1. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing 4/e by Quester, McGuiggan, Perreault and McCarthy 13–1 Part 3: The marketing mix Chapter 13: Setting prices for goods and services Step 5: Design the marketing strategy

2. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing 4/e by Quester, McGuiggan, Perreault and McCarthy 13–2 When we finish this lecture you should Understand how most wholesalers and retailers use mark-ups Understand why turnover is so important in pricing Understand the six different types of cost Understand the advantages and disadvantages of average-cost pricing Understand the use of break-even analysis in evaluating possible prices Understand the advantages of marginal analysis and how it is used in price setting Understand the various factors that influence customer price sensitivity Be familiar with the use of demand estimates in pricing

3. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing 4/e by Quester, McGuiggan, Perreault and McCarthy 13–3 Strategic pricing Strategic pricing decisions are essential if an organisation is to compete successfully in the marketplace Pricing objectives and policies should guide these pricing decisions The traditional method for companies to set prices is to add a standard mark-up to the average cost of the products they sell Now managers are realising that they should evaluate the effect of a price decision on demand and therefore sales volume, costs and total profit

4. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing 4/e by Quester, McGuiggan, Perreault and McCarthy 13–4 Figure 13.1 Key factors that influence price setting

5. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing 4/e by Quester, McGuiggan, Perreault and McCarthy 13–5 Mark-ups Mark-up—Dollar amount added to the cost of the products to get the selling price Standard mark-up per cent—The percentage of the selling price that is added to the cost to get the selling price—the per cent of selling price unless otherwise noted Products may be marked up several times through the channel—The sequence of mark-ups is the mark-up chain Margins and profitability—High mark-ups do not always mean high profits; profitability depends on the inventory turnover rate

6. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing 4/e by Quester, McGuiggan, Perreault and McCarthy 13–6 Inventory turnover rates Number of times average inventory is sold in a year 1.(Cost of sales) / (Average inventory at cost) 2.(Net sales) / (Average inventory at selling price) 3.(Sales in units) / (Average inventory in units)

7. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing 4/e by Quester, McGuiggan, Perreault and McCarthy 13–7 Types of cost Total fixed costs (TFC)—Sum of those costs that are fixed in total, irrespective of quantity sold Total variable costs (TVC)—Sum of those variable expenses that are closely related to output Total cost (TC)—Sum of total fixed and total variable costs Average cost (AC) per unit—Total cost divided by related quantity Average fixed cost (FC) per unit—Total fixed cost divided by the related quantity Average variable cost (AVC) per unit—Total variable cost divided by the related quantity

8. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing 4/e by Quester, McGuiggan, Perreault and McCarthy 13–8 Average-cost pricing Adding a ‘reasonable’ mark-up to the average cost of a product Simplifies pricing Quite common, especially among intermediaries Average cost is usually based on estimates or past records – But actual average costs depend on quantity sold – And quantity sold depends on price

9. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing 4/e by Quester, McGuiggan, Perreault and McCarthy 13–9 Figure 13.3 Results of average-cost pricing

10. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing 4/e by Quester, McGuiggan, Perreault and McCarthy 13–10 Figure 13.4 Cost structure of an organisation

11. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing 4/e by Quester, McGuiggan, Perreault and McCarthy 13–11 Figure 13.5 Typical shape of cost (per unit) curves when average variable cost is assumed constant per unit

12. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing 4/e by Quester, McGuiggan, Perreault and McCarthy 13–12 Figure 13.6 Evaluation of various prices along an organisation’s demand curve

13. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing 4/e by Quester, McGuiggan, Perreault and McCarthy 13–13 Figure 13.7 Summary of relationships among quantity, cost and price using cost-oriented pricing ?

14. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing 4/e by Quester, McGuiggan, Perreault and McCarthy 13–14 Break-even analysis Used to evaluate whether the organisation will be able to cover costs (break even) at a particular price Indicates the break-even point (BEP)—that is sales (units or dollars) needed to break even Can be modified to incorporate a target return Limitations of break-even analysis – Assume any quantity can be sold at a given price – Total cost curve is assumed to be a straight line

15. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing 4/e by Quester, McGuiggan, Perreault and McCarthy 13–15 Figure 13.8 Break-even chart for a particular situation

16. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing 4/e by Quester, McGuiggan, Perreault and McCarthy 13–16 Marginal analysis Company should produce that output where marginal cost is just less than or equal to marginal revenue Marginal analysis—Evaluating the change in total revenue and total cost from selling one more unit— to find most profitable price and quantity Marginal revenue (MR)—The change in total revenue that results from the sale of one more unit of a product Marginal cost (MC)—Change in total cost that results from producing one more unit

17. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing 4/e by Quester, McGuiggan, Perreault and McCarthy 13–17 Figure 13.9 Revenue, cost and profit at different prices for an individual organisation

18. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing 4/e by Quester, McGuiggan, Perreault and McCarthy 13–18 Figure 13.10 Graphic determination of the price giving the greatest total profit for a company

19. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing 4/e by Quester, McGuiggan, Perreault and McCarthy 13–19 Marginal analysis—Price leadership In industries dominated by a few major companies, a price leader appears and other members of the industry follow Price leader is usually a seller who sets a price to maximise profits or to achieve a certain target return on investment Price leader usually the company with the lowest costs

20. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing 4/e by Quester, McGuiggan, Perreault and McCarthy 13–20 Demand-oriented approaches Value-in-use pricing Online auctions Customer reference prices Leader pricing Psychological pricing Odd-even pricing Prestige pricing Price lining Demand-backward pricing

21. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing 4/e by Quester, McGuiggan, Perreault and McCarthy 13–21 Figure 13.11 Demand curve when psychological pricing is appropriate

22. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing 4/e by Quester, McGuiggan, Perreault and McCarthy 13–22 Figure 13.12 Demand curve showing a prestige pricing situation

23. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing 4/e by Quester, McGuiggan, Perreault and McCarthy 13–23 Full-line pricing Full-line pricing involves setting prices for a whole line of products – Market-oriented pricing – Company-oriented pricing – Costing the line – Complementary product pricing – Product-bundle pricing

24. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing 4/e by Quester, McGuiggan, Perreault and McCarthy 13–24 Tendering and negotiated pricing Tendering—Offering a specific price for each possible job, rather than setting a price that applies for all customers Negotiated price—A price that is arrived at after bargaining between the buyer and seller

25. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Marketing 4/e by Quester, McGuiggan, Perreault and McCarthy 13–25 What we will be doing in the next chapter In the following chapter we will be discussing marketing communications, including – Integrated marketing communications – Why marketers use a blend of promotional methods – Why the Internet has changed the communication process – How marketing communication plans are designed and who should manage them – What an advertising agency is and how it operates