1. Price the Product Chapter Eleven © 2012 Pearson Education, Inc. publishing as Prentice-Hall.

2. 11-2 © 2012 Pearson Education, Inc. publishing as Prentice-Hall. 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

3. 11-3 © 2012 Pearson Education, Inc. publishing as Prentice-Hall. 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

4. 11-4 © 2012 Pearson Education, Inc. publishing as Prentice-Hall. “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

5. 11-5 © 2012 Pearson Education, Inc. publishing as Prentice-Hall. Steps in Price Planning Step 1: Set Pricing Objectives  Pricing objectives take many of the following forms: Profit Profit Sales Sales Market share Market share Competitive effect Competitive effect Customer satisfaction Customer satisfaction Image enhancement Image enhancement

6. 11-6 © 2012 Pearson Education, Inc. publishing as Prentice-Hall. Steps in Price Planning Step 2: Estimate Demand  Demand: Customers’ desire for a product How much of a product are customers willing to buy as its price goes up or down? How much of a product are customers willing to buy as its price goes up or down?  Demand curves illustrate the effect of price on quantity demanded  Law of demand: As price goes up, quantity demanded declines As price goes up, quantity demanded declines For prestige products, a price increase may actually increase the quantity demanded For prestige products, a price increase may actually increase the quantity demanded

7. 11-7 © 2012 Pearson Education, Inc. publishing as Prentice-Hall. Shifts in Demand  Typical demand curves assume that only price changes, but in reality, other factors can shift demand upward or downward: Changes in marketing strategy (improved product, new advertising) Changes in marketing strategy (improved product, new advertising) Non-marketing activities (product recalls, development of new technologies, etc.) Non-marketing activities (product recalls, development of new technologies, etc.)

8. 11-8 © 2012 Pearson Education, Inc. publishing as Prentice-Hall. Estimating Demand  Total demand: Number of buyers * average amount of each buyer’s purchase Number of buyers * average amount of each buyer’s purchase  Firm’s demand: Total demand * the firm’s estimated share of the market Total demand * the firm’s estimated share of the market Demand estimates should be adjusted if competition, the economy, or other factors change Demand estimates should be adjusted if competition, the economy, or other factors change

9. 11-9 © 2012 Pearson Education, Inc. publishing as Prentice-Hall. Price Elasticity of Demand  Elasticity of demand: The percentage change in unit sales that results from a percentage change in price When changes in price have large effects on the amount demanded, demand is elastic When changes in price have large effects on the amount demanded, demand is elastic When changes in price have little or no effect on the amount demanded, demand is inelastic When changes in price have little or no effect on the amount demanded, demand is inelastic

10. 11-10 © 2012 Pearson Education, Inc. publishing as Prentice-Hall. Elastic vs. Inelastic Demand  Elastic Demand: Revenues decrease as price increases and vice versa Revenues decrease as price increases and vice versa Non-necessities (pizza) generate elastic demand Non-necessities (pizza) generate elastic demand Availability of close substitute products facilitates elastic demand Availability of close substitute products facilitates elastic demand  Inelastic Demand: As price increases, revenues increase As price increases, revenues increase The demand for necessities such as food and electricity is generally inelastic The demand for necessities such as food and electricity is generally inelastic

11. 11-11 © 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

12. 11-12 © 2012 Pearson Education, Inc. publishing as Prentice-Hall. Steps in Price Planning Step 3: Determine Costs  Variable costs: Costs of production that are tied to and vary depending on the number of units produced Average variable costs may change as the number of products produced changes Average variable costs may change as the number of products produced changes

13. 11-13 © 2012 Pearson Education, Inc. publishing as Prentice-Hall. Steps in Price Planning Step 3: Determine Costs  Fixed costs: Costs of production that don’t change with the number of units produced Average fixed cost per unit will decrease as the number of units produced increases Average fixed cost per unit will decrease as the number of units produced increases  Total costs: Total of fixed costs and variable costs for a set number of units produced

14. 11-14 © 2012 Pearson Education, Inc. publishing as Prentice-Hall. Break-Even Analysis  Break-even analysis: Determines the number of units a firm must produce/sell at a given price to cover costs Determines the number of units a firm must produce/sell at a given price to cover costs  Break-even point: Point at which total revenue and total cost are equal Point at which total revenue and total cost are equal Break-even point (in units) Break-even point (in units)  Contribution per unit Break-even point (in dollars) Break-even point (in dollars)

15. 11-15 © 2012 Pearson Education, Inc. publishing as Prentice-Hall. Marginal Analysis  Analysis that uses cost and demand to find the price that will maximize profits: Marginal cost: Increase in total costs from producing one additional unit of a product Marginal cost: Increase in total costs from producing one additional unit of a product Marginal revenue: Increase in total income or revenue from selling one additional unit (decreases with each additional unit sold) Marginal revenue: Increase in total income or revenue from selling one additional unit (decreases with each additional unit sold) Profit is maximized where marginal cost is exactly equal to marginal revenue Profit is maximized where marginal cost is exactly equal to marginal revenue

16. 11-16 © 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

17. 11-17 © 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  Competition  Government regulation  Consumer trends  The international environment

18. 11-18 © 2012 Pearson Education, Inc. publishing as Prentice-Hall. Steps in Price Planning Step 5: Choose a Price Strategy  Pricing strategies based on cost: Simple to calculate and relatively risk free Simple to calculate and relatively risk free Drawbacks: demand, competition, and the nature of the target market are not considered Drawbacks: demand, competition, and the nature of the target market are not considered Cost-plus pricing: Total all product costs and add markup Cost-plus pricing: Total all product costs and add markup

19. 11-19 © 2012 Pearson Education, Inc. publishing as Prentice-Hall. Steps in Price Planning Step 5: Choose a Price Strategy  Pricing strategies based on demand: Based on estimates of the quantity a firm can sell at different prices Based on estimates of the quantity a firm can sell at different prices Target costing: Identify quality and functionality customers need and price they’re willing to pay before designing product Target costing: Identify quality and functionality customers need and price they’re willing to pay before designing product Yield management pricing: Manages capacity by charging different prices to different customers Yield management pricing: Manages capacity by charging different prices to different customers

20. 11-20 © 2012 Pearson Education, Inc. publishing as Prentice-Hall. Steps in Price Planning Step 5: Choose a Price Strategy  Pricing strategies based on the competition can include: Pricing near, at, above, or below the competition Pricing near, at, above, or below the competition Price leadership strategy: Industry giant announces price, and competitors get in line or drop out Price leadership strategy: Industry giant announces price, and competitors get in line or drop out  Typical in oligopolistic industries

21. 11-21 © 2012 Pearson Education, Inc. publishing as Prentice-Hall. Steps in Price Planning Step 5: Choose a Price Strategy  Pricing strategies based on customers’ needs Value pricing or everyday low pricing (EDLP): Pricing strategy in which a firm sets prices that provide ultimate value to customers Value pricing or everyday low pricing (EDLP): Pricing strategy in which a firm sets prices that provide ultimate value to customers Some firms use hybrid EDLP to compete with low-price retailers Some firms use hybrid EDLP to compete with low-price retailers

22. 11-22 © 2012 Pearson Education, Inc. publishing as Prentice-Hall. Steps in Price Planning Step 5: Choose a Price Strategy  New-product pricing Skimming pricing: A very high premium price is charged Skimming pricing: A very high premium price is charged Penetration pricing: A very low price is set to encourage more customers to purchase Penetration pricing: A very low price is set to encourage more customers to purchase Trial pricing: Low price for a limited period of time Trial pricing: Low price for a limited period of time

23. 11-23 © 2012 Pearson Education, Inc. publishing as Prentice-Hall. Steps in Price Planning Step 6: Develop Pricing Tactics  Pricing for individual products include: Two-part pricing Two-part pricing Payment pricing Payment pricing  Pricing for multiple products include: Price bundling Price bundling Captive pricing Captive pricing

24. 11-24 © 2012 Pearson Education, Inc. publishing as Prentice-Hall. Steps in Price Planning Step 6: Develop Pricing Tactics  Distribution-based pricing include: 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

25. 11-25 © 2012 Pearson Education, Inc. publishing as Prentice-Hall. Steps in Price Planning Step 6: Develop Pricing Tactics  Discounting for channel members include: Trade or functional discounts Trade or functional discounts  Price given to channel members Quantity discounts Quantity discounts Cash discounts Cash discounts  Encourages prompt payment Seasonal discounts Seasonal discounts  Available only at certain times of the year

26. 11-26 © 2012 Pearson Education, Inc. publishing as Prentice-Hall. Pricing and Electronic Commerce  Strategy 1 - Dynamic pricing: Cost of changing prices on the Internet is practically zero Cost of changing prices on the Internet is practically zero Firms can respond quickly and frequently to changes in costs, supply, and/or demand Firms can respond quickly and frequently to changes in costs, supply, and/or demand  Strategy 2 - Online auctions (eBay.com) E-commerce allows shoppers to purchase products through online bidding E-commerce allows shoppers to purchase products through online bidding

27. 11-27 © 2012 Pearson Education, Inc. publishing as Prentice-Hall. Pricing and Electronic Commerce  Strategy 3 - Freenomics A business model that encourages giving products away for free because of the increase in profits that can be achieved by getting more people to participate in a market  Pricing advantages for online shoppers

28. 11-28 © 2012 Pearson Education, Inc. publishing as Prentice-Hall. Psychological Issues in Setting Prices  Issues in setting price include: Buyer’s pricing expectation Buyer’s pricing expectation Internal reference price Internal reference price Price/quality inferences Price/quality inferences  Psychological pricing strategies include: Odd-even pricing Odd-even pricing Price lining Price lining Prestige pricing Prestige pricing

29. 11-29 © 2012 Pearson Education, Inc. publishing as Prentice-Hall. Legal and Ethical Considerations in Pricing  Deceptive pricing practices include: Going-out-of-business sale Going-out-of-business sale Bait-and-switch Bait-and-switch  Unfair sales acts include: Loss-leader pricing Loss-leader pricing Unfair sales acts Unfair sales acts

30. 11-30 © 2012 Pearson Education, Inc. publishing as Prentice-Hall. Legal and Ethical Considerations in Pricing  Legal issues in business-to-business pricing include: 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

31. 11-31 © 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?

32. 11-32 © 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)

33. 11-33 © 2012 Pearson Education, Inc. publishing as Prentice-Hall. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America