© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 11: Pricing Fundamentals Pride/Ferrell Foundations of Marketing Fourth Edition Prepared by Milton Pressley University of New Orleans

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Objectives 1.Understand the role of price. 2.Identify the characteristics of price and nonprice competition. 3.Be familiar with demand curves and the price elasticity of demand. 4.Understand the relationships among demand, costs, and profits. 5.Describe key factors that may influence marketers’ pricing decisions. 6.Be familiar with the major issues that affect the pricing of products for business markets.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Price –the value paid for a product in a marketing exchange The Nature of Price –price does not always take the form of money –the oldest form of trade is barter

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Importance of Price to Marketers price can be changed quickly in response to changing demand price is related to total revenue and profit: –Profit = Total Revenue – Total Costs –Profits = (Price x Quantity Sold) – Total Costs price can determine quantity sold price has a psychological dimension

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Terms Used to Describe Price Tuition Premium Fine Fee Fare Toll Rent Tips Deposit Dues Interest Taxes

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Price Competition emphasizing price as an issue and matching or beating competitors’ prices to compete effectively, firm must be the low cost seller relies on standardized products frequent price changes provides flexibility Price Competition Consumer electronics stores compete on the basis of price.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Nonprice Competition Emphasizing factors other than price to distinguish a product from competing brands –Features –Quality –Promotion –Packaging

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Demand Curve A graph of the quantity of a product taken by buyers in the market at various prices, given that all other factors are held constant

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Demand Curve Illustrating the Relationship Between Price and Quantity for Prestige Products

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Factors Contributing to Demand Fluctuations Demand Fluctuations Changes in Buyers’ Needs Variations in Effectiveness of Marketing MIS Presence of Substitutes Dynamic Environmental Factors Seasonality

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Analysis of Demand Price Elasticity of Demand a measure of the sensitivity of demand to changes in price Assessing the Price Elasticity of Demand elastic demand a change in price causes an opposite change in total revenue an increase in price will decrease total revenue price changes have a big impact on sales inelastic demand a change in price results in a change in the same direction as total revenue an increase in price will increase total revenue price changes have little impact on quantity demanded

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Elasticity of Demand

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Breakeven Analysis Breakeven Point = Fixed Costs Per-Unit Contribution to Fixed Costs (Price – Variable Costs) Break-Even Point point at which the costs of producing a product equal the revenue made from selling the product

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Factors That Affect Pricing Decisions

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Types of Pricing Objectives Prices are set consistent with the organization’s mission and goals. –Market share iPhone –Lower prices Costco –Raise cash quickly early season promotions –Temporary price reductions

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Price Affects Promotion Decisions Most fragrance advertisements do not include prices.

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Factors Affecting Pricing Decisions Channel Member Expectations –channel member expects to receive profit –compensated with discounts for large orders and prompt payments –provide support activities such as training, service, and promotions Customer Interpretation and Response -Internal reference price -developed in the buyer’s mind through experience -External reference price -comparison price provided by others -Value-conscious -concerned about price and quality -Price-conscious -striving to pay low prices -Prestige-sensitive -drawn to products that signify prominence and status

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Factors Affecting Pricing Decisions-Costs crucial component of price ideally goods are sold above cost, exceptions: –match competition –generate cash flow –increase market share in elastic markets, focus on cost reduction costs shared with others in product line

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Give an example of a situation where you, or someone you know, acted in a value-conscious manner when shopping for a product. Give an example of a situation where you, or someone you know, acted in a price-conscious manner when shopping for a product. Give an example of a situation where you, or someone you know, acted in a prestige-sensitive manner when shopping for a product. Discussion Questions

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Impact of Other Marketing Mix Variables All marketing mix variables are highly interrelated Price affects demand Perceived price/quality relationships influence image of products or brands –be careful not to discount too frequently Distribution is linked to price Promotions vary by price of goods

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Factors Affecting Pricing Decisions Reference Pricing –Internal - develops in buyer’s mind through experience with product –External - a comparison price provided by others Competition Legal and Regulatory Issues –Price discrimination (providing price differentials that injure competition by giving one or more buyers a competitive advantage)

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Pricing for Business Markets Trade (functional) discounts – given to an intermediary for performing certain functions Quantity discounts – for purchasing large quantities –Cumulative discounts – aggregated over certain period –Noncumulative discounts – one time only Cash discounts – for prompt or cash payment Seasonal discounts – for purchasing out of season Allowances – a concession to achieve a desired goal Unlike selling to consumers, where prices remain fairly consistent, sellers must sometimes adjust prices in business markets by using:

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Pricing for Business Markets Geographic Pricing – reductions for transportation - F.O.B. factory – price of the merchandise at the factory, before shipment - F.O.B. destination – indicates the producer is absorbing the shipping costs - Uniform geographic pricing – charging all customers the same price, regardless of shipping - Zone pricing – based on transportation costs within major geographic zones - Base-point pricing – combines factory price and freight charges from base point nearest the buyer - Freight absorption pricing - indicates the seller is absorbing all shipping costs

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. After Reviewing This Chapter You Should: 1.Understand the role of price. 2.Be able to identify the characteristics of price and nonprice competition. 3.Be familiar with demand curves and the price elasticity of demand. 4.Understand the relationships among demand, costs, and profits. 5.Know how to describe key factors that may influence marketers’ pricing decisions. 6.Be familiar with the major issues that affect the pricing of products for business markets.