductions for transportation and other costs related to the physical distance between buyer and seller F.O.B. factory – is the price of merchandise at the factory before shipment F.O.B. destination – is a price indicating the producer is absorbing shipping costs Uniform geographic pricing – is charging all customers the same price, regardless of geographic location © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Geographic Pricing Geographic pricing strategy is used to improve market penetration and retain a hold in an increasingly competitive market Zone pricing – is pricing based on transportation costs within major geographic zones Base-point pricing – is geographic pricing that combines factory price and freight charges from the base point nearest the buyer Freight absorption pricing – is absorption of all or part of actual freight costs by the seller © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Pricing Renewable Energy Projects: Think Long-Term Discussion Point Pricing Renewable Energy Projects: Think Long-Term A wind turbine can cost $17,500 and a solar power for the average home can cost $40,000, yet demand remains heavy Business customers may not recover their costs within 10 years, and homeowners may take even longer to recover costs When pricing its products, what external factors should Standard Renewable Energy pay particular attention to, and why? Does geographic pricing affect what business customers pay for a wind turbine? © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Transfer Pricing Transfer pricing – Prices charged in sales between an organization’s units Four methods to determine price Actual full cost is calculated by dividing all fixed and variable expenses for a period into the number of units produced Standard full cost is calculated based on what it would cost to produce the goods at full plant capacity Cost plus investment is calculated as full cost plus the cost of a portion of the selling units’ assets used for internal needs Market-based cost is calculated at the market price less a small discount to reflect the lack of sales effort and other expenses © 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.