Pricing Concepts Chapters 13

Price and Value Value = perceived benefits/price Price = perception of quality Price = consumer perception of prestige Example: Swiss firm TAG HEUER Changed prices from $250 to $1000 Sales volume increased sevenfold

Step 1: Pricing Objectives Survival Maximum current profit/profit oriented pricing Maximum market share/sales oriented pricing Maximum market skimming Product quality leadership

Step 2: Determining Demand Quantity demanded S Price .50 1.00 1.50 2.00 2.50 20 40 60 80 100 120 D Surplus Shortage Price Equilibrium

Elasticity of Demand Consumers sensitivity to price changes Price Goes... Revenue Goes... Demand is... Down Up Elastic Inelastic Up or Down Stays the Same Unitary Elasticity

Factors that Affect Elasticity DEMAND LESS ELASTIC IF: Few or no substitutes Buyers don’t notice higher price Buyers are slow to change habits Buyers think higher prices are justified

Step 3: Estimating Cost Variable costs – changes with level of output Fixed costs – no change with output level Marginal costs – the change in total costs associated with a 1 unit change in output Average variable costs – total variable costs divided by quantity of output Average total costs – total costs divided by quantity of output

Step 4: Analyzing Competition Analyze competitors costs, prices and offers

Step 5: Methods of Setting Prices Markup pricing Keystoning Target return pricing Perceived value pricing Value pricing Going Rate pricing Auction type pricing Group pricing

Step 6: Selecting Final Price Psychological pricing Marketing mix Company policies

Fine Tuning the Base Price Geographical pricing Quantity discounts Cash discounts Functional discounts Seasonal discounts Promotional discounts Rebates

Special Pricing Tactics Single-Price Tactic Flexible 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 Several line items at specific price points Sell product at near or below cost Lure customers through false or misleading price advertising Odd-number prices imply bargain Even-number prices imply quality Combining two or more products in a single package Two separate charges to consume a single good