1 Pricing Concepts & Setting the Right Price

2 The Importance of Price to Marketing Managers Revenue Profit The price charged to customers multiplied by the number of units sold. Revenue minus expenses Price – Cost = Profit

3 The Importance of Price To earn a profit, marketers must select a price that is not too high or too low, or too low, a price that equals the perceived value to target consumers Revenue = Unit Price X Number of Units Sold Revenue pays for every activity. Whats left over is Profit.

4 Trends Influencing Price Setting Flood of new product introductions Increased availability of bargain-priced private and generic brands Increased availability of bargain-priced private and generic brands Price cutting as a strategy to maintain or regain market share Price cutting as a strategy to maintain or regain market share A general decline in consumer confidence after terrorist attacks Trends in the MarketTrends Market

5 Pricing Objectives Profit-Oriented Pricing Objectives Sales-Oriented Pricing Objectives Status Quo Pricing Objectives

6 Profit-Oriented Pricing Objectives Profit Maximization Profit Maximization Satisfactory Profits Target Return on Investment Target Return on Investment

7 Sales-Oriented Pricing Objectives Market Share Market Share Sales Maximization Sales Maximization Sales-Oriented Pricing Objectives

8 Status Quo Pricing Objectives Maintain existing prices Maintain existing prices Meet competitions prices Meet competitions prices Status Quo Pricing Objectives

9 The Cost Determinant of Price Change with changes in level of output Change with changes in level of output Types of Costs VariableCostsVariableCosts Fixed Costs Do not change as level of output changes Do not change as level of output changes

10 The Cost Determinant of Price Methods Used to Set Prices Markup pricing Key Stoning Profit Maximization Pricing Break-Even Pricing Introductory Price Point

11 Markup Pricing Markup Pricing Markup Pricing The cost of buying the product from the producer plus amounts for profit and for expenses not otherwise accounted for. Keystoning The practice of marking up prices by 100%, or doubling the cost. The practice of marking up prices by 100%, or doubling the cost.

12 Profit Maximization Profit Maximization Profit Maximization A method of setting prices that occurs when marginal revenue equals marginal cost. Marginal Revenue Marginal Revenue The extra revenue associated with selling an extra unit of output, or the change in total revenue with a one-unit change in output.

13 Break-Even Pricing Quantity $ 2,000 01,0002,000 3,0004,0005,0006,000 4,000 Fixed costs Loss Profit Total Revenue Total Costs Break-even point Variable Costs

14 Fixed and Variable Costs Fixed costs do not change as production or sales quantity changes. Variable costs change as production changes

15 Average Variable Cost (AVC) Assuming $2.00 AVC per unit (raw materials, labor, packaging, distribution, etc.) 50,000 units produced = $100,000 variable costs 250,000 units produced = $500,000 variable costs

16 Steps to Find Break Even Price 1. Total Fixed Costs + (AVC x # of Units Sold) = Total Costs 2. Total Costs / # of Units Sold = Break Even Price

17 Other Determinants of Price Perceived Quality Promotion Strategy Distribution Strategy Competition Stages of the Product Life Cycle Stages of the Product Life Cycle

18 Stages in the Product Life CycleIntroductoryStageGrowthStageDeclineStage MaturityStage

19 Steps in Setting the Right Price Results lead to the right price Fine tune with pricing tactics Choose a price strategy Estimate demand, costs, and profits Establish pricing goals

20 Choosing a Price Strategy Basic Strategies for Setting Prices Basic Strategies for Setting Prices Status Quo Pricing Price Skimming Penetration Pricing

21 Price Skimming Situationswhen Is Successful Situationswhen Price Skimming Is Successful Unique Advantages/Superior Legal Protection of Product Blocked Entry to Competitors Technological Breakthrough Inelastic Demand

22 Penetration Pricing AdvantagesAdvantages Discourages or blocks competition from market entry Boosts sales and provides large profit increases.DisadvantagesDisadvantages Requires gear up for mass production Selling large volumes at low prices Strategy to gain market share may fail

23 Status Quo PricingAdvantagesAdvantages Simplicity Safest route to long- term survival for small firmsDisadvantagesDisadvantages Strategy may ignore demand and/or cost

24 The Legality and Ethics of Price Strategy Issues That Limit PricingDecisionsIssues PricingDecisions Unfair Trade Practices Price Fixing Price Discrimination Predatory Pricing

25 Price Fixing An agreement between two or more firms on the price they will charge for a product.

26 Price Discrimination The Robinson-Patman Act of 1936: Prohibits any firm from selling to two or more different buyers at different prices if the result would lessen competition

27 Robinson-Patman Act Defenses Seller Defenses Cost Market Conditions Market Conditions Competition

28 Predatory Pricing The practice of charging a very low price for a product with the intent of driving competitors out of business or out of a market.

29 Tactics for Fine-Tuning the Base Price Special Pricing Tactics Discounts Geographic Pricing

30 Tactics for Fine-Tuning the Base Price Quantity Discounts Cash Discounts Functional Discounts Seasonal Discounts Promotional Allowances Rebates Value-Based Pricing Zero Percent Financing

31 Geographic Pricing FOB Origin Pricing FOB Origin Pricing The buyer absorbs the freight costs from the shipping point (free on board). Uniform Delivered Pricing Uniform Delivered Pricing The seller pays the freight charges and bills the purchaser an identical, flat freight charge.

32 Geographic Pricing Zone Pricing Freight Absorption Pricing Freight Absorption Pricing Basing-Point Pricing Basing-Point Pricing The U.S. is divided into zones and a flat freight rate is charged to customers in a given zone. The seller pays for all or part of the freight charges and does not pass them on to the buyer. The seller designates a location as a basing point and charges all buyers the freight costs from that point.

33 Special Pricing Tactics Single-Price Tactic Flexible Pricing Professional Services Pricing Professional Services Pricing Price Lining Leader Pricing Bait Pricing Odd-Even Pricing Price Bundling Two-Part Pricing All goods offered at the same price Different customers pay different price Used by professionals with experience, training or certification Used by professionals with experience, training or certification Several line items at specific price points Sell product at near or below cost Lure customers through false or misleading price advertising Lure customers through false or misleading price advertising Odd-number prices imply bargain Even-number prices imply quality Odd-number prices imply bargain Even-number prices imply quality Combining two or more products in a single package Combining two or more products in a single package Two separate charges to consume a single good