Pricing the Product Chapter Eleven

Chapter Objectives  Explain the importance of pricing and how prices marketers set objectives for pricing strategies  Describe how marketers use costs, demands, revenue and the pricing environment to make pricing decisions  Understand key pricing strategies and tactics  Understand the opportunities for Internet pricing strategies  Describe the psychological, legal, and ethical aspects of pricing © 2012 Pearson Education, Inc. publishing as Prentice-Hall. 11-2

Real People, Real Choices: Decision Time at Taco Bell  Which pricing option should Taco Bell implement? Option 1: Price the entire menu at $1.29 Option 1: Price the entire menu at $1.29 Option 2: Use mixed price menu #4, and price items at $.99 and $1.29 Option 2: Use mixed price menu #4, and price items at $.99 and $1.29 Option 3: Use mixed price menu #1, and price menu items at $.99, $1.19, and $1.29 Option 3: Use mixed price menu #1, and price menu items at $.99, $1.19, and $1.29 © 2012 Pearson Education, Inc. publishing as Prentice-Hall. 11-3

“Yes, But What Does It Cost?”  Price: The assignment of value, or the amount the consumer must exchange to receive the offering Includes money, goods, services, favors, votes, or anything else that has value to the other party Includes money, goods, services, favors, votes, or anything else that has value to the other party Opportunity costs must also be considered Opportunity costs must also be considered © 2012 Pearson Education, Inc. publishing as Prentice-Hall. 11-4

Figure 11.1 Elements of Price Planning © 2012 Pearson Education, Inc. publishing as Prentice-Hall. 11-5

Creating Product Identity: Branding Decisions Bad pricing decisions can hurt an entire industry, as the U.S. airline industry found out. © 2012 Pearson Education, Inc. publishing as Prentice-Hall. 11-6

Figure 11.2 Pricing Objectives © 2012 Pearson Education, Inc. publishing as Prentice-Hall. 11-7

Figure 11.3 Factors in Price Setting © 2012 Pearson Education, Inc. publishing as Prentice-Hall. 11-8

Figure 11.4 Demand Curves for Normal and Prestige Products © 2012 Pearson Education, Inc. publishing as Prentice-Hall. 11-9

Figure 11.5 Shift in Demand © 2012 Pearson Education, Inc. publishing as Prentice-Hall

Table 11.1 Estimating Demand for a Pizza © 2012 Pearson Education, Inc. publishing as Prentice-Hall

Figure 11.7 Price Elastic and Inelastic Demand Curves © 2012 Pearson Education, Inc. publishing as Prentice-Hall

Figure 11.6 Price Elasticity of Demand © 2012 Pearson Education, Inc. publishing as Prentice-Hall

Figure 11.6 Price Elasticity of Demand © 2012 Pearson Education, Inc. publishing as Prentice-Hall

It’s Debatable Class Discussion Question What factors influence the price elasticity of demand? How would you classify the following in terms of price elasticity? Gasoline Air travel Movie ticketsBaby diapers What alternatives to a price increase might marketers of an elastic product consider? © 2012 Pearson Education, Inc. publishing as Prentice-Hall

Cross-elasticity of Demand  Changes in the prices of other products affect a product’s demand If products are substitutes, an increase in the price of one will increase demand for the other If products are substitutes, an increase in the price of one will increase demand for the other If one product is essential for use of second, an increase in the price of one decreases demand for another If one product is essential for use of second, an increase in the price of one decreases demand for another © 2012 Pearson Education, Inc. publishing as Prentice-Hall

Figure 11.8 Variable Costs at Different Levels of Production © 2012 Pearson Education, Inc. publishing as Prentice-Hall

Figure 11.9 Break-Even Analysis Assuming a Price of $100 © 2012 Pearson Education, Inc. publishing as Prentice-Hall

Calculating Break-even total fixed costs total fixed costs Break-even point (units) contribution per unit to fixed costs contribution per unit to fixed costs total fixed costs total fixed costs Break-even point ($) variable cost per unit variable cost per unit price price © 2012 Pearson Education, Inc. publishing as Prentice-Hall ()

Figure Marginal Analysis © 2012 Pearson Education, Inc. publishing as Prentice-Hall

Markups and Margins: Pricing Through the Channel  Markup An amount added to the cost of the product to create a price at which the channel member will sell the product Gross margin Gross margin Retailer margin Retailer margin Wholesaler margin Wholesaler margin List price List price © 2012 Pearson Education, Inc. publishing as Prentice-Hall

Steps in Price Planning Step 4: Evaluate the Pricing Environment  The economy Broad economic trends Broad economic trends Recession Recession Inflation Inflation © 2012 Pearson Education, Inc. publishing as Prentice-Hall

Steps in Price Planning Step 4: Evaluate the Pricing Environment  Competition  Government regulation  Consumer trends  The international environment © 2012 Pearson Education, Inc. publishing as Prentice-Hall

Figure Pricing Strategies and Tactics © 2012 Pearson Education, Inc. publishing as Prentice-Hall

Figure Target Costing using a Jeans Example © 2012 Pearson Education, Inc. publishing as Prentice-Hall

Steps in Price Planning Step 5: Choose a Price Strategy  Pricing strategies based on the competition  Pricing strategies based on customers’ needs  New product pricing © 2012 Pearson Education, Inc. publishing as Prentice-Hall

It’s Debatable Class Discussion Question Retail giant Wal-Mart is well known for its everyday low pricing strategy. How do they do it? Wal-Mart achieves discounts through volume purchasing, but also squeezes profits and concessions from suppliers in an attempt to lower prices year after year. Although many consumers want low prices and shop at Wal-Mart for this reason, critics feel that the costs to suppliers are too high as many suppliers end up closing U.S. plants and laying off American employees when jobs are sent overseas to lower costs. Where do you stand? © 2012 Pearson Education, Inc. publishing as Prentice-Hall Visit Wal-Mart.comWal-Mart.com

Steps in Price Planning Step 6: Develop Pricing Tactics  Pricing for individual products Two-part pricing Two-part pricing Payment pricing Payment pricing  Pricing for multiple products Price bundling Price bundling Captive pricing Captive pricing © 2012 Pearson Education, Inc. publishing as Prentice-Hall

Steps in Price Planning Step 6: Develop Pricing Tactics  Distribution-based pricing F.O.B. (free on board) origin pricing F.O.B. (free on board) origin pricing F.O.B delivered pricing F.O.B delivered pricing Basing-point pricing Basing-point pricing Uniform delivered pricing Uniform delivered pricing Freight absorption pricing Freight absorption pricing © 2012 Pearson Education, Inc. publishing as Prentice-Hall

Steps in Price Planning Step 6: Develop Pricing Tactics  Discounting for channel members Trade or functional discounts Trade or functional discounts Quantity discounts Quantity discounts Cash discounts Cash discounts Seasonal discounts Seasonal discounts © 2012 Pearson Education, Inc. publishing as Prentice-Hall

Figure Internet Pricing Strategies © 2012 Pearson Education, Inc. publishing as Prentice-Hall Ticketmaster and Dynamic Pricing Visit skoreit.comskoreit.com Visit Wired.comWired.com

Figure Psychological Pricing © 2012 Pearson Education, Inc. publishing as Prentice-Hall

Psychological Issues in Pricing © 2012 Pearson Education, Inc. publishing as Prentice-Hall

Psychological Pricing Strategies © 2012 Pearson Education, Inc. publishing as Prentice-Hall

Legal and Ethical Issues: B2C © 2012 Pearson Education, Inc. publishing as Prentice-Hall

Legal and Ethical Issues: B2B © 2012 Pearson Education, Inc. publishing as Prentice-Hall

Legal and Ethical Considerations in Pricing  Legal issues in business-to-business pricing Price discrimination Price discrimination Price fixing: Two or more companies conspire to keep prices at a certain level Price fixing: Two or more companies conspire to keep prices at a certain level  Horizontal vs. vertical price fixing Predatory pricing: Firm sets a very low price for purpose of driving competitors out of business Predatory pricing: Firm sets a very low price for purpose of driving competitors out of business © 2012 Pearson Education, Inc. publishing as Prentice-Hall

Real People, Real Choices: Decision Made at Taco Bell  Danielle chose option 3 Why do you think Danielle chose to implement the mixed price menu? Why do you think Danielle chose to implement the mixed price menu? © 2012 Pearson Education, Inc. publishing as Prentice-Hall

Keeping It Real: Fast-Forward to Next Class Decision Time at Campfire  Meet Mike Monello, the partner/executive creative director at Campfire, a communication agency in New York  Campfire’s campaigns cross all media channels and center around storytelling and experience  The decision to be made: Whether to become a full-service digital agency for a new client as their agent of record (AOR) © 2012 Pearson Education, Inc. publishing as Prentice-Hall

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