Chapter 12 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 12-1 Pricing Strategies

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall C HAPTER O BJECTIVES 1. What are the roles of price and value in the marketing mix? How do market structures, costs, and demand affect prices? 2. What are the most important market factors influencing pricing decisions? 3. How do marketers use pricing strategy and pricing objectives to achieve their goals? 4. What procedures and strategies do marketers use when making pricing decisions?

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Objective 1 What are the roles of price and value in the marketing mix? How do market structures, costs, and demand affect prices?

DEFINEDDEFINED Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 12-4 A Price is the exchange value of a product or service in the marketplace.

EXPLAINEDEXPLAINED Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 12-5 Value Value = Benefits - Costs Service Benefits Brand Benefits Product Benefits Price & Other Costs Value

EXPLAINEDEXPLAINED Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 12-6 Value Creation More Reliable Performance Longer Lasting Safety Reduce Costs Design

APPLIEDAPPLIED Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 12-7 Establishing Prices Price ProductPlace Promotion

APPLIEDAPPLIED Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 12-8 Market Structure Pure Competition Oligopoly Monopolistic Competition Monopoly

APPLIEDAPPLIED Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 12-9  Monopoly: A single firm has the power to set and control price in a market.  Drug and software manufacturers, due to patent protections, are examples. Market Structure Monopoly

APPLIEDAPPLIED Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall  Oligopoly: Few sellers, fairly large, requires sizable investment to enter market  Where several firms share price power by being able to control supply.  Airlines, Farm Implement Industries  Competition is more through product differentiation than price Market Structure Oligopoly

APPLIEDAPPLIED Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall  Monopolistic: Relatively large number of sellers, each seller tries to differentiate their products from the competition  Clothing, Shoes  Product Differentiation: Developing and promoting differences between one’s products and similar products. Market Structure Monopolistic Competition

APPLIEDAPPLIED Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Monopolistic competition Copyright © Cengage Learning. All rights reserved.1 | 12 $5.00$30.00

APPLIEDAPPLIED Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall  Pure Competition: Numerous producers selling undifferentiated products.  Agricultural Products: Corn, Wheat, Milk Market Structure Pure Competition

APPLIEDAPPLIED Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall  Perfect (or pure) competition  The market situation in which there are many buyers and sellers of a product, and no single buyer or seller is powerful enough to affect the price of that product Supply: The quantity of a product that producers are willing to sell at each of various prices Demand: The quantity of a product that buyers are willing to purchase at each of various prices Market Price (Equilibrium): The price at which the quantity demanded is exactly equal to the quantity supplied Types of Competition: Perfect 1 | 14

APPLIEDAPPLIED Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Supply Curve and Demand Curve 1 | 15

APPLIEDAPPLIED Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Cost-Based Pricing ProfitRevenueCosts Price x units sold Fixed Costs + Variable Costs

APPLIEDAPPLIED Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall  Add a fixed amount, called a margin, to the cost of each item sufficient enough to earn a desired profit. Margin Price Cost Margin

APPLIEDAPPLIED Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall  Contribution Margin = Price – Variable Costs Contribution Margin $10 Price $7 Variable Costs $3 Contribution Margin

APPLIEDAPPLIED Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall  Profit Margin = Price – Total Cost of the Product Profit Margin $10 Price $7 Variable Costs $2 Profit Margin $1

APPLIEDAPPLIED Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall  Recognize the need to establish a price that offsets costs and results in a reasonable profit margin. Cost-Based Pricing $10 Price $7 Variable Costs $2 Profit Margin $1 Fixed Costs

APPLIEDAPPLIED Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall  Margin is the percentage of the final selling price that is profit.  Take the variable cost of a product and adding a fixed percentage to arrive at a selling price.  To calculate the selling price of a $12 product, and a desired margin of 10% the formula would be:  $12 /(1-.10) or $12 /.9 =  Profit = $1.33 or 10% of the selling price. Cost-Plus Pricing: MARGIN $13.33.

APPLIEDAPPLIED Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall  To calculate the selling price of a $12 product, and a desired margin of 10% the formula would be:  $12 /(1-.10) or $12 /.9 =  Calculate the selling price of a product that costs $14 to produce and has a margin of 15%  $14 /(1-.15) or $14 /.85 =  Calculate the selling price of a product that costs $25 to produce and has a margin of 18%  $25 /(1-.82) or $25 /.82 = Group Activity $ $ $30.49

APPLIEDAPPLIED Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall  Markup is the percentage difference between the actual cost and the selling price  The margin is determined by dividing the contribution per unit by the unit cost. Cost = $12 Contribution per unit = $1.33 Selling price =  The margin is: $1.33 / $12 =  There difference between the cost and the selling price is 11%. Cost-Plus Pricing 11%

APPLIEDAPPLIED Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall  The markup is determined by dividing the contribution per unit by the unit cost.  Find the margin for the following:  Cost = $14  Contribution per unit = $2.47  Selling price = $16.47  the margin is: $2.47/ $16.47 =  Problem 2  Cost = $25  Contribution per unit = $5.49  Selling price = $30.49  the margin is: $5.49 / $30.49 = Cost-Plus Pricing 15% 18%

APPLIEDAPPLIED Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Cost-Plus Pricing Markup %MarginSelling Price 10%11.0%$ % 20% 25% 30% Determine the Margin and Selling Price for a product costing $ % 25.0% 42.8% 33% $14.12 $15.00 $16.00 $17.14

APPLIEDAPPLIED Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Break-even Point Fixed cost = $40k; Variable Cost = $5; Selling Price = $10 Break-Even In Units = Fixed Costs Price-Variable Costs Break-Even= $40,000 $10-$5 Break-Even8,000 units= Calculate the break even point in number of units

APPLIEDAPPLIED Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Break-even Point Fixed cost = $40k; Variable Cost = $5; Selling Price = $10

APPLIEDAPPLIED Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall  Elastic vs. Inelastic Determination of Demand 100K 200K 300K Quantity $0.50 Price $0.25 $0.10

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 29 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 12- Objective 3 & 4 How do marketers use pricing strategy and pricing objectives to achieve their goals? What procedures and strategies do marketers use when making pricing decisions?

DEFINEDDEFINED Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall A Pricing Strategy identifies what a business will charge for its products or services.

EXPLAINEDEXPLAINED Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Pricing Objectives Profitability $ Volume $ Meeting Competition $ Prestige $

APPLIEDAPPLIED Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall New Product Pricing Skimming Product outperforms others Early adopters value product Demand is inelastic Expected demand can’t be met High quality is desired position

APPLIEDAPPLIED Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall New Product Pricing Penetration Higher volume reduces costs Low price deters competitors Demand is elastic Buyers price sensitive Competitor imitation possible

APPLIEDAPPLIED Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Pricing Strategies Storefront Pricing Online Pricing Tiered Pricing Dynamic Pricing Carnival Cruise Verizon Wireless Priceline

APPLIEDAPPLIED Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Portfolio Pricing Customer’s willingness to pay Price ceiling $$$ Price floor $ Product 1 Product 2 Product 3 Price range for brand/product line

APPLIEDAPPLIED Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Price Adjustment Strategies Cash DiscountQuantity DiscountTrade-inRebate

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 37 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 12- Visual Summary