1. 12
Pricing Fundamentals

2. Chapter Learning Objectives
Understand the role of price
Identify the characteristics of price and non price competition
Be familiar with demand curves and the price elasticity of demand
Understand the relationships among demand, costs, and profits
Describe key factors that may influence marketers’ pricing decisions
Be familiar with the major issues that affect the pricing of products for business markets
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3. Chapter Outline The Role of Price Price and Nonprice Competition
Price competition - Nonprice competition
Analysis of Demand
The Demand Curve - Demand fluctuations
Assessing price elasticity of demand
Demand, Cost, and Profit Relationships
Marginal analysis - Breakeven analysis
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4. Chapter Outline Factors Affecting Pricing Decisions
Organizational and marketing objectives
Types of pricing objectives
Costs Other marketing mix variables
Channel member expectations
Customers’ interpretation and response
Competition Legal and regulatory issues
Pricing for Business Markets
Price discounting - Geographic pricing
Transfer pricing
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5. The Role of Price
Price
The value exchanged for products in a marketing exchange
Barter
The trading of products; the oldest form of exchange
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6. The Nature of Price = Costs Total - Revenues Profit Sold) Quantity x
It is the most readily changeable characteristic (under favorable circumstances) of a product.
It is a key element in the marketing mix because it relates directly to generation of revenues and quantities sold.
It is a key component of the profit equation, having strong effect on the firm’s profitability.
It has symbolic value to customers—prestige pricing.
Costs
Total -
Revenues
Profit =
Sold)
Quantity x
(Price
Profits
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7. Price Competition Price Competition
Emphasizing price and matching or beating competitors’ prices
An effective strategy in markets with standardized products
Lowest-cost competitor (seller) will be most profitable.
Allows marketers to respond quickly to competitors
Price wars can weaken competing organizations.
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8. Nonprice Competition Nonprice Competition
Emphasizing factors other than price to distinguish a product from competing brands
Distinctive product features • Service
Product quality • Promotion • Packaging
Advantage is in increasing brand’s unit sales without changing price.
Is effective when a product or service’s features are difficult to imitate by competitors and customers perceive their value
Builds customer loyalty by focusing on nonprice features
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9. Analysis of Demand The Demand Curve
A graph of the quantity of products expected to be sold at various prices
Decreases in price create increases in quantities demanded.
Increased demand means larger quantities sold at the same price.
Prestige items sell best in higher price ranges.
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10. Demand Curve Illustrating the Price/ Quantity Relationship and Increase in Demand
FIGURE 12.1
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11. Demand Curve Illustrating the Relationship Between Price and Quantity for Prestige Products
FIGURE 12.2
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12. Elasticity of Demand FIGURE 12.3
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13. Analysis of Demand = Demand Fluctuations Changes in buyers’ needs
Variations in the effectiveness of the marketing mix
The presence of substitutes
Dynamic environmental/market factors
Assessing Price Elasticity of Demand
Price elasticity
A measure of the sensitivity of demand to changes in price—the greater the change in demand for a specific change in price, the more elastic demand is
Price in
Change %
Demanded
Quantity
Demand of
Elasticity =
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14. Demand, Cost, and Profit Relationships
Marginal Analysis
Examines what happens to a firm’s costs and revenues when product changes by one unit
Marginal Revenue
The change in total revenue resulting from the sale of an additional unit of product
Profit is maximized where marginal costs (MC) are equal to marginal revenue (MR).
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15. Types of Costs
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16. Costs and Their Relationships
Quantity
Fixed Cost
Average Fixed Cost (2)
Average Fixed Cost (2) ÷ (1)
Average Total Cost (3) + (4)
Total Cost (5) × (1)
Marginal Cost 1
$40
$40.00
$20.00
$60.00
$60
$10 2 40
20.00
$15.00
35.00 70 3
13.33
$10.67
24.00 72 18 4
10.00
$12.50
22.50 90 20 5
8.00
$14.00
22.00
110 30 6
6.67
$16.67
23.33
140 7
5.71
25.71
180
TABLE 12.1
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17. Marginal Analysis Method for Determining the Most Profitable Price1 2 3 4 5 6 7
Price
Quantity Sold
Total Revenue (1) × (2)
Marginal Revenue
Marginal Cost
Total Cost
Profit (3) – (6)
$57.00
$ 57
$ 60
-$3
$50.00
100 43 10 70 30
$38.00
114 14 72 42
$33.00*
132 18 90
$30.00
150 20
110 40
$27.00
162 12
140 22
$25.00
175 13
180 -5
*Boldface indicates the best price-profit combination.
TABLE 12.2
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18. Typical Marginal Cost and Average Total Cost Relationship
FIGURE 12.4
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19. Typical Marginal Revenue and Average Revenue Relationship
FIGURE 12.5
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20. Combining the Marginal Cost and Marginal Revenue Concepts for Optimal Profit
FIGURE 12.6
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21. Breakeven Analysis Breakeven Point
The point at which the costs of producing a product equal the revenue made from selling the product
The point after which profitability begins
Costs
Fixed to
Contribution
Unit -
Per
Breakeven Point =
Costs
Unit Variable –
Price
Unit
Fixed
Total
Breakeven Point =
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22. Determining the Breakeven Point
FIGURE 12.7
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23. Factors That Affect Pricing Decisions
FIGURE 12.8
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24. Factors Affecting Pricing Decisions
Organizational and Marketing Objectives
Prices should be set that are consistent with the organization’s goals and mission.
Prices must be compatible with marketing objectives (e.g., setting premium prices to enhance a product’s quality image).
Types of Pricing Objectives
Setting prices low to increase market share
Using temporary price reductions to gain market share
Lowering prices to raise cash quickly
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25. Factors Affecting Pricing Decisions (cont’d)
Costs
Set a floor price—products must be sold above their costs if the firm is to remain in business.
Reducing costs increases productivity and profitability.
Using labor-saving technologies
Focusing on quality
Establishing efficient manufacturing processes
Other Marketing Mix Variables
Price/quality image of the product or brand
Selective or intensive product distribution
Product pricing used as a promotional tool
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26. Factors Affecting Pricing Decisions (cont’d)
Channel Member Expectations
To make a profit at least equivalent to the potential profit from handling a competitor’s brand
To earn a profit commiserate with the effort and resources the channel member expends on the product
To receive discounts for volume purchases and prompt payment
To be supported by the producer with training, advertising, sales promotion, and return policies
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27. Factors Affecting Pricing Decisions (cont’d)
Customers’ Interpretation and Response
What meaning does the product’s price have to the customer?
Does the customer respond to the price by moving closer to or farther away from making a purchase?
Internal reference price
A price developed in the buyer’s mind through experience with the product
External reference price
A comparison price provided by others
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28. Factors Affecting Pricing Decisions (cont’d)
Buyers’ Responses to Price
Value consciousness
Concern about price and quality
Price consciousness
Striving to pay low prices
Prestige sensitivity
Being drawn to products that signify prominence and status
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29. Factors Affecting Pricing Decisions (cont’d)
Competition
Pricing to match competitors’ prices
Judging competitors’ responses to adjusting prices
Changes in an industry’s market structure cause and create pricing opportunities.
Legal and Regulatory Issues
Price controls intended to curb inflation
Controls that set/regulate prices for specific products
Regulations and laws to prohibit price fixing, and deceptive and discriminatory pricing
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30. Pricing for Business Markets
Price Discounting
Trade (Functional) Discounts
A reduction off the list price given by a producer to an intermediary for performing for performing certain functions
Quantity Discounts
Deductions from list price for purchasing large quantities
Cumulative Discounts
Quantity discounts aggregated over a stated period
Noncumulative Discounts
One-time reductions in price based on specific factors
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31. Pricing for Business Markets (cont’d)
Price Discounting (cont’d)
Cash Discount
A price reduction given to buyers for prompt payment or cash payment
Seasonal Discount
A price reduction given to buyers for purchasing goods or services out of season
Allowance
A concession in price to achieve a desired goal
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32. Table 12.3
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33. Pricing for Business Markets (cont’d)
Geographic Pricing
Reductions for transportation costs and other costs related to the physical distance between buyer and seller
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34. Pricing for Business Markets (cont’d)
Transfer Pricing
The price of products that one organizational unit charges when selling to another unit in the same organization
Actual full cost
All fixed and variable costs divided by the number of units produced
Standard full cost
Pricing based on what it would cost to produce the goods at full plant capacity.
Cost plus investment
Full cost plus internal cost of assets used in production
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35. Pricing for Business Markets (cont’d)
Transfer Pricing (cont’d)
Market-based pricing
Market price less marketing and selling costs
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36. After reviewing this chapter you should:
Understand the role of price.
Be aware of the characteristics of price and nonprice competition.
Be familiar with demand curves and the price elasticity of demand.
Be aware of the relationships among demand, costs, and profits.
Be able to describe the key factors that may influence marketers’ pricing decisions.
Have considered the issues affecting the pricing of products for organizational markets.
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