Pricing Considerations and Approaches

Definition Price The amount of money charged for a product or service, or the sum of the values that consumers exchange for the benefits of having or using the product or service. Goal 1: Identify and define internal factors affecting pricing decisions

What is Price? Price Has Many Names Rent Fee Rate Commission Assessment Tuition Fare Toll Premium Retainer Bribe Salary Wage Interest Tax Goal 1: Identify and define internal factors affecting pricing decisions

What is Price? Dynamic Pricing on the Web allows SELLERS to: Monitor customer behavior and tailor offers. Change prices on the fly to adjust for changes in demand or costs. Aid consumers with price comparisons. Negotiate prices in online auctions and exchanges. Goal 1: Identify and define internal factors affecting pricing decisions

What is Price? Price and the Marketing Mix: Common Pricing Mistakes Only element to produce revenues Most flexible element Can be changed quickly Common Pricing Mistakes Reducing prices too quickly to get sales Pricing based on costs, not customer value Goal 1: Identify and define internal factors affecting pricing decisions

Factors to Consider When Setting Price Market positioning influences pricing strategy Other pricing objectives: Survival Current profit maximization Market share leadership Product quality leadership Internal Factors Marketing objectives Marketing mix strategies Costs Organizational considerations Goal 1: Identify and define internal factors affecting pricing decisions

Factors to Consider When Setting Price Internal Factors Pricing must be carefully coordinated with the other marketing mix elements Target costing is often used to support product positioning strategies based on price Nonprice positioning can also be used Marketing objectives Marketing mix strategies Costs Organizational considerations Goal 1: Identify and define internal factors affecting pricing decisions

Factors to Consider When Setting Price Internal Factors Types of costs: Variable Fixed Total costs How costs vary at different production levels will influence price setting Experience (learning) curve affects price Marketing objectives Marketing mix strategies Costs Organizational considerations Goal 1: Identify and define internal factors affecting pricing decisions

Factors to Consider When Setting Price Internal Factors Who sets the price? Small companies: CEO or top management Large companies: Divisional or product line managers Price negotiation is common in industrial settings where pricing departments may be created Marketing objectives Marketing mix strategies Costs Organizational considerations Goal 1: Identify and define internal factors affecting pricing decisions

Factors to Consider When Setting Price Types of markets Pure competition Monopolistic competition Oligopolistic competition Pure monopoly Consumer perceptions of price and value Price-demand relationship Demand curve Price elasticity of demand External Factors Nature of market and demand Competitors’ costs, prices, and offers Other environmental elements Goal 2: Identify and define external factors affecting pricing decisions

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 Different Types of Markets The Market and Demand This CTR relates to the discussion on pp. 309-310. 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 Demand Curves Price Quantity Demanded per Period 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.

Factors to Consider When Setting Price Consider competitors’ costs, prices, and possible reactions Pricing strategy influences the nature of competition Low-price low-margin strategies inhibit competition High-price high-margin strategies attract competition Benchmarking costs against the competition is recommended External Factors Nature of market and demand Competitors’ costs, prices, and offers Other environmental elements Goal 2: Identify and define external factors affecting pricing decisions

Factors to Consider When Setting Price Economic conditions Affect production costs Affect buyer perceptions of price and value Reseller reactions to prices must be considered Government may restrict or limit pricing options Social considerations may be taken into account External Factors Nature of market and demand Competitors’ costs, prices, and offers Other environmental elements Goal 2: Identify and define external factors affecting pricing decisions

General Pricing Approaches Cost-Based Pricing: Cost-Plus Pricing Adding a standard markup to cost Ignores demand and competition Popular pricing technique because: It simplifies the pricing process Price competition may be minimized It is perceived as more fair to both buyers and sellers Goal 3: Contrast the three general approaches to setting prices

General Pricing Approaches Cost-Based Pricing Example - Variable costs: $20 - Fixed costs: $ 500,000 - Expected sales: 100,000 units - Desired Sales Markup: 20% Variable Cost + Fixed Costs/Unit Sales = Unit Cost $20 + $500,000/100,000 = $25 per unit Unit Cost/(1 – Desired Return on Sales) = Markup Price $25 / (1 - .20) = $31.25 Goal 3: Contrast the three general approaches to setting prices

General Pricing Approaches Cost-Based Pricing: Break-Even Analysis and Target Profit Pricing Break-even charts show total cost and total revenues at different levels of unit volume. The intersection of the total revenue and total cost curves is the break-even point. Companies wishing to make a profit must exceed the break-even unit volume. Goal 3: Contrast the three general approaches to setting prices

General Pricing Approaches Value-Based Pricing: Uses buyers’ perceptions of value rather than seller’s costs to set price. Measuring perceived value can be difficult. Consumer attitudes toward price and quality have shifted during the last decade. Value pricing at the retail level Everyday low pricing (EDLP) vs. high-low pricing Goal 3: Contrast the three general approaches to setting prices

General Pricing Approaches Competition-Based Pricing: Also called going-rate pricing May price at the same level, above, or below the competition Bidding for jobs is another variation of competition-based pricing Sealed bid pricing Goal 3: Contrast the three general approaches to setting prices