Chapter 11 Price the Product

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-2 Chapter Objectives  Explain the importance of pricing and understand how prices can take both monetary and nonmonetary forms  Understanding the pricing objectives that marketers typically set when they plan pricing strategies  Describe how marketers use costs, demands, and revenue to make pricing decisions

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-3 Chapter Objectives  Understand some of the environmental factors that affect pricing  Understand key pricing strategies  Explain pricing tactics for single and multiple products  Understand the opportunities for Internet pricing strategies  Describe the psychological, legal, and ethical aspects of pricing

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-4 Real People, Real Choices: Decision Time at Taco Bell  Which pricing option should Taco Bell implement? –Option 1: Price the entire menu at $1.29 –Option 2: Use mixed price menu #4, and price items at $.99 and $1.29 –Option 3: Use mixed price menu #1, and price menu items at $.99, $1.19, and $1.29

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-5 “Yes, but what does it cost?”  Price: The assignment of value, or the amount the consumer must exchange to receive the offering –Includes money, goods, services, favors, votes, or anything else that has value to the other party

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-6 Steps in Price Planning Step 1: Develop Pricing Objectives  Pricing objectives take many forms: –Sales or market share objectives –Profit objectives –Competitive effect objectives –Customer satisfaction objectives –Image enhancement objectives

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-7 Steps in Price Planning Step 2: Estimate Demand  Demand: Customers’ desire for a product –How much of a product are customers willing to buy as its price goes up or down?  Law of demand: –For most products, as price goes up, quantity demanded goes down –For prestige products, a price increase may actually result in an increase in quantity demanded

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-8 Shifts in Demand  Typical demand curves assume that only price changes, but in reality, other factors can shift demand upward or downward –Changes in marketing strategy (improved product, new advertising) –Non-marketing activities (product recalls, development of new technologies, etc.)

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-9 Estimating Demand  Total demand: –Number of buyers * average amount of each buyer’s purchase  Firm’s demand: –Total demand * the firm’s estimated share of the market –Demand estimates should be adjusted if competition, the economy, or other factors change

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-10 Price Elasticity of Demand  Elasticity of demand: The percentage change in unit sales that results from a percentage change in price –When changes in price have large effects on the amount demanded, demand is elastic –When changes in price have little or no effect on the amount demanded, demand is inelastic

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-11 Elastic vs. Inelastic Demand  Elastic Demand –Revenues decrease as price increases and vice versa –Non-necessities (pizza) generate elastic demand –Availability of close substitute products facilitates elastic demand  Inelastic Demand –As price increases, revenues increase –The demand for necessities such as food and electricity is generally inelastic

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-12 Cross-elasticity of Demand  Changes in the prices of other products affect a product’s demand –If products are substitutes, an increase in the price of one will increase demand for the other (bananas vs. strawberries) –If one product is essential for use of second, an increase in the price of one decreases demand for another (Example: increasing price of gas lowers demand for tires)

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-13 Steps in Price Planning Step 3: Determine Costs  Variable costs: Costs of production that are tied to and vary depending on the number of units produced –Average variable costs may change as the number of products produced changes

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-14 Steps in Price Planning Step 3: Determine Costs  Fixed costs: Costs of production that don’t change with the number of units produced –Rent, cost of owning/maintaining factory, utilities, equipment, fixed salaries of a firm’s executives –Average fixed cost per unit will decrease as the number of units produced increases  Total costs: Total of fixed costs and variable costs for a set number of units produced

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-15 Break-Even Analysis  Break-even analysis: –Determines the number of units a firm must produce/sell at a given price to cover costs  Break-even point: –Point at which total revenue and total cost are equal –Break-even point (in units) Contribution per unit –Break-even point (in dollars)

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-16 Marginal Analysis  Analysis that uses cost and demand to find the price that will maximize profits –Marginal cost: Increase in total costs from producing one additional unit of a product –Marginal revenue: Increase in total income or revenue from selling one additional unit (decreases with each additional unit sold) –Profit is maximized where marginal cost is exactly equal to marginal revenue

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-17 Steps in Price Planning Step 4: Evaluate the Pricing Environment  The economy –Broad economic trends –Recession Consumers become more price sensitive –Inflation Accustoms consumers to price increases  Competition  Consumer trends

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-18 Steps in Price Planning Step 5: Choose a Price Strategy  Pricing strategies based on cost –Simple to calculate and relatively risk free –The drawback of cost-based strategies is that they do not consider demand, competition, or the nature of the target market –Cost-plus pricing: Total all product costs and add markup

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-19 Steps in Price Planning Step 5: Choose a Price Strategy  Pricing strategies based on demand –Based on estimates of the quantity a firm can sell at different prices –Target costing: Identify quality and functionality customers need and price they’re willing to pay before designing product –Yield management pricing: Manages capacity by charging different prices to different customers

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-20 Steps in Price Planning Step 5: Choose a Price Strategy  Pricing strategies based on the competition –Pricing near, at, above, or below the competition –Price leadership strategy: Industry giant announces price, and competitors get in line or drop out Typical in oligopolistic industries

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-21 Steps in Price Planning Step 5: Choose a Price Strategy  Pricing strategies based on customers’ needs –Value pricing or everyday low pricing (EDLP): Pricing strategy in which a firm sets prices that provide ultimate value to customers

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-22 Steps in Price Planning Step 5: Choose a Price Strategy  New-product pricing –Skimming price: A very high premium price is charged –Penetration pricing: A very low price to encourage more customers to purchase –Trial pricing: Low price for a limited period of time

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-23 Steps in Price Planning Step 6: Develop Pricing Tactics  Pricing for individual products –Two-part pricing –Payment pricing  Pricing for multiple products –Price bundling –Captive pricing

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-24 Steps in Price Planning Step 6: Develop Pricing Tactics  Distribution-based pricing –F.O.B. (free on board) origin pricing –F.O.B delivered pricing –Basing-point pricing –Uniform delivered pricing –Freight absorption pricing

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-25 Steps in Price Planning Step 6: Develop Pricing Tactics  Discounting for channel members –List price (suggested retail price) –Trade or functional discounts Price given to channel members –Quantity discounts –Cash discounts Encourages prompt payment –Seasonal discounts Available only at certain times of the year

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-26 Pricing and Electronic Commerce  Dynamic pricing strategies are common in e-commerce: –Cost of changing prices on the Internet is practically zero –Firms can respond quickly and frequently to changes in costs, supply, and/or demand

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-27 Pricing and Electronic Commerce  Online auctions (eBay.com) –E-commerce allows shoppers to purchase products through online bidding  Pricing advantages for online shoppers –Consumers gain control –Search engines and “shopbots” make customers more price-sensitive –Consumers have more negotiating power –Saves gas, time, and hassle associated with shopping at stores

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-28 Pricing and Electronic Commerce  Freenomics: A business model that encourages giving products away for free because of the increase in profits that can be achieved by getting more people to participate in a market –Example: Comcast gave 9 million subscribers FREE digital video recorders but made money on installation and monthly DVR usage fees

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-29 Psychological Issues in Setting Prices  Buyer’s pricing expectation –Internal reference price –Price/quality inferences  Psychological pricing strategies –Odd-even pricing –Price lining –Prestige pricing

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-30 Legal and Ethical Considerations in Pricing  Deceptive pricing practices –Going-out-of-business sale –Bait-and-switch  Unfair sales acts –Loss-leader pricing –Unfair sales acts  Illegal business-to-business price discrimination

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-31 Legal and Ethical Considerations in Pricing  Price fixing: Two or more companies conspire to keep prices at a certain level –Horizontal price fixing –Vertical price fixing  Predatory pricing: Firm sets a very low price for purpose of driving competitors out of business

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-32 Real People, Real Choices: Decision Made at Taco Bell  Danielle chose option 3 –Implementation: Menu items were priced at $.99, $1.19 and $1.29. Consumers responded well to the Big Bell Value Menu –Measuring success: Sales lift (overall sales increase due to Big Bell Value Menu) was used. Other metrics include occasion-based analysis of purchase and performance relative to the break-even point

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-33 Keeping It Real: Fast-Forward to Next Class Decision Time at NAME  Meet Walter F. Judas, VP of Marketing Communications at Tourism Vancouver  Tourism Vancouver is a not-for-profit business association that promotes tourism  The decision to be made: How to ensure that Tourism Vancouver continues to play a lead role in the 2010 Olympic and Paralympic Winter games

Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall11-34 Copyright © 2009 Pearson Education, Inc. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.