1. PRICE

2. Yes, But What Does It Cost?
Price is the value that customers give up or exchange to obtain a desired product
Payment may be in the form of money, goods, services, favors, votes or anything else that has value to the other party

3. Opportunity Costs
The value of something that is given up to obtain something else also affects the “price” of a decision
Example: the cost of going to college is charged in tuition and fees but also includes the opportunity cost of what a student cannot earn by working instead

4. The Importance of Pricing Decisions
Price is the only P which represents revenue rather than an expense
Pricing and the Marketing Mix
Price and Place
Price and Product
Price and Promotion

5. The price of four different purchases

6. Steps in setting price Identify objectives & constraints
Estimate demand & revenue
Determine cost, volume and profit
Set an approximate price level
Set List or Quoted price
Make adjustments to list price

7. 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 & Time Period They Apply
Types of Competitive Markets - Competitors’ Prices

8. Pricing Objectives Sales or market share objectives Profit objectives
Competitive effect objectives
Customer satisfaction objectives
Image enhancement objectives
Social Responsibility

9. Estimating Demand Demand refers to customers’ desire for products
How much of a product do consumers want?
How will this change as the price goes up or down?
Identify demand for an entire product category in markets the company serves
Predict what the company’s market share is likely to be

10. The Price Elasticity of Demand
How sensitive are customers to changes in the price of a product?
Price elasticity of demand is a measure of the sensitivity of customers to changes in price.
Price elasticity of demand = Percentage change in quantity demanded / Percentage change in price

11. Demand Curves
Shows the quantity of a product that customers will buy in a market during a period of time at various prices if all other factors remain the same
Vertical axis represents the different prices a firm might charge
Horizontal axis shows the number of units

12. Demand Curves

13. Influences on Price Elasticity of Demand
Availability of substitute goods or services
If a product has a close substitute, its demand will be elastic
Time period
The longer the time period, the greater the likelihood that demand will be more elastic
Income effect
Change in income affects demand for a product even if its price remains the same
normal goods, luxury goods, inferior goods

14. Elastic and Inelastic Demand Curves

15. Types of Costs - 1
Variable costs - per-unit costs of production that will fluctuate depending on how many units or individual products a firm produces
Fixed costs - do not vary with the number of units produced. Costs remain the same regardless of amount produced

16. Types of Costs - 2
Average fixed cost is the fixed cost per unit produced (total fixed costs / number of units produced)
Total costs = variable costs plus fixed costs

17. Break-Even Analysis
Technique used to examine the relationship between cost and price and to determine what sales volume must be reached at a given price before the company will completely cover its total costs and past which it will begin making a profit
All costs are covered but there isn’t a penny left over

18. Break-even analysis chart

19. Marginal Analysis
Provides a way for marketers to look at cost and demand at the same time
Examines the relationship of marginal cost to marginal revenue
marginal cost is the increase in total costs from producing one additional unit of a product
marginal revenue is the increase in total income or revenue that results from selling one additional unit of a product

20. Marginal Analysis

21. Pricing Strategies Based on Cost
Disadvantages
Fail to consider several factors
target market
demand
competition
product life cycle
product’s image
Difficult to accurately estimate costs
Advantages
Simple to calculate
Relatively risk free

22. Cost-Plus Pricing Most common cost-based approach
Marketer figures all costs for the product and then adds desired profit per unit
Straight markup pricing is the most frequently used type of cost-plus pricing
price is calculated by adding a pre-determined percentage to the cost

23. Steps in Cost-Plus Pricing
Estimate unit cost
Calculate markup
Markup on cost
Markup on selling price - markup percentage is the seller’s gross margin
gross margin is the difference between the cost to the wholesaler or retailer and the price needed to cover overhead and profit

24. Cost Plus Pricing Excerpt
Fixed costs = $2,000,000
Number of jeans produced = 400,000
Fixed costs per unit = $5
Variable costs per unit = $15
Markup as % of costs = 25%
Markup on cost
Price = total cost + (total cost * markup percentage)
Price = $20 + ($20 * .25) = $20 + $5 = $25

25. Markup on Cost versus Markup on Selling Price
Price paid = $30
Markup = 40%
Price = total cost + (total cost * markup percentage)
Price = $30 + ($30 *.40) = $42
on Selling Price
Price paid = $30
Markup = 40%
Price = cost/1.00 – markup %
Price = $30/ = $50

26. Price Floor Pricing
Method for calculating price that considers both costs and what can be done to assure that a plant can operate at capacity
Typically used when market conditions make it impossible for a firm to sell enough
If the price-floor price can be set above the variable costs, the firm can use the difference to increase profits or cover fixed costs

27. Pricing Strategies Based on Demand-1
Demand-based pricing means that the selling price is based on an estimate of volume or quantity that a firm can sell in different markets at different prices
Demand-backward pricing starts with a customer-pleasing price and works backward to costs

28. Pricing Strategies Based on Demand-2
Chain-Markup Pricing extends demand backward pricing from end consumer back to the manufacturer
Example:
Price customers are willing to pay = $39.99
Markup required by retailer = 40%
Price retailer will pay $39.99 * .60 = $23.99

29. Pricing Strategies Based on Competition
Competitive parity - price products at near the competition
Price leadership - price products based on prices of industry leaders
Loss leaders - price products below competition

30. Pricing Strategies Based on Customers’ Needs
Cost of ownership strategy - price consumers pay for product, plus the cost of maintaining and using the product, less any resale value (e.g., Sanyo batteries)
Value pricing (EDLP*) - offers a fair value to consumers (e.g., Kmart’s blue light specials)
** EDLP = everyday low pricing

31. New Product Pricing
Skimming price - firm charges a high, premium price for its new product with the intention of reducing it in future response to market pressures
Penetration pricing - new product is introduced at a very low price
Trial pricing - product carries a low price for a limited time period

32. Pricing Tactics Pricing for Individual Products
two-part pricing (e.g., country clubs)
payment pricing (e.g., easy payments for new cars)
Pricing for Multiple Products
Price bundling (e.g., monitor, keyboard, CPU in a computer package)
Captive pricing (e.g., razors and razor blades)

33. More Pricing Tactics Geographic pricing F.O.B. pricing Zone pricing
Uniform delivered pricing
Freight absorption pricing

34. Discounting for Channel Members
Trade or functional discounts
Quantity discounts
Cash discounts
Seasonal discounts

35. Trade Discounts Pricing structure built around list price
List price, also called suggested retail price, is the price that the manufacturer sets as the appropriate price for the end consumer
Manufacturers offer discounts because channel members perform selling, credit, storage and transportation services

36. Pricing with Electronic Commerce
Dynamic pricing strategies
price can be adjusted to meet changes in the marketplace
online price changes can occur quickly, easily, and at virtually no cost
Auctions
sites offer chance to bid on items
sites offer reverse-price auctions

37. Price Discrimination
Means that marketers classify customers based on some characteristic that indicates what they are willing or able to pay
Acceptable when price differences are in response to
changes in cost of product
changes in competitive activity
changes in marketplace

38. Psychological Issues in Pricing
Internal Reference Prices - consumers have a set price or price range in their mind
If the actual price is higher, consumers will feel the product is overpriced
If it is too low below the internal reference price, consumers may assume its quality is inferior
Competition as Reference Price - If the price is close, the assimilation effect will encourage the customer to think the products are similar enough and choose the lower priced product

39. Price-Quality Inferences
If consumers are unable to judge the quality of a product through examination or prior experience, they usually will assume that the higher-priced product is the higher-quality product

40. Price and Quality Consumers tend to associate high prices
with high quality. This Belgian ad for Chat Noir coffee tries to suggest otherwise. It reads, “Quality coffee. But
we’ve really squeezed
the price.”

41. Psychological Pricing Strategies
Odd-even pricing
Price lining

42. Price Lining

43. Legal and Ethical Considerations in Pricing
Deceptive pricing practices
Price discrimination

44. Deceptive Pricing Practices
Retailers must not claim prices are lower than competitors unless it is true
A going out-of-business sale should be the last sale before going out of business
Bait-and-switch - consumers are lured into store for a very low price, but then the item is not available. A more expensive product is offered instead
Trading up is acceptable

45. Price Discrimination
Means selling the same product to different wholesalers and retailers at different prices if practices lessen competition

46. Price Fixing
Occurs when two or more companies conspire to keep prices at a certain level
Horizontal price fixing occurs when competitors making the same product jointly determine what price they each will charge
Vertical price fixing occurs when manufacturers attempt to force the retailer to charge the suggested retail price

47. Predatory Pricing
Means that a company sets a very low price for the purpose of driving competitors out of business

48. Dumping (US) Selling in foreign market at or below cost
Selling in a foreign market more than 5% below price in home market