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Transcript of Chapter 11- slide 1 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Pricing...
Chapter 11- slide 1Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Pricing Decisions
Chapter 11- slide 2Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Learning Objectives
• After studying this chapter, you should be able to:– Identify and define the internal factors affecting a
firm’s pricing decisions– Identify and define the external factors affecting
pricing decisions, including the impact of consumer perceptions of price and value
– Contrast the two general approaches to setting prices
– Discuss how companies use pricing strategies for different customers and situations
Chapter 11- slide 3Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
What is a Price?• Price: the amount of money charged for a product
or service, or the sum of values exchanged for the benefits of having or using the product or service
– Fixed pricing– Dynamic pricing– Only marketing mix element that
produces revenue
Chapter 11- slide 4Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Factors Affecting Pricing Decisions
• Marketing objectives: – Survival– Current profit maximization– Market share leadership– Product quality leadership
• Marketing mix strategy: – Price should be
consistent with other mix elements
– Target costing– Non-price positions
Chapter 11- slide 5Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
External Factors Affecting Pricing Decisions
• Types of markets: – Pure competition– Monopolistic competition– Oligopolistic competition– Pure monopoly
• Competition: – Consumers will
compare– High margins attract
competition– Benchmarking costs
Chapter 11- slide 6Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Types of Costs• Fixed costs: costs that do not vary with production
• Variable costs: costs that vary directly with the level of production
• Total costs: sum of fixed and variable costs
Chapter 11- slide 7Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Cost Per Unit/Accumulated Production
• Experience (learning) curve: the drop in the average per-unit production cost that comes with accumulated production experience
Chapter 11- slide 8Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
How to set price?
Chapter 11- slide 9Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
General Pricing Approaches
• Cost-based pricing: Adding a standard markup to the cost of the product; using formula:
– Average unit cost = variable cost + (fixed cost / unit sales)– Markup price = Unit cost / (1 - desired return on sales)– Example: – $10 + ($300,000/50,000) = $16– Selling price based on 20%: $16/(1 - .20) = $20– Double-check: $4 profit/selling price = 20% profit margin
Chapter 11- slide 10Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Break-even Pricing• Break-even (target profit) pricing: setting
price to break even (or make a target profit) on the costs of making and marketing a product
• Break-even = fixed cost / (price - variable cost)
• Example (a):• B/E = $300,000/($20 - $10)• B/E = 30,000 units
• Example (b):• B/E = ($300,000 + $75,000
profit)/($20 - $10)• B/E = 37,500 units
Chapter 11- slide 11Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Cost Versus Value Pricing
• Value-based pricing: setting price based on buyers’ perceptions of value rather than on the seller’s cost
• Everyday low pricing (EDLP): charging a constant low price with few discounts or promotional sales; used successfully by Wal-Mart, suits busy consumers, encourages impulse buying due to trust
Chapter 11- slide 12Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Pricing Strategies
•New product pricing strategies•Product Mix pricing strategies•Price adjustment strategies
Chapter 11- slide 13Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
New-Product Pricing Strategies
• Market skimming pricing: setting a high price to skim maximum revenues layer by layer from the segments willing to pay the high price
• Market penetration pricing: setting a low price for a new product to attract a large number of buyers and achieve a large market share
Figure 7.7
Chapter 11- slide 14Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Product mix Pricing Strategies
Chapter 11- slide 15Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Product Mix Pricing Strategies
Product line pricing takes into account the cost differences between products in the line, customer evaluation of their features, and competitors’ prices
Optional product pricing takes into account optional or accessory products along with the main product
Chapter 11- slide 16Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Product Mix Pricing Strategies
Captive-product pricing involves products that must be used along with the main product
• Two-part pricing involves breaking the price into: – Fixed fee– Variable usage fee
Pricing Strategies
Chapter 11- slide 17Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
By-product pricing refers to products with little or no value produced as a result of the main product. Producers will seek little or no profit other than the cost to cover storage and delivery.
Product bundle pricing combines several products at a reduced price
Chapter 11- slide 18Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Price Adjustment Strategies
Table 12.2
Discount andAllowance pricing
Segmentedpricing
Psychologicalpricing
Promotionalpricing
Geographicalpricing
Internationalpricing
Reducing prices to reward customerresponses such as paying early
Adjusting prices to allow for differencesin customers, products, or locations
Adjusting prices forpsychological effect
Temporarily reducing pricesto increase short-run sales
Adjusting prices to account forgeographic location of customers
Adjusting prices forinternational markets
Chapter 11- slide 19Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Price-Adjustment Strategies
Promotional pricing is when prices are temporarily priced below list price or cost to increase demand
Examples:• Special event pricing• Cash rebates• Low-interest financing• Longer warrantees• Free maintenance
Chapter 11- slide 20Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Price-Adjustment Strategies
• FOB (free on board) pricing means that the goods are delivered to the carrier and the title and responsibility passes to the customer
• Uniformed delivery pricing means the company charges the same price plus freight to all customers, regardless of location
• Zone pricing means that the company sets up two or more zones where customers within a given zone pay a single total price
Geographic Strategies
Chapter 11- slide 21Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Price-Adjustment Strategies
• Basing point pricing means that a seller selects a given city as a “basing point” and charges all customers the freight cost associated from that city to the customer location, regardless of the city from which the goods are actually shipped
• Freight absorption pricing means the seller absorbs all or part of the actual freight charge as an incentive to attract business in competitive markets
Geographic Strategies
Chapter 11- slide 22Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Price-Adjustment Strategies
International pricing is when prices are set in a specific country based on country-specific factors
• Economic conditions• Competitive conditions• Laws and regulations• Infrastructure• Company marketing objective