1. Pricing Concepts
Chapters 13

5. Price and Value Value = perceived benefits/price
Price = perception of quality
Price = consumer perception of prestige
Example:
Swiss firm TAG HEUER
Changed prices from $250 to $1000
Sales volume increased sevenfold

6. Step 1: Pricing Objectives
Survival
Maximum current profit/profit oriented pricing
Maximum market share/sales oriented pricing
Maximum market skimming
Product quality leadership

7. Step 2: Determining Demand
Quantity demanded S
Price
.50
1.00
1.50
2.00
2.50 20 40 60 80
100
120 D
Surplus
Shortage
Price Equilibrium

8. Elasticity of Demand Consumers sensitivity to price changes
Price Goes...
Revenue Goes...
Demand is...
Down Up
Elastic
Inelastic
Up or Down
Stays the Same
Unitary Elasticity

9. Factors that Affect Elasticity
DEMAND LESS ELASTIC IF:
Few or no substitutes
Buyers don’t notice higher price
Buyers are slow to change habits
Buyers think higher prices are justified

10. Step 3: Estimating Cost Variable costs – changes with level of output
Fixed costs – no change with output level
Marginal costs – the change in total costs associated with a 1 unit change in output
Average variable costs – total variable costs divided by quantity of output
Average total costs – total costs divided by quantity of output

11. Step 4: Analyzing Competition
Analyze competitors costs, prices and offers

12. Step 5: Methods of Setting Prices
Markup pricing
Keystoning
Target return pricing
Perceived value pricing
Value pricing
Going Rate pricing
Auction type pricing
Group pricing

13. Step 6: Selecting Final Price
Psychological pricing
Marketing mix
Company policies

14. Fine Tuning the Base Price
Geographical pricing
Quantity discounts
Cash discounts
Functional discounts
Seasonal discounts
Promotional discounts
Rebates

15. Special Pricing Tactics
Single-Price Tactic
Flexible Pricing
Professional
Services Pricing
Price Lining
Leader Pricing
Bait Pricing
Odd-Even Pricing
Price Bundling
Two-Part Pricing
All goods offered at the same price
Different customers pay different price
Used by professionals with experience,
training or certification
Several line items at specific price points
Sell product at near or below cost
Lure customers through false or misleading
price advertising
Odd-number prices imply bargain
Even-number prices imply quality
Combining two or more products in a
single package
Two separate charges to consume a single good