Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press Chapter 13 Price Determination

Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press PRICE IN THE MARKETING MIX Price: exchange value of a good or servicePrice: exchange value of a good or service © PhotoDisc

Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press Figure Alternative Pricing Objectives

Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press Profitability Objectives Perhaps the most commonly used objective in firms’ pricing strategiesPerhaps the most commonly used objective in firms’ pricing strategies Some firms try to maximize profits by reducing costs rather than through price changesSome firms try to maximize profits by reducing costs rather than through price changes © PhotoDisc

Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press Volume Objectives Bases pricing decisions on market shareBases pricing decisions on market share Market share: the percentage of a market controlled by a certain company or productMarket share: the percentage of a market controlled by a certain company or product © PhotoDisc

Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press Pricing to Meet Competition Third set of pricing objectivesThird set of pricing objectives Seeks to meet competitors’ pricesSeeks to meet competitors’ prices © PhotoDisc

Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press Prestige Objectives Prestige pricing encompasses the effect of price on prestigePrestige pricing encompasses the effect of price on prestige Prestige pricing establishes a relatively high price to develop and maintain an image of quality and exclusivenessPrestige pricing establishes a relatively high price to develop and maintain an image of quality and exclusiveness Interesting WWW Site 

Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press Figure Product Priced to Achieve Prestige Objectives Copyright © 2001 by Harcourt, Inc. All rights reserved.

Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press HOW PRICES ARE DETERMINED Determined in two basic ways:Determined in two basic ways: –By applying the theoretical concepts of supply and demand –By completing cost analyses © PhotoDisc

Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press Price Determination in Practice Cost-based pricing formulas: formulas calculate base-cost figures per unit and then add markups to cover overhead costs and generate profitsCost-based pricing formulas: formulas calculate base-cost figures per unit and then add markups to cover overhead costs and generate profits Simpler and easier to use than economic theory-based pricingSimpler and easier to use than economic theory-based pricing © PhotoDisc

Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press Figure The Markup Chain for a Hardcover Book

Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press Breakeven Analysis Breakeven analysis: pricing technique that determines the sales volume that a firm must achieve at a specified price in order to generate enough revenue to cover its total costBreakeven analysis: pricing technique that determines the sales volume that a firm must achieve at a specified price in order to generate enough revenue to cover its total cost

Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press Break Even Analysis Break-even point is the unit or dollar sales at which an organization neither makes a profit nor a loss. At the organization’s break-even sales volume: Total Revenue = Total Cost

Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press Finding the Breakeven Point Breakeven point Total Fixed Cost (in units) Contribution to Fixed Costs Per Unit Breakeven point Total Fixed Cost (in dollars) 1 – Variable Cost Per Unit/Price Calculate the breakeven point in units and dollars for the following: Manufacturer selling price = $5.00 Unit variable costs = $2.00 Total fixed costs = $ 30,000 = =

Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press Finding the Breakeven Point 10,000 30,000 (in units) ,000 30,000 (in units) 3.00 $50,000 30,000 (in dollars) 1 – 2.00/5.00 $50,000 30,000 (in dollars) 1 – 2.00/5.00 What if you had a profit goal of $9,000? Calculate the breakeven point in units for the following: Manufacturer selling price = $5.00 Unit variable costs = $2.00 Total fixed costs = $ 30,000 = =

Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press Target Returns 13,000 30, ,000 (in units) ,000 30, ,000 (in units) 3.00 $65,000 30, ,000 (in dollars) 1 – 2.00/5.00 $65,000 30, ,000 (in dollars) 1 – 2.00/5.00 = =

Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press Skimming pricing strategy: sets an intentionally high price relative to the prices of competing products Often works for introduction of a distinctive good or service with little or no real competition Skimming Alternative Pricing Strategies © PhotoDisc

Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press Penetration pricing strategy: sets a low price as a major marketing weapon Assumes that a below-market price will attract buyers and move a brand from an unknown newcomer to at least a brand recognition or even a brand preference stage Skimming Penetration Alternative Pricing Strategies © PhotoDisc

Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press Competitive Competitive pricing strategy: product priced at the general level of competing offerings Attempts to reduce the emphasis on price and concentrates marketing efforts on product, distribution, and promotion Skimming Penetration Alternative Pricing Strategies © PhotoDisc

Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press CONSUMER PERCEPTIONS OF PRICES Price-Quality RelationshipsPrice-Quality Relationships –Consumers’ perceptions of product quality is closely related to price –Most marketers believe that this perceived price-quality relationship holds over a relatively wide range of prices –In other situations, marketers establish price-quality relationships with comparisons that demonstrate a product’s value at the established price © PhotoDisc

Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press Figure Establishing Price-Quality Relationships for Printers Copyright © 2001 by Harcourt, Inc. All rights reserved.

Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press CONSUMER PERCEPTIONS OF PRICES Psychological PricingPsychological Pricing –Odd pricing (charging $39.95 or $19.98 instead of $40 or 20) –Commonly-used retail practice, as many retailers believe that consumer favor uneven amounts © PhotoDisc

Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press The exchange value of a good or service. Price

Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press Profitability Objectives Profit Maximization Target Return Volume Objectives Sales Maximization Market Share Meeting Competition Objectives Prestige Objectives Pricing Objectives

Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press The point at which the additional revenue gained by increasing the price of a product equals the increase in total costs. Profit Maximization Profitability

Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press A short-run or long-run pricing practice intended to achieve a specified return on either sales or investment. Target Return Objective

Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press A research program that discovered a strong positive relationship between a firm’s market share and its return on investment. Profit Impact or Market Strategies (PIMS) Project Volume

Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press A pricing strategy that emphasizes benefits a product provides in comparison to the price and quality levels of competing offerings. Value Pricing Meeting Competition Objectives

Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press Prestige A pricing strategy that establishes a relatively high price to develop and maintain an image of quality and exclusiveness. This typically appeals to the status-conscious consumer

Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press A schedule of the amounts of a firm’s product that consumers will purchase at different prices during a specified time period. Demand

Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press A schedule of the amounts of a good or service that a firm will offer for sale at different prices during a specified time period. Supply

Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press A market structure in which relatively few sellers compete, while high start-up costs form barriers to keep out new competitors. Oligopoly

Contemporary Marketing Wired, 9th Edition© 1998 The Dryden Press A market structure in which only one seller dominates trade in a good or service for which buyers can find no close substitutes. Monopoly