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Chapter 10

Pricing Products:Pricing Considerations and

Approaches

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PricePrice is the sum of all the values that consumers exchange for the benefits of having or using the product or service.Price has been the major factor affecting buyer choice; nonprice factors have become increasingly important in buyer-choice behavior.Price is the only element in the marketing mix that produces revenues; all others represent costs.

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Factors Affecting Price Decisions ( Fig. 10.1)

Internal Factors

Marketing ObjectivesMarketing Mix StrategyCostsOrganizational considerations

Internal Factors

Marketing ObjectivesMarketing Mix StrategyCostsOrganizational considerations

External Factors

Nature of the market and demandCompetitionOther environmental factors (economy, resellers, government)

External Factors

Nature of the market and demandCompetitionOther environmental factors (economy, resellers, government)

PricingDecisions

PricingDecisions

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Marketing

Objectives

SurvivalLow Prices to Cover Variable Costs

andSome Fixed Costs to Stay in

Business.Current Profit Maximization

Choose the Price that Produces the Maximum Current Profit, Etc.

Market Share LeadershipLow as Possible Prices to Become

the Market Share Leader.

Product Quality LeadershipHigh Prices to Cover Higher

Performance Quality and R & D.

Internal Factors Affecting Pricing Decisions: Marketing Objectives

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Internal Factors Affecting Pricing Decisions: Marketing Objectives

Other specific objectives include: Set prices low to prevent competition from

entering the market, Prices might be reduced temporarily to create

excitement or draw more customers.

Nonprofit and public organization may have other pricing objectives such as: University aims for partial cost recovery, Hospital may aim for full cost recovery, Theater may price to fill maximum number of

seats.

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Price

Product Design

Distribution

Promotion

NonpricePositions

Internal Factors Affecting Pricing Decisions: Marketing Mix

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Types of Cost Factors that

Affect Pricing Decisions

Total CostsSum of the Fixed and Variable Costs for a Given

Level of Production

Total CostsSum of the Fixed and Variable Costs for a Given

Level of Production

Variable Costs

Costs that do varydirectly with the

level of production.

Raw materials

Fixed Costs(Overhead)

Costs that don’tvary with sales or production levels.

Executive Salaries, Rent

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Costs ConsiderationsC

ost

per

un

it 12

3 4SRAC

LRAC

Quantity Produced per Day

1,0

00

2,0

00

3,0

00

4,0

00

Cost Per Unit at Different Levels of Production Per Period

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Types of Cost Factors that

Affect Pricing DecisionsAs a firm gains experience in production, it learns how to do it better.The experience curve (or the learning curve) indicates that average cost drops with accumulated production experience.Strategy: company should price products low; sales increases; costs continue to decrease; and then lower prices further. Risks are present with this strategy.

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Market andDemand

Competitors’ Costs, Prices, and Offers

Other External FactorsEconomic Conditions

Reseller NeedsGovernment Actions

Social Concerns

External Factors Affecting Pricing Decisions

Competitor Costs

This ad by LCI International accuses its competitors of using unfair practices in pricing, hiding fees incurred by rounding up.

Hidden fees, defined as“cramming” by theFCC, are the numberone source of billingcomplaints amonglong-distancecustomers.

Why is LCI focusing onthis practice?

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Pure CompetitionPure CompetitionMany Buyers and Sellers

Who Have Little Effect on the Price

Pure CompetitionPure CompetitionMany Buyers and Sellers

Who Have Little Effect on the Price

Monopolistic Monopolistic CompetitionCompetition

Many Buyers and Sellers Who Trade Over a

Range of Prices

Monopolistic Monopolistic CompetitionCompetition

Many Buyers and Sellers Who Trade Over a

Range of Prices

Pricing in Different Types of Markets

Market and Demand Factors Affecting Pricing Decisions

Oligopolistic Oligopolistic CompetitionCompetition

Few Sellers Who AreSensitive to Each Other’s

Pricing/ Marketing Strategies

Oligopolistic Oligopolistic CompetitionCompetition

Few Sellers Who AreSensitive to Each Other’s

Pricing/ Marketing Strategies

Pure MonopolyPure MonopolySingle Seller

Pure MonopolyPure MonopolySingle Seller

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Demand Curves and Price Elasticity of Demand

A Demand Curve is a Curve that Shows the Number of Units the Market Will Buy in a Given Time Period at Different Prices that

Might be Charged.

Price Elasticity Refers to How Responsive Demand Will be to a Change in Price.

Price Elasticity of Demand = % Change in Quantity Demanded

% Change in Price

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Price Elasticity of DemandPri

ce

Quantity Demanded per Period

A. Inelastic Demand - Demand Hardly Changes Witha Small Change in Price.

P2

P1

Q1Q2

Pri

ce

Quantity Demanded per Period

P’2P’1

Q1Q2

B. Elastic Demand -Demand Changes Greatly Witha Small Change in Price.

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Major Considerations in Setting Price (Fig. 10.5)

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Cost-Based PricingCertainty About Costs

Pricing is Simplified

Price Competition Is Minimized

UnexpectedSituational

Factors

Attitudes of

Others

Ethical

Ignores Current

Demand & Competitio

n

Cost-Plus Pricing is an

Approach That Adds a

Standard Markup to the

Cost of the Product.

Simplest Pricing Method

Much Fairer to Buyers & Sellers

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Breakeven Analysis or Target Profit Pricing

2

4

6

8

10

12

200 400 600 800 1,000

Total Revenue

Total Cost

Fixed Cost

Target Profit($2 million)

Sales Volume in Units (thousands)Cost

in

Dolla

rs (

mill

ion

s)

Tries to Determine the Price at Which a Firm Will Break Even or Make a Certain Target

Profit.

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ProductProduct

CostCost

PricePrice

ValueValue

CustomersCustomers

CustomerCustomer

ValueValue

PricePrice

CostCost

ProductProduct

Cost-Based Pricing Value-Based Pricing

Cost-Based Versus Value-Based Pricing (Fig. 10.7)

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Discussion Connections

Pick two competing brands from a familiar product category (watches, perfume, etc) - one low priced and the other high priced. Which, if either, offers the greatest value?Does “value” mean the same thing as “low price”? How do these concepts differ?

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Setting Prices

Sealed-BidCompany Sets Prices Based on What They Think Competitors

Will Charge.

Going-Rate Company Sets Prices Based on What

Competitors Are Charging.

??

Competition-Based Pricing

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Review of Concept Connections

Identify and define the internal factors affecting a firm's pricing decisions.Identify and define the external factors affecting pricing.Contrast the three general approaches to setting prices.

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Chapter 11

Pricing Products:Pricing Considerations and

Strategies

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New Product Pricing Strategies

Market Skimming

Setting a High Price for a New Product to “Skim” Maximum Revenues from the Target Market.

Results in Fewer, But More Profitable Sales.

Market Skimming

Setting a High Price for a New Product to “Skim” Maximum Revenues from the Target Market.

Results in Fewer, But More Profitable Sales.

Use Under These Conditions:

Product’s Quality and Image Must Support Its Higher Price.

Costs Can’t be so High that They Cancel the Advantage of Charging More.

Competitors Shouldn’t be Able to Enter Market Easily and Undercut the High Price.

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New Product Pricing Strategies

Market Penetration

Setting a Low Price for a New Product in Order to “Penetrate” the Market Quickly and Deeply.

Attract a Large Number of Buyers and Win a Larger Market Share.

Market Penetration

Setting a Low Price for a New Product in Order to “Penetrate” the Market Quickly and Deeply.

Attract a Large Number of Buyers and Win a Larger Market Share.

Use Under These Conditions:

Market Must be Highly Price-Sensitive so a Low Price Produces More Market Growth.

Production/ Distribution Costs Must Fall as Sales Volume Increases.

Must Keep Out Competition & Maintain Its Low Price Position or Benefits May Only be Temporary.

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Product Mix-Pricing Strategies:Product Line Pricing

Involves setting price steps between various products in a product line based on: Cost differences

between products, Customer evaluations

of different features, and

competitors’ prices.

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Product Mix- Pricing Strategies

Optional-Product Pricing optional or

accessory products sold with the main product. i.e camera bag.

Captive-Product Pricing products that

must be used with the main product. i.e. film.

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Product Mix- Pricing Strategies

By-Product Pricing low-

value by-products to get rid of them and make the main product’s price more competitive.

Product-Bundling Combining

several products and offering the bundle at a reduced price.

i.e. theater season tickets.

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Discount and Allowance Pricing

Cash Discount Seasonal Discount

Quantity Discount T rade-In Allow ance

Functional Discount Prom otional Allow ance

A djus ting Bas ic Price to Rew ard C ustom ersF or C erta in Responses

Cash Discount Seasonal Discount

Quantity Discount T rade-In Allow ance

Functional Discount Prom otional Allow ance

A djus ting Bas ic Price to Rew ard C ustom ersF or C erta in Responses

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Segmented Pricing

Custom er - Segm ent Location Pricing

Product - Form T im e Pricing

S e ll ing Products A t D iffe rent Pr ices E venT hough T here is No D iffe rence in C ost

Custom er - Segm ent Location Pricing

Product - Form T im e Pricing

S e ll ing Products A t D iffe rent Pr ices E venT hough T here is No D iffe rence in C ost

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Psychological PricingConsiders the psychology of prices and not simply the economics.Customers use price less when they can judge quality of a product.Price becomes an important quality signal when customers can’t judge quality; price is used to say something about a product.

Value $22.00Sale $14.99

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Special-Event PricingSpecial-Event Pricing

Cash RebatesCash Rebates

Low-Interest FinancingLow-Interest Financing

Longer WarrantiesLonger Warranties

Free MerchandiseFree Merchandise

DiscountsDiscounts

Loss LeadersLoss Leaders Temporarily Pricing Products Below List Price

to Increase Short-Term Sales

Through:

Promotional Pricing

This Sprint ad offers f ree long distance on Fridays.

Why can Sprint afford t o offer this promotion on Fridays rat her than on another day (like Monday)?

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Discussion ConnectionsMany other industries have created “deal-prone” consumers through the heavy use of promotional pricing - fast foods, airlines, tires, furniture, and others.Pick a company in one of these industries and suggest ways that it might deal with this problem.How does the concept of value relate to promotional pricing? Does promotional pricing add to or detract from customer value?

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• Adjusting Prices to Account for the Geographical Location of Customers.• i.e. FOB-Origin, Uniform- Delivery, Zone Pricing, Basing Point, & Freight-Absorption.

• Adjusting Prices for International Markets.• Price Depends on Costs, Consumers, Economic Conditions, Competitive Situations & Other Factors.

Geographical Pricing

International Pricing

Other Price Adjustment Strategies

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Initiating Price Changes

Why?

Excess Capacity

Falling Market Share

Dominate Market Through Lower

Costs

Why?

Cost Inflation

Overdemand: Company Can’t

Supply All Customer’s Needs

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Being Replaced by Newer Models

Being Replaced by Newer Models

Current Models Are Not Selling Well

Current Models Are Not Selling Well

Company is in Financial TroubleCompany is in

Financial Trouble

Quality Has Been Reduced

Quality Has Been Reduced

Price Comes Down Further

Price Comes Down Further

Price Cuts Are Seen by Buyers As:

Reactions to Price Changes

Number of Firms is Small

Number of Firms is Small

Product is UniformProduct is Uniform

Buyers are Well Informed

Buyers are Well Informed

Competitors Reactions When:

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Assessing/Responding to Competitor’s Price Changes (Fig. 11.1)

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Public Policy Issues in Pricing (Fig. 11.2)

Manufacturer A

Price-fixingPredatory pricing

Manufacturer B

Manufacturer A

Price-fixingPredatory pricing

Manufacturer B

Retail pricemaintenance.DiscriminatoryPricing

Retailer 1

Price-fixingPredatory Pricing

Retailer 2

Retailer 1

Price-fixingPredatory Pricing

Retailer 2

DeceptivePricing ConsumersConsumers

DeceptivePricing

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Price FixingPrice Fixing

Pricing Within Channel LevelsPricing Within Channel Levels

Predatory Pricing

Predatory Pricing

Public Policy Issues in Pricing

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PriceDiscrimination

Ensure Sellers Offers the Same PriceTerms to a Given Level

Of Trade

PriceDiscrimination

Ensure Sellers Offers the Same PriceTerms to a Given Level

Of Trade

Resale PriceMaintenance

Manufacturer Can’t Require

Dealers to Charge a

Specified RetailPrice for Its

Product

Resale PriceMaintenance

Manufacturer Can’t Require

Dealers to Charge a

Specified RetailPrice for Its

Product

DeceptivePricing

Occurs When a Seller States

Prices or PricesSavings that

Available To Consumers

DeceptivePricing

Occurs When a Seller States

Prices or PricesSavings that

Available To Consumers

Pricing Across Channel Levels

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Review of Concept Connections

Describe the major strategies for pricing imitative and new products.Explain how companies find a set of prices that maximizes the profits from the total product mix.Discuss how companies adjust their prices to take into account different types of customers and situations.Discuss the key issues related to initiating and responding to price changes.