1. Pricing the Product

2. Chapter Objectives
Explain the importance of pricing and how prices can take both monetary and nonmonetary forms
Understand the pricing objectives marketers typically have in planning pricing strategies
Describe how marketers use costs, demands, and revenue to make pricing decisions
Understand some of the environmental factors that affect pricing strategies

3. Chapter Objectives (cont’d)
Understand key pricing strategies
Explain pricing tactics for single and multiple products, and for pricing on the Internet
Understand the opportunities for Internet pricing strategies
Describe the psychological, legal, and ethical aspects of pricing

4. Real People, Real Choices
Taco Bell (Danielle Blugrind)
In order to differentiate itself from the competition, Taco Bell needed to update its value pricing menu.
Option 1: price entire menu
at $1.29
Option 2: price items at 99
cents and $1.29
Option 3: price items at
99 cents, $1.19, and $1.29
TACO BELL

5. “Yes, but what does it cost?”
Price: the assignment of value, or the amount the consumer must exchange to receive the offering
Money, goods, services, favors, votes, or anything else that has value to the other party

6. Figure 11.1: Steps in Price Planning

7. Step 1: Develop Pricing Objectives
Sales or market share objectives
Profit objectives
Competitive effect objectives
Customer satisfaction objectives
Image enhancement objectives
ROLLS-ROYCE

8. Step 2: Estimate Demand Demand: customers’ desires for a product
How much of a product are customers willing to buy as its price goes up or down?

9. Demand Curves
Law of demand: as price goes up, quantity demanded goes down.
For prestige products, a price increase may actually result in an increase in quantity demanded.

10. Figure 11.2: Demand Curves for Normal and Prestige Products

11. Shifts in Demand Curve
Changes in marketing strategy (improved product, new advertising) or non-marketing activities can cause upward or downward shifts in demand.
At a given price, demand is greater or less than before the shift.

12. Figure 11.3: Shift in Demand Curve

13. Estimating Demand
Marketers predict total demand by estimating potential buyers for a product, then multiplying number of buyers times average amount of each buyer’s purchase.
Then they predict what the company’s share of the total market will be.

14. Price Elasticity of Demand
The percentage change in unit sales that results from a percentage change in price.
Figure 11.5: Price Elastic and Inelastic Demand Curves

15. Elastic Demand
A change in price results in a substantial change in quantity demanded.
If price is increased, revenues
decrease, and vice-versa.
Non-necessities (pizza)
generate elastic demand.
Availability of close substitute
products facilitates elastic demand.

16. Inelastic Demand
A change in price has little or no effect on quantity demanded.
If price is increased, revenues increase.
The demand for necessities (food and electricity) is generally inelastic.

17. Cross-elasticity of Demand
Changes in prices of other products affect a product’s demand.
Products are substitutes: increase in price of one will increase demand for other (bananas vs. strawberries).
One product is essential for use of second: increase in price of one decreases demand for other (increasing price of gas lowers demand for tires).

18. Group Activity
Your group are marketers for a candy bar manufacturer. You feel it’s time to increase price, but you’re concerned the increase might not be profitable.
--How would you investigate elasticity of demand?
--What findings would lead you to increase price?
--What findings would lead you not to increase it?

19. Step 3: Determine Costs
Variable costs: costs of production that are tied to and vary depending on the number of units produced.
Average variable costs may change as the number of products produced changes.

20. Figure 11.6: Variable Costs at Different Levels of Production

21. Step 3: Determine Costs (cont’d)
Fixed costs: costs of production that don’t change with number of units produced
Rent, cost of owning/maintaining factory, utilities, equipment, fixed salaries of firm’s executives
Average fixed cost: fixed cost per unit (total fixed costs divided by number of units produced) will decrease as number of units produced increases.

22. Step 3: Determine Costs (cont’d)
Total costs: total of fixed costs and variable costs for a set number of units produced.

23. Break-Even Analysis
A method for determining the number of units a firm must produce and sell at a given price to cover all its costs.
Break-even point: point at which a firm doesn’t lose any money and doesn’t make any profit.
Song Airlines
Video

24. Figure 11.7: Break-Even Analysis

25. Break-Even Analysis (cont’d)
Break-even point (in units) = (total fixed costs) divided by (contribution per unit)
Contribution per unit: the difference between the price the firm charges for a product and the variable costs
Break-even point (in dollars) = (total fixed costs) divided by [1 - (variable cost per unit divided by price)]

26. Marginal Analysis
A method that uses cost and demand to identify the price that will maximize profits.
Marginal cost: increase in total costs from producing one additional unit of a product
Marginal revenue: increase in total income or revenue from selling one additional unit of a product (decreases with each additional unit sold)
Profit is maximized where marginal cost is exactly equal to marginal revenue.

27. Figure 11.8: Marginal Analysis

28. Marketing Math Activity
You and your friend have decided to go into business together manufacturing handbags.
--You know fixed costs will be $120,000 a year, and you expect variable costs to be $28 per bag.
--If you plan to sell the bags to retail stores for $35, how many must you sell to break even?

29. Step 4: Evaluate the Pricing Environment
The economy
Broad economic trends
Recessions,
Inflation
The competition
Consumer trends

30. Step 5: Choose a Price Strategy
Pricing strategies based on cost
Simple to calculate and relatively risk free
Cost-plus pricing: total all product costs and add markup

31. Step 5: Choose a Price Strategy (cont’d)
Pricing strategies based on demand
Based on estimate of quantity a firm can sell at different prices
Target costing: identify quality and functionality customers need and price they’re willing to pay before designing product.
Yield management pricing: charge different prices to different customers to manage capacity
PRICELINE.COM

32. Step 5: Choose a Price Strategy (cont’d)
Pricing strategies based on the competition
Pricing near, at, above, or below the competition
Price leadership strategy: industry giant announces price, and competitors get in line or drop out

33. Discussion
In what ways is a price leadership strategy good or bad for consumers?
Should governments allow price leadership?

34. Step 5: Choose a Price Strategy (cont’d)
Pricing strategies based on customers’ needs
Value pricing or everyday low pricing (EDLP): pricing strategy in which a firm sets prices that provide ultimate value to customers.

35. Step 5: Choose a Price Strategy (cont’d)
New-product pricing
Skimming price: a very high premium price
Penetration pricing: a very low price to encourage more customers to purchase
Trial pricing: low price for a limited period of time
HP FINANCIAL CALCULATORS

36. Discussion
In pricing new products, marketers may choose a skimming or a penetration pricing strategy.
--What is the advantage or disadvantage of this practice for consumers?
--For the industry as a whole?

37. Step 6: Develop Pricing Tactics
Pricing for individual products
Two-part pricing: offering two separate types of payments to purchase the product
Payment pricing: breaking total price into smaller amounts payable over time

38. Step 6: Develop Pricing Tactics (cont’d)
Pricing for multiple products
Price bundling: selling two or more goods or services as a single package for one price
Captive pricing: pricing two products that work only when used together

39. Step 6: Develop Pricing Tactics (cont’d)
Distribution-based pricing
F.O.B. (free on board) origin pricing
F.O.B delivered pricing
Basing-point pricing
Uniform delivered pricing
Freight absorption pricing

40. Step 6: Develop Pricing Tactics (cont’d)
Discounting for channel members
List price (suggested retail price): price that manufacturer sets as appropriate for end consumer to pay
Trade or functional discounts: set percentage discounts off list price for each channel level
Quantity discounts: reduced prices for purchases of larger quantities

41. Step 6: Develop Pricing Tactics (cont’d)
Discounting for channel members (continued)
Cash discounts: enticements to customers to pay bills quickly (2% 10 days, net 30 days)
Seasonal discounts: price reductions offered during certain times of year

42. Pricing and Electronic Commerce
Dynamic pricing strategies: seller easily adjusts price to meet changes in marketplace.
Cost of changing prices on Internet is practically zero.
Firms can respond quickly and frequently to changes in costs, supply, and/or demand.
CHEAPTICKETS.COM

43. Pricing and Electronic Commerce (cont’d)
Online auctions (eBay.com)
E-commerce allows shoppers to purchase products through online bidding.
Pricing advantages for online shoppers
Consumers gain control.
Search engines and “shopbots” make customers more price-sensitive.
Consumers have more negotiating power.

44. Psychological Issues in Pricing
Buyer’s pricing expectation
Internal reference price: consumers use a price/price range to evaluate product’s cost.
Assimilation effect
Contrast effect
Price/quality inferences: consumers assume higher-priced product has higher quality.

45. Discussion
Consumers often make price-quality inferences about products.
--What are some products for which you make price-quality inferences?
--Do your inferences make sense?

46. Psychological Pricing Strategies
Odd-even pricing: prices ending in 99 rather than 00 lead to increased sales.
Price lining: items in a product line sell at different price points.

47. Legal and Ethical Considerations in Pricing
Deceptive pricing practices
Going-out-of-business sale
Bait-and-switch
Unfair sales acts
Loss-leader pricing
Illegal business-to-business price discrimination

48. Discussion
In loss-leader pricing, retailers advertise and sell an item below cost to get customers into the store.
--Do you consider this an unethical practice?
--Who benefits and who is hurt by it?
--Should the practice be made illegal (some states have done so)?
--How is loss-leader pricing different from bait-and-switch pricing?

49. Legal and Ethical Considerations in Pricing (cont’d)
Price fixing: two or more companies conspire to keep prices at a certain level
Horizontal price fixing
Vertical price fixing
Predatory pricing: company sets a very low price for purpose of driving competitors out of business

50. Real People, Real Choices
Taco Bell (Danielle Blugrind)
Danielle chose option 3: price items at 99 cents, $1.19, and $1.29
By carefully tuning its pricing strategy, Taco Bell is reclaiming its position as purveyor of fast-food value for the money.

51. Marketing Plan Exercise
A new seaside resort offers luxury rentals for a few days, a week, or longer. Consider possible pricing strategies -- cost-plus, yield management, everyday low pricing, skimming, and penetration and trial pricing.
--What pricing strategy do you
recommend for the resort ?
--What pricing tactics do
you suggest?

52. Marketing in Action Case: You Make the Call
What is the decision facing True Religion?
What factors are important in understanding this decision situation?
What are the alternatives?
What decision(s) do you recommend?
What are some ways to implement your recommendation?

53. Keeping It Real: Fast-Forward to Next Class, Decision Time at General Motors R*Works
Meet Vince O’Brien, VP-Regional Managing Director for General Motors R*Works
R*Works: regional promotional agency for GM; manages partnerships with sports organizations
The decision: How to get dealers to support R*Works ski mountain promotional partnerships?