1. Principles of Marketing - UNBSJ
BA 2303
Principles of Marketing - UNBSJ
Pricing Products and Services
Instructor – Terry Conrod

2. Learning Objectives BA 2303
Understand the nature and importance of pricing products and services.
Recognize the constraints on a firm’s pricing latitude and the objectives a firm has in setting prices.
Explain what a demand curve is and what price elasticity of demand means.
Perform a break-even analysis.
Understand approaches to pricing as well as factors considered to establish prices for products and services.
Describe basic laws and regulations affecting pricing practices.

3. NATURE AND IMPORTANCE OF PRICE
BA 2303
NATURE AND IMPORTANCE OF PRICE
What is a Price?
Money (or other bartered considerations) exchanged for the ownership or use of goods or services
Price as an Indicator of Value
Value-based pricing
Other approaches to pricing
Price in the Marketing Mix
Profit = Total revenue - Total cost 3

4. The price of four different purchases
BA 2303
The price of four different purchases 4

5. Process steps in setting price
BA 2303
Process steps in setting price 5

6. STEP 1: IDENTIFYING PRICING CONSTRAINTS AND OBJECTIVES
BA 2303
STEP 1: IDENTIFYING PRICING CONSTRAINTS AND OBJECTIVES
Identifying Pricing Constraints
Demand for the Product Class, Product, and Brand
Newness of the Product: Stage in the Product Life Cycle
Single Product versus a Product Line
Cost of Producing and Marketing the Product
Cost of Changing Prices and Time Period They Apply
Types of Competitive Markets
Pure monopoly
Oligopoly
Monopolistic competition
Pure competition
Competitors’ Prices 6

7. BA 2303
Pricing, product, and advertising strategies available to firms in four types of competitive markets 7

8. STEP 1: IDENTIFYING PRICING CONSTRAINTS AND OBJECTIVES
BA 2303
STEP 1: IDENTIFYING PRICING CONSTRAINTS AND OBJECTIVES
Identifying Pricing Objectives
Profit
Sales
Market Share
Unit Volume
Survival
Social Responsibility 8

9. STEP 2: ESTIMATING DEMAND AND REVENUE
BA 2303
STEP 2: ESTIMATING DEMAND AND REVENUE
Fundamentals of Estimating Demand
The Demand Curve
Consumer tastes
Price and availability of other products
Consumer income
Movement Along VS Shift of a Demand Curve
A movement along a demand curve means there is a change in the quantity demanded, with no substantial change in demand factors. If those factors change, such as in increase in incomes, a shift in the demand curve can occur.
Price Elasticity of Demand
The percentage change in quantity demanded relative to a percentage change in price.
Inelasticity - Slight increases or decreases in price will not have much impact on demand. 9

10. Illustrative demand curves
BA 2303
Illustrative demand curves 10

11. STEP 3: ESTIMATING COST, VOLUME, AND PROFIT RELATIONSHIPS
BA 2303
STEP 3: ESTIMATING COST, VOLUME, AND PROFIT RELATIONSHIPS
Controlling Costs
Total cost
Fixed cost
Variable cost
Break-Even Analysis
Break-even point (BEP)
Calculating a Break-Even Point
Break-even chart
Application of Break-Even Analysis
Using Microsoft Excel to answer hypothetical “what-if” questions. 11

12. Calculating a break-even point
BA 2303
Calculating a break-even point -
Consider a frame shop example – Suppose the frame shop owner wanted to identify how many
pictures must be sold to cover fixed costs at a given price. Also assume that the average price
a customer will pay for each picture is $100. Suppose that the fixed cost is $28,000 (including
such items as real estate rental, bank loan interest and other fixed cost items) and the unit variable
costs for each picture is $30 (including such items as labour, glass, frame, matting), the break even
quantity is 400 pictures.
BE Point (qty) = Fixed cost / (Unit price – Unit variable cost)
BE Point (qty) = $28,000 / ($100 - $30) 12

13. Break-even analysis chart for a picture frame shop
BA 2303
Break-even analysis chart for a picture frame shop 13

14. STEP 4: SELECTING AN APPROXIMATE PRICE LEVEL
BA 2303
STEP 4: SELECTING AN APPROXIMATE PRICE LEVEL
Demand-Oriented Approaches
Skimming Pricing
Penetration Pricing
Prestige Pricing
Price Lining
Odd-Even Pricing
Target Pricing
Bundle Pricing
Yield Management Pricing

15. Four approaches for selecting an approximate price level
BA 2303
Four approaches for selecting an approximate price level

16. STEP 4: SELECTING AN APPROXIMATE PRICE
BA 2303
STEP 4: SELECTING AN APPROXIMATE PRICE
Cost-Oriented Approaches
Standard Markup Pricing
Cost-Plus Pricing
Experience Curve Pricing
Profit-Oriented Approaches
Target Profit Pricing
Target Return-on-Sales Pricing
Target Return-on-Investment Pricing
Competition-Oriented Approaches
Customary Pricing
Above- At- or Below- Market Pricing
Loss Leader Pricing

17. STEP 5: SETTING THE LIST OR QUOTED PRICE
BA 2303
STEP 5: SETTING THE LIST OR QUOTED PRICE
One-Price versus Flexible-Price Policy
Company, Customer, and Competitive Effects
Company Effects
Product-line pricing
Customer Effects
Competitive Effects
Price war

18. STEP 6: MAKING SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE
BA 2303
STEP 6: MAKING SPECIAL ADJUSTMENTS TO THE LIST OR QUOTED PRICE
Discounts
Quantity Discounts
Seasonal Discounts
Trade (Functional) Discounts
Cash Discounts
Allowances
Trade-In Allowances
Promotional Allowances
Everyday low pricing
Geographical Adjustments
FOB Origin Pricing
Uniform Delivered Pricing
Legal and Regulatory Aspects of Pricing
Price Fixing
Price Discrimination
Deceptive Pricing
Delivered Pricing
Predatory Pricing

19. Five most common deceptive pricing practices
BA 2303

20. What factors impact the list price to determine the final price?
BA 2303
Concept Check
What factors impact the list price to determine the final price?
Answer:
Factors that may limit the latitude of prices a firm may set are pricing constraints. These pricing constraints are: (1) Demand for the Product Class, Product and Brand, (2) Newness of the Product: Stage of the Product Life Cycle, (3) Single Product vs. a Product Line, (4) Cost of Producing and Marketing the Product, (5) Cost of Changing Prices and Time Period They Apply, (6) Type of Competitive Markets, and (7) Competitors' Prices 20

21. BA 2303
Concept Check
How does the type of competitive market a firm is in affect its latitude in setting price?
Answer:
The type of competition considerably influences the latitude of price competition and, in turn, the nature of product differentiation and extent of advertising. A firm must recognize the general type of competitive market it is in to understand the latitude of both its price and non-price strategies. 21

22. BA 2303
Concept Check
What is the difference between a movement along and a shift of a demand curve?
Answer:
A movement along a demand curve means there is a change in the quantity demanded, with no substantial change in demand factors. If those factors change, such as in increase in incomes, a shift in the demand curve can occur. 22

23. What does it mean if a product has inelastic demand?
BA 2303
Concept Check
What does it mean if a product has inelastic demand?
Answer:
Slight increases or decreases in price will not have much impact on demand. 23

24. What is the difference between fixed cost and variable cost?
BA 2303
Concept Check
What is the difference between fixed cost and variable cost?
Answer:
Fixed cost is the sum of the firm's expenses that are stable and do not change with the quantity of product that is produced and sold. Variable cost is the sum of the firm's expenses that vary directly with the quantity of product that is produced and sold. 24

25. BA 2303
Concept Check
What are the circumstances in pricing a new product that might support skimming or penetration pricing?
Answer:
Circumstances that support skimming pricing are: (1) enough prospective customers are willing to buy the product immediately at the high initial price to make sales profitable, (2) the high initial price will not attract competitors, (3) lowering price has only a minor effect on increasing the sales volume and reducing the unit costs, and (4) customers interpret the high price as signifying high quality. Circumstances that support penetration pricing are the opposite of skimming, and they are: (1) many segments of the market are price sensitive, (2) low initial price discourages competitors from entering the market, and (3) unit production and marketing costs fall dramatically as production volume increase.

26. What is odd-even pricing?
BA 2303
Concept Check
What is odd-even pricing?
Answer:
Odd-even pricing is setting prices a few dollars or cents under an even number.

27. What is standard markup pricing?
BA 2303
Concept Check
What is standard markup pricing?
Answer:
Standard markup pricing entails adding a fixed percentage to the cost of all items in a specific product class.

28. What is the purpose of loss-leader pricing when used by a retail firm?
BA 2303
Concept Check
What is the purpose of loss-leader pricing when used by a retail firm?
Answer:
The purpose of loss-leader pricing is not to increase sales of that particular produce but to attract customers in hopes they will buy other products as well, particularly discretionary items carrying large markups.

29. BA 2303
Concept Check
Why would a seller choose a flexible-price policy over a one-price policy?
Answer:
Most companies use a one-price policy. A flexible- price policy gives sellers considerable discretion in setting the final price in light of demand, cost, and competitive factors. Flexible pricing has grown in popularity because of increasingly sophisticated information technology.

30. Which pricing practices are covered by the Competition Act?
BA 2303
Concept Check
Which pricing practices are covered by the Competition Act?
Answer:
The Competition Act covers these pricing practices: (1) Price Fixing, (2) Price Discrimination, (3) Deceptive Pricing, (4) Predatory Pricing, and (5) Delivered Pricing

31. Profit Equation Profit = total revenue – Total cost, or
BA 2303
Profit Equation
Profit = total revenue – Total cost, or
Profit = (Unit Price x Quantity Sold) – Total Cost

32. BA 2303
Pricing Constraints
Factors that limit the latitude of price a firm may set.

33. BA 2303
Pricing Objectives
Expectations that specify the role of price in an organization’s marketing and strategic plans.

34. BA 2303
Demand Curve
The summation of points representing the maximum number of products consumers will buy at a given price.

35. Total Revenue The total money received from the sale of a product.
BA 2303
Total Revenue
The total money received from the sale of a product.

36. Price Elasticity of Demand
BA 2303
Price Elasticity of Demand
The percentage change in quantity demanded relative to a percentage change in price.

37. BA 2303
Total Cost
The total expense incurred by a firm in producing and marketing a product. Total cost is the sum of fixed cost and variable cost. In physical distribution decisions, the sum of all applicable costs for logistical activities.

38. BA 2303
Fixed Cost
The sum of expenses of the firm that are stable and do not change with the quantity of product that is produced and sold.

39. BA 2303
Variable Cost
The sum of the expenses of the firm that vary directly with the quantity of product that is produced and sold.

40. BA 2303
Break-Even Analysis
A technique that analyses the relationship between total revenue and total cost to determine profitability at various levels of output.

41. BA 2303
Penetration Pricing
Setting a low initial price on a new product to appeal immediately to the mass market.

42. BA 2303
Price
The money or other considerations (including other goods and services) exchanged for the ownership or use of a good or service.

43. BA 2303
Skimming Pricing
The highest initial price that customers really desiring the product are willing to pay.

44. Above-, At-, or Below-Market Pricing
BA 2303
Above-, At-, or Below-Market Pricing
Setting prices based on pricing of similar products in the market.

45. BA 2303
Bundle Pricing
The marketing of two or more products in a single “package” price.

46. BA 2303
Cost-Plus Pricing
Summing the total unit cost of providing a product or service and adding a specific amount to the cost to arrive at a price.

47. BA 2303
Customary Pricing
Setting prices dictated by tradition, standardized channels of distribution, or other competitive factors.

48. Experience Curve Pricing
BA 2303
Experience Curve Pricing
Pricing method based on production experience, that is, the unit cost of many products and services declines by 10 to 30 percent each time a firm’s experience at producing and selling them doubles.

49. BA 2303
Loss-Leader Pricing
Selling products below their customary prices to attract attention to them in the hope that customers will buy other products as well.

50. BA 2303
Odd–Even Pricing
Setting prices a few dollars or cents under an even number.

51. BA 2303
Prestige Pricing
Setting a high price on a product to attract quality- or status-conscious consumer.

52. BA 2303
Price Lining
Pricing a line of products at a number of different specific pricing points.

53. Standard Markup Pricing
BA 2303
Standard Markup Pricing
Adding a fixed percentage to the cost of all items in a specific product class.

54. BA 2303
Target Pricing
The practice of deliberately adjusting the composition and features of a product to achieve the target price to consumers.

55. BA 2303
Target Profit Pricing
Pricing method based on an annual target of a specific dollar volume of profit.

56. Target Return-on-Investment Pricing
BA 2303
Target Return-on-Investment Pricing
Setting prices to achieve return-on-investment (ROI) targets.

57. Target Return-on-Sales Pricing
BA 2303
Target Return-on-Sales Pricing
Setting typical prices that will give a firm a profit that is a specific percentage.

58. Yield Management Pricing
BA 2303
Yield Management Pricing
The charging of different prices to maximize revenue for a set amount of capacity at any given time.

59. What is a break-even point?
BA 2303
Concept Check
What is a break-even point?
Answer:
The break-even point (BEP) is the quantity at which total revenue and total cost are equal and beyond which profit occurs. 59