Pricing Products: Pricing Considerations and Approaches PRINCIPLES OF MARKETING Eighth Edition Philip Kotler and Gary Armstrong Chapter 10 Pricing Products: Pricing Considerations and Approaches

Factors to Consider When Setting Prices Internal Factors Factors to Consider When Setting Prices Factors to Consider When Setting Prices This CTR corresponds to Figure 10-1 on p. 303 and relates to the discussion on pp. 303-313. Pricing Decisions Positioning Objectives Target Market External Factors

Internal Factors Affecting Pricing Decisions Marketing Objectives Internal Factors Affecting Pricing Decisions Marketing-Mix Strategy Costs Organizational Considerations

Marketing Objectives that Affect Pricing Decisions Internal Factors Affecting Pricing Decisions This CTR relates to the discussion on pp. 303-304. Survival Low Prices to Cover Variable Costs and Some Fixed Costs to Stay in Business. Marketing Objectives The overall marketing objectives that influence price: Survival. This can be the primary factor in setting price especially in marginal businesses or industries. Price is used to stay in business in hopes of making profits when conditions improve. Current Profit Maximization. This objective means the company is emphasizing short term results over long-run performance. Market-Share Leadership. This factor affects price when the company seeks the dominant market share. Low prices increase demand so that later volume creates profit. Product-Quality Leadership. This tends to push prices high. This pricing strategy may be linked to niching strategy in other discussions. Current Profit Maximization Choose the Price that Produces the Maximum Current Profit, Cash Flow or ROI. Marketing Objectives Market Share Leadership Low as Possible Prices to Become the Market Share Leader. Product Quality Leadership High Prices to Cover Higher Performance Quality

Marketing Mix Variables that Affect Pricing Decisions Internal Factors Affecting Pricing Decisions This CTR relates to the discussion on pp. 304-305. Product Design and Quality Marketing-Mix Strategy Marketing Mix Strategy Price must be considered in light of its role in support of the overall marketing mix. Price is one kind of information the consumer receives about the product. Price should consistently support the overall positioning strategy targeted by the marketing mix. Non-Price Factors Distribution Promotion

Types of Cost Factors that Affect Pricing Decisions Internal Factors Affecting Pricing Decisions This CTR relates to the discussion on pp. 305-306. Total Costs Sum of the Fixed and Variable Costs for a Given Level of Production Costs Costs set the pricing floor that the company can charge for its product. Types of costs include: Fixed Costs (or overhead) are costs that do not vary much with production or sales levels. Variable Costs vary directly with the level of production. Total Costs are the sum of the fixed and variable costs for any given level of production. Fixed Costs (Overhead) Costs that don’t vary with sales or production levels. Executive Salaries Rent Variable Costs Costs that do vary directly with the level of production. Raw materials

Costs Considerations Costs Considerations This CTR corresponds to Figure 10-2 B on p. 308 relates to the discussion on pp. 306-309. Cost Per Unit at Different Levels of Production Per Period Costs at Different Levels of Production Management must consider how costs will change at different levels of production as part of their overall demand management strategy. A key concept to this planning is the Short-Run Average Cost curve (SRAC) shown on the CTR. Use of SRAC comparisons help summarize and illustrate quickly the optimal level of production for a particular enterprise. The SRAC curves follow a larger Long-Run Average Cost curve (LRAC) that indicates the turning point where manufacturing economies of scale are overturned by the increased costs associated with managing and administering a larger workforce. Cost per unit 1 2 3 SRAC 4 LRAC 1,000 2,000 3,000 4,000 Quantity Produced per Day

Other External Factors Market and Demand External Factors Affecting Pricing Decisions Competitors’ Costs, Prices, and Offers Other External Factors Economic Conditions Reseller Needs Government Actions Social Concerns

The Market and Demand Factors that Affect Pricing Decisions Pure Competition Many Buyers and Sellers Who Have Little Affect on the Price. Monopolistic Competition Many Buyers and Sellers Trading Over a Range of Prices. The Market and Demand Factors that Affect Pricing Decisions The Market and Demand This CTR relates to the discussion on pp. 309-310. Different Types of Markets The Market and Demand Types of Markets. Each presents distinct pricing challenges: Pure Competition - is characterized by many buyers and sellers to that no one agent affects pricing. Going rate pricing is the rule. Monopolistic Competition - consists of many buyers and sellers trading over a range of prices. Products can be differentiated in quality, features, or styles. Oligopolistic Competition - consists of few sellers each sensitive to the other's pricing and marketing strategies. Barriers to entry prohibit new sellers from entering the market. Pure Monopoly. This market consists of a single seller. The seller may by a government, private regulated monopoly, or unregulated monopoly. Pricing may be linked to other than cost or profit factors, including fear of competition entering or regulation. Consumer Perceptions of Price and Value. Buyers ultimately decide prices. Marketers must combine technical expertise with creative judgment and an awareness of buyers’ motivations. Oligopolistic Competition Few Sellers Each Sensitive to Other’s Pricing/ Marketing Strategies Pure Monopoly Single Seller

Demand Curves Price Quantity Demanded per Period A. Inelastic Demand - This CTR corresponds to Figure 10-4 on p. 311 and relates to the discussion on pp. 310-312. Price Quantity Demanded per Period A. Inelastic Demand - Demand Hardly Changes With a Small Change in Price. P2 P1 Q1 Q2 P’2 P’1 B. Elastic Demand - Demand Changes Greatly With Price Demand Relationship A demand curve show the number of units the market will buy in a given time period at various prices. The price elasticity of demand illustrates how responsive demand will be to a change in price. Two concepts are important here: Inelastic Demand. If demand hardly changes with a small change in price, demand is inelastic. Elastic Demand. If a small change in prices changes demand greatly, demand is elastic. Discussion Note: The ethical issues involved in pricing products characterized by inelastic demand are often complicated and controversial. For example, many new drugs are extremely expensive to develop and market but may be the only treatment available for an illness. In other cases, relatively cheap drugs are sold for high prices under the same “must have” conditions. Also, the concept of induced demand, which characterizes both the medical and legal professions is a controversial issue. Induced demand refers to the fact that in these industries, the provider also determines the level of demand or product to be used. In both cases, those providers also set the price of their services. To make matters worse, consumers do not have price comparison information. For example, the WSJ reported heart by-pass operations for two hospitals within four miles of each other varying on price by over $20,000. And even if consumers have knowledge, in critical care situations they may not have time to exercise choice.

What is Cost-Plus Pricing and Why is it Popular? This CTR relates to the discussion on pp. 314. Instructor’s Note: The remaining CTRs and Notes for this chapter cover the cost-based, value-based, and competition-based approaches to pricing. Adding a Standard Markup to the Cost of the Product Sellers Are More Certain About Costs Than Demand Minimizes Price Competition Cost-Plus Pricing Cost-Plus Pricing consists of adding a standard markup to the cost of the product. Markups vary widely across different industries. Cost-plus simplifies pricing strategy and covers costs but ignores market demand factors. Reasons for cost-plus pricing popularity include: Certainty. Sellers are more certain of their costs than they are about demand. This approach simplifies pricing. Minimize Price Competition. When all firms in the industry use this method, prices tend to be similar and price competition is minimized. Perceived Fairness. Cost-plus pricing ensures a profit for sellers for their value-added activities and does not take advantage of consumers when demand is greater. Discussion Note: You might have to discuss macroeconomic concepts to explain to students why cost-plus pricing isn’t the best approach. The idea that supply and demand balance in a dynamic and impersonal marketplace may require a leap of faith abstraction most students aren’t willing to make. Perceived Fairness to Both Buyers and Sellers

Breakeven Analysis or Target Profit Pricing This CTR corresponds to Figure 10-6 on p. 315 and relates to the discussion on pp. 315-316. Tries to Determine the Price at Which a Firm Will Break Even or Make a Target Profit 200 400 600 800 1,000 1,200 10 20 30 40 50 Total Revenue Cost in Dollars (thousands) Other Cost-Oriented Approaches Breakeven Analysis. Breakeven analysis utilizes an analysis of the company's costs in relation to units of the product produced and sold. This approach identifies the minimum pricing level the company's activities can support. Teaching Tip: You might ask students doing a term marketing project to include a break-even chart in their financial projections. Target Profit Pricing. Target profit pricing is a variation on break-even analysis that links price to profit objectives above total costs. Discussion Note: Target profit pricing is mathematically appealing but be sure students understand that its use in planning should accommodate the fact that increased prices decrease demand. Target Profit ($200,000) Total Cost Fixed Cost Sales Volume in Units (thousands)

Value-Based Pricing Product Cost Price Value Customers Customer Value This CTR corresponds to Figure 10-7 on p. 316 and relates to the discussion on pp. 316-318. Cost-Based Pricing Value-Based Pricing Product Cost Price Value Customers Customer Value Price Cost Product Buyer-Based Approach Value-Based Pricing . This approach uses the buyer's perception of value as the key to pricing. Strategy under this approach utilizes non price mix variables to help set perceived value in the buyer's mind. As illustrated on the CTR, this approach is the reverse of the cost-based approach to pricing. The key is that the marketer must have an accurate view of what benefits and features consumer want and are willing to pay for in setting a specific value-pricing goal. Discussion Note: Toyota Motor company used a value-based approach on its lower end cars like the Tercel and the Corolla in the early 1980s. Once the value price was determined and profit per car objectives set, engineers and designers were challenged with the task of making the cost of production support those goals.

Competition-Based Pricing Setting Prices Competition-Based Pricing Competition-Based Pricing This CTR relates to the discussion on pp. 318-319. Going-Rate Company Sets Prices Based on What Competitors Are Charging. Competition-Based Approach Going-Rate Pricing. This approach bases price largely on what competitors charge for their products. This approach is popular in markets where demand elasticity is difficult to measure. Sealed-Bid Pricing. This approach involves competition between sellers attempting to under price each other while still covering costs. Winning a sealed bid contract requires careful estimation of competitor's costs and likely profit margins to bid successfully. This approach is common in bidding for government contracts. Teaching Tip: You might consider giving students an out of class assignment to obtain bids on one or more projects from cooperating vendors in your area. For example, a two-car garage pricing might vary by 100% among three contractors in a sealed bid. Sealed-Bid Company Sets Prices Based on What They Think Competitors Will Charge. ? ?