1. Idil Yaveroglu Lecture Notes
Chapter 10 Pricing
Idil Yaveroglu
Lecture Notes

2. What is a Price?
The amount of money charged for a product or service, or the sum of the values that consumers exchange for the benefits of having or using the product or service.
To the seller... Price is revenue
and profit source
What is Price?
To the consumer... Price is the cost of something

3. Factors to Consider When Setting Prices

4. Customer Perceptions of Value (no demand above this price)
PRICE CEILING
Customer Perceptions of Value
(no demand above this price)
INTERNAL CONSIDERATIONS
Marketing Goals
Marketing-Mix Strategy
Costs
Organizational Considerations
EXTERNAL CONSIDERATIONS
Nature of Market
Consumer Demand
Competition
Environmental Factors
PRICE FLOOR
Product Costs
(no profits below this price)

5. Pricing Approaches Cost Based Pricing Value Based Pricing
Competition Based Pricing

6. Cost Based Pricing 1. Cost-Based Pricing: Cost-Plus Pricing
Adding a standard markup to cost
Popular pricing technique because:
It simplifies the pricing process
Price competition may be minimized
It is perceived as more fair to both buyers and sellers
Two kinds of mark-up applied:
Cost plus percentage of cost
Cost plus fixed fee

7. Disadvantages of Cost Based Pricing
Ignores demand (price sensitivity)
Does not account for competition
May result in underpricing or overpricing

8. Costs
Fixed Costs: Costs that do not vary with sales or production levels.
Overhead: Executive salaries, rent
Direct Fixed Costs: Advertising, marketing manager’s salary
Variable Costs: Costs that do vary directly with the level of production.
e.g. raw materials
Total Costs (for a given level of production)

9. Costs
Costs at different levels of production (cost changes in short term)

10. Costs
EXPERIENCE / LEARNING CURVE: the drop in average per unit production cost that comes with accumulated production experience.

11. Cost-Based Pricing Example
- Variable costs: $ Fixed costs: $ 500,000
- Expected sales: 100,000 units - Desired Sales Markup: 20%
Variable Cost + Fixed Costs/Unit Sales = Unit Cost
$20 + $500,000/100,000 = $25 per unit
Unit Cost/(1 – Desired Return on Sales) = Markup Price
$25 / ( ) = $31.25

12. Cost Based Pricing
2. Cost-Based Pricing: Break-Even Analysis and Target Profit Pricing
Break-even charts show total cost and total revenues at different levels of unit volume.
The intersection of the total revenue and total cost curves is the break-even point.
Companies wishing to make a profit must exceed the break-even unit volume.

13. Break-Even Analysis and Target Profit Pricing
Cost Based Pricing
Break-Even Analysis and Target Profit Pricing
Revenues
1000
800
600
400
200
Target Profit $200,000
Thousands of Dollars
Total Costs
Break-even point
Fixed Costs
Quantity To Be Sold To Meet Target Profit
Sales Volume in Thousands of Units

14. Value Based Pricing Value-Based Pricing: Good-Value Pricing
Uses buyers’ perceptions of value rather than seller’s costs to set price.
Measuring perceived value can be difficult.
Consumer attitudes toward price and quality have shifted during the last decade.
Good-Value Pricing
Everyday low pricing (EDLP) vs. high-low pricing
Value-Added Pricing
Adding value added features and services to be able to charge high prices

16. Competition Based Pricing
Also called going-rate pricing
May price at the same level, above, or below the competition
Bidding for jobs is another variation of competition-based pricing
Sealed bid pricing

17. Other Internal and External Considerations Affecting Pricing Decisions
Overall Marketing Strategy, Objectives and Mix
Company pricing objectives may include;
Survival
Low prices to cover variable costs and some of fixed costs
Current profit maximization
Choose the price that maximizes current profit, cash flow or ROI
Market share leadership
As low as possible to increase market share
Product quality leadership
High prices to cover higher performance quality

18. Price vs. Non Price Positioning

19. Other External Considerations Affecting Pricing Decisions
Market Demand Structure
Pure Competition
Monopolistic Competition
Oligopolistic Competition
Pure Monopoly

20. The Demand Curve D Price .50 1.00 1.50 2.00 2.50 20 40 60 80 100 12020 40 60 80
100
120
Quantity demanded

21. Shift vs. Movement Along the Curve
Demand curve under initial conditions
Shift in the demand curve with more favorable conditions
Slide 13-28

22. The Supply Curve Quantity supplied S Price .50 1.00 1.50 2.00 2.50 2020 40 60 80
100
120

23. Equilibrium Price Quantity demanded S Price .50 1.00 1.50 2.00 2.50 2020 40 60 80
100
120 D
Surplus
Shortage
Price Equilibrium

24. Price Elasticity A. Inelastic Demand - Demand Hardly Changes With
a Small Change in Price.
Price P2 P1 Q2 Q1
Quantity Demanded per Period
B. Elastic Demand -
Demand Changes Greatly With
a Small Change in Price.
Price
P’2
P’1 Q2 Q1
Quantity Demanded per Period

25. Total Revenue and Price Elasticity
Percentage change in Q
Elasticity (E) =
Percentage change in P
Inelastic Demand  E < 1  when P increases, TR increases
Elastic Demand  E > 1  when P increases, TR decreases
Unitary Elasticity  E = 1  P increase is offset by increase in Q
 no change in TR

26. Price Elasticity Buyers are less sensitive to price changes when,
Product they are buying is unique
When it is high in quality, prestige, or exclusiveness
Substitutes are hard to find
When the total expenditure for a product is low relative to their income or when cost is shared by another party

27. Other External Considerations Affecting Pricing Decisions
Nature of Market and Demand
Competitors’ Strategies
Economic Conditions
Government Actions