1. PRICING PRODUCTS AND SERVICES
CHAPTER
PRICING PRODUCTS AND SERVICES

2. NATURE AND IMPORTANCE OF PRICE
The Many Names of Price - ???
Hotel
Doctor
Insurance
apartment
What Is Price?
To the seller... Price is revenue
and profit source
To the consumer... Price is what you give
up to get what you want

3. THE PRICING EQUATION FOR CONSUMERS
PRICE = LIST PRICE - INCENTIVES & ALLOWANCES + EXTRA FEES

4. Profit = Total revenue - Total cost or
THE PROFIT EQUATION FOR SELLERS
Profit = Total revenue Total cost or
Profit = (Unit price × Quantity sold) −Total cost

5. WAYS TO SELECT BASE PRICE LEVELS
Demand oriented – focus on consumer preference
Cost oriented – focus on business’s expenses
Profit oriented – focus on profit
Competition oriented – focus on the marketplace players

6. DEMAND ORIENTED APPROACHES
Skimming Pricing – high initial price
Penetration Pricing – low initial price
Prestige Pricing – high price = quality and status
Target Pricing-make product fit price market will pay
Bundle Pricing- 2 products priced as one. helps poorer seller
Yield Management Pricing – peak and non peak prices

7. PROFIT ORIENTED APPROACHES
Target Profit Pricing-set annual dollar volume or profit
If I need to make $5000, & I can make 5 units,
selling price is $1000.
Target Return-on-Sales Pricing-
Want to receive 1% of sales as my profit – actors & directors
Target Return-on-Investment Pricing –
I can make 5 % on my money in the bank. Set price so
I make 6% on my investment if I invest it in my business.

8. COST ORIENTED APPROACHES
Standard Markup Pricing
add the standard industry fixed % to my costs. Easy
to implement.
Cost-Plus Pricing
add a standard dollar amount to my costs- like $5.00
for shipping and handling

9. COMPETITION ORIENTED APPROACHES
Customary Pricing
Adjust product to fit costs & maintain price
75¢ candy bar in a vending machine
Above-, At-, or Below-Market Pricing
Use largest competitor as a benchmark to set your price.
Rolex watches (above) or Value City Furniture (below)
Loss-Leader Pricing-
Price below cost to lure buyers in
Want buyer purchasing other things you sell at high mark ups
Lots of choices, but when to use which one?

10. PRICING OBJECTIVES Profit-Oriented Pricing Objectives-
Sales revenue
Sales-Oriented Pricing Objectives-
Status Quo Pricing Objectives-
Survival, social responsibility
Market share, unit volume

11. PRICING CONSTRAINTS Demand for the Product Class, Product, & Brand
Newness of the Product: Stage in the Product Life Cycle
Cost of Producing and Marketing the Product
Competitors’ Prices

12. ESTIMATING DEMAND AND REVENUE
Always use price first, but must adjust for:
Consumer Tastes
Price and Availability of Similar Products
Consumer Income levels
Changes in external environment

13. demand curve for Newsweek (initial conditions)

14. demand curve for Newsweek (shift in demand)

15. HOW MUCH MORE WILL THEY BUY WHEN I LOWER PRICE?
Price Elasticity of Demand
Inelastic Demand
An increase or decrease in price will not significantly affect demand
Elastic Demand
Consumers buy more or less of a product when the price changes

16. FUNDAMENTAL REVENUE CONCEPT
Total revenue is the total money received
from the sale of a product
Total Revenue = Price X Quantity
But price set depends on costs, so how to value them?

17. FUNDAMENTAL COST CONCEPT
Deviate with changes
in level of output
Total Costs
Variable
Costs
Fixed Costs
Do not deviate
as level of output changes
How do you know when you’re making money?

18. CALCULATING A BREAK EVEN POINT
Copyright
2007 by The McGraw -
Hill Companies, Inc. All Rights Reserved.
Slide 12 - 32

19. LEGAL AND ETHICAL CONSIDERATIONS
Deceptive pricing- can’t bait and switch
Issues
That
Limit
Pricing
Decisions
Price Fixing-Manufacturer can’t agree
with competitors or resellers to
set price
Price Discrimination-can’t set a different
price for the same item for two
different customers
Predatory Pricing-can’t sell an
item at a loss to bankrupt
the competition

20. Step 1: Set an Approximate Price Level
SETTING A FINAL PRICE
Step 1: Set an Approximate Price Level
pick a starting range using demand and
break even analysis
Step 2: Set the Specific List or Quoted Price
One-Price Policy – Dollar Store or no haggling
Flexible-Price Policy- different prices for different
buyers and buying situations

21. Step 3: Make Special Adjustments to the List or Quoted Price
SETTING A FINAL PRICE
Step 3: Make Special Adjustments to the List or Quoted Price
Discounts
Quantity Discounts
Seasonal Discounts
Cash Discounts
Trade Discounts to resellers

22. SETTING A FINAL PRICE Allowances Trade-In Allowances - like for cars
Promotional Allowances – if you sell 12, 13th is free
Everyday Low Pricing-reduce promotional allowances
but also reduce price of item so reseller sells more

23. Geographical Adjustments
SETTING A FINAL PRICE
Geographical Adjustments
FOB Origin Pricing – buyer pays shipping
owns goods in transit
Uniform Delivered Pricing – seller pays shipping
and charges it to all buyers equally,
but holds title during transit

24. Price (P)
Price (P) is the money or other considerations (including other goods and services) exchanged for the ownership or use of a good or service.

25. Demand Curve
A demand curve is a graph relating the quantity sold and price, which shows the maximum number of units that will be sold at a given price.

26. Total Cost (TC)
Total cost (TC) is the total expense incurred by a firm in producing and marketing a product. Total cost (TC) equals the sum of fixed cost (FC) and variable cost (VC) or TC = FC + VC.

27. Fixed Cost (FC)
Fixed cost (FC) is the sum of the expenses of the firm that are stable and do not change with the quantity of a product that is produced and sold.

28. Variable Cost (VC)
Variable cost (VC) is the sum of the expenses of the firm that vary directly with the quantity of a product that is produced and sold.

29. Break-Even Analysis
Break-even analysis is a technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output.

30. Pricing Objectives
Pricing objectives involve specifying the role of price in an organization’s marketing and strategic plans.

31. Pricing Constraints
Pricing constraints involve factors that limit the range of prices a firm may set.