Chapter 10 Copyright John Wiley & Sons 2007 Presentation prepared by Robin Roberts, Griffith University and Mike Spark, Swinburne University of Technology

Chapter 10 Copyright John Wiley & Sons 2007 Chapter 10 Pricing fundamentals

Chapter 10 Copyright John Wiley & Sons 2007 Chapter Objectives 1.Understand the role of price 2.Identify the characteristics of price and non-price competition 3.Understand demand curves and the price elasticity of demand 4.Explain the relationships among demand, costs and profits

Chapter 10 Copyright John Wiley & Sons 2007 Chapter Objectives (cont.) 5.Describe key factors that may influence marketers’ pricing decisions 6.Recognise the major issues that affect the pricing of products for business markets

Chapter 10 Copyright John Wiley & Sons 2007 The role of price The purpose of marketing is to facilitate satisfying exchange relationships between buyer and seller Price is the value exchanged for products in a marketing transaction Price - The value exchanged for products in a marketing transaction Barter -The trading of products This is the oldest form of exchange

Chapter 10 Copyright John Wiley & Sons 2007 The nature of price Price is the most readily changeable characteristic of a product Key element in the marketing mix: – relates directly to generation of revenues – quantities sold Key component of the profit equation: (Profit = Total Revenue – Total Costs) – strong effect on product costs – profitability

Chapter 10 Copyright John Wiley & Sons 2007 How important is pricing to customers in your B2B marketing environment? Simon Bottomley, General Manager, HaveStock Manufacturing Dial-UpBroadband

Chapter 10 Copyright John Wiley & Sons 2007 Price and non-price competition Price Competition emphasises price, and matching or beating competitors’ prices –Lowest-cost seller will be the most profitable –Effective strategy in markets with standardised products or commodities –Allows quick response to competitive or market changes –Price wars can weaken organisations and thus should be avoided

Chapter 10 Copyright John Wiley & Sons 2007 Price and non-price competition (cont.) Non-price Competition emphasises factors other than price to distinguish a product from competing brands –Can increase brand’s unit sales without changing the price –Can build customer loyalty by focusing on distinctive non-price features –effective when a product or service’s features are difficult to imitate

Chapter 10 Copyright John Wiley & Sons 2007 Can Aldi compete effectively on price? Dial-UpBroadband

Chapter 10 Copyright John Wiley & Sons 2007 Analysis of demand The demand curve is a graph of the quantity of products expected to be sold at various Prices if other factors remain constant –Decreases in price create increases in quantities demanded. –Increased demand means larger quantities sold at the same price –Prestige items sell best in higher price ranges

Chapter 10 Copyright John Wiley & Sons 2007 Classic demand curve Figure 10.1 Page 280

Chapter 10 Copyright John Wiley & Sons 2007 Prestige product demand curve Figure 10.2 Page 281

Chapter 10 Copyright John Wiley & Sons 2007 Demand fluctuations Influencers of Demand Fluctuations –Changes in buyers’ needs –Variations in the effectiveness of the marketing mix –The presence of substitutes –Dynamic environmental/market factors

Chapter 10 Copyright John Wiley & Sons 2007 Assessing the price elasticity of demand Price elasticity of demand is a measure of the sensitivity of demand to changes in price. the greater the change in demand for a specific change in price, the more elastic demand is. Price Elasticity of Demand = % change in quantity demanded % change in price

Chapter 10 Copyright John Wiley & Sons 2007 Price elasticity of demand Figure 10.3 Page 281

Chapter 10 Copyright John Wiley & Sons 2007 How does pricing affect the demand for your product? Dial-UpBroadband Geoff Rollason, Chief Financial Officer, Story Bridge Adventure Climb

Chapter 10 Copyright John Wiley & Sons 2007 Demand, cost and profit relationships The analysis of demand, cost and profit is important because customers are becoming less tolerant of price increases forcing manufacturers to find new ways to control costs Marginal Analysis Examines what happens to a firm’s costs and revenues when it sells one more unit of product

Chapter 10 Copyright John Wiley & Sons 2007 Demand, cost and profit relationships Marginal Revenue The change in total revenue resulting from the sale of an additional unit of product Marginal Cost The additional cost to produce an additional unit of product

Chapter 10 Copyright John Wiley & Sons 2007 Marginal and total costs Figure 104 Page 283

Chapter 10 Copyright John Wiley & Sons 2007 Marginal and average revenue Figure 10.5 Page 283

Marginal revenue and costs Profit is maximised where marginal costs (MC) are equal to marginal revenue (MR) Figure 10.6 Page 284

Chapter 10 Copyright John Wiley & Sons 2007 Demand, cost and profit relationships There are two types of total costs: Fixed costs –costs that do not vary with the changes in the number of units produced or sold Variable costs –costs that vary with the changes in the number of units produced or sold

Chapter 10 Copyright John Wiley & Sons 2007 Breakeven analysis Breakeven Point is the point at which the costs of producing a product equal the revenue made from selling the product –The point at which profitability starts Break-even point = Fixed costs Per-unit contribution to fixed costs (price – variable costs)

Chapter 10 Copyright John Wiley & Sons 2007 Break-even point Figure 10.7 Page 286

Chapter 10 Copyright John Wiley & Sons 2007 Factors affecting pricing decisions — Internal (company) factors Pricing decisions can be complex due to the number of factors to be considered: Organisational and marketing objectives –set prices that are consistent with the organisation’s goals and mission –Prices should also be compatible with marketing objectives

Chapter 10 Copyright John Wiley & Sons 2007 Factors affecting pricing decisions — Internal (company) factors (cont.) Types of pricing objectives –Setting prices low to increase market share –Using temporary price reductions to gain market share –Lowering prices to raise cash quickly

Chapter 10 Copyright John Wiley & Sons 2007 Factors affecting pricing decisions – Internal (company) factors (cont.) Costs –Set a floor price –Reducing costs increases productivity and profitability –Costs may be shared between products Other marketing mix variables –Price/quality image of the product or brand –Selective or intensive product distribution –Pricing used as a promotional tool

Chapter 10 Copyright John Wiley & Sons 2007 Factors affecting pricing decisions — External (market) factors Channel member expectations are: –To make a profit at least equivalent to the potential profit from handling a competitor’s brand –To earn a profit commensurate with the time and resources put in –To receive discounts for large orders and prompt payment –To be supported by the producer with training, promotion and return policies

Chapter 10 Copyright John Wiley & Sons 2007 Factors affecting pricing decisions — External (market) factors Customers’ interpretation and response: Interpretation: What meaning does the product’s price have to the customer? Customer response: Does the customer respond to the price by moving closer to, or farther away, from making a purchase? –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

Chapter 10 Copyright John Wiley & Sons 2007 Competition: A marketer needs to know competitors’ prices so it can adjust its own prices accordingly: –Pricing to match, exceed or beat competitors’ prices –Judging competitors’ responses to adjusting prices is essential –Changes in an industry’s market structure both cause and create pricing opportunities Factors affecting pricing decisions — External (market) factors

Chapter 10 Copyright John Wiley & Sons 2007 Legal and Regulatory Issues – many regulations and laws affect pricing decisions: –Price controls or freezes can be invoked to curb inflation –Governments can set and regulate prices for specific products –Regulations and laws to prohibit price fixing, and deceptive and discriminatory pricing is illegal in some cases Factors affecting pricing decisions — External (market) factors

Chapter 10 Copyright John Wiley & Sons 2007 Pricing for business markets Producers commonly provide intermediaries with discounts or reductions from list prices There are many types of discounts: Trade (or Functional) Discounts: A reduction off the list price given by a producer to an intermediary for performing certain functions Quantity Discounts: Deductions from list price for purchasing in large quantities –Cumulative Discounts –Non-cumulative Discounts

Chapter 10 Copyright John Wiley & Sons 2007 Pricing for business markets (cont.) Cash Discount: A price reduction given to buyers for prompt payment or cash payment Seasonal Discount: A price reduction given to buyers for purchasing goods or services out of season Allowance: A concession in price to achieve a desired goal –Trade-in or promotional allowances are common

Chapter 10 Copyright John Wiley & Sons 2007 Pricing for business markets (cont.) Geographic Pricing types – Allows for costs incurred through the physical distance between the buyer and seller –FOB factory –FOB destination –Uniform geographic pricing –Zone pricing –Freight absorption pricing

Chapter 10 Copyright John Wiley & Sons 2007 Pricing for business markets (cont.) Transfer pricing — The price of products that one organisational unit charges when selling to another unit in the same organisation –Actual full cost –Standard full cost –Cost plus investment –Market-based pricing

Chapter 10 Copyright John Wiley & Sons 2007