Fall Ch13 Notes

8/3/2019 Fall Ch13 Notes

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Schedule

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Ch. 13 - Pricing Concepts Internal/External Factors of Price

Pricing Objectives

Elasticity

Cost-based Pricing


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Ch. 13 - Pricing Concepts New Product Pricing

Methods of Pricing

Product Mix Pricing Strategies

Price Adjustment Strategies


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What is Price?

$ - what you pay for

something or

The that you

exchange for the benefits

of having or using the

product/service (i.e. time,

psychological costs, other

resources)

Value = Benefits -

Service

Benefits

Brand

Benefits

Product

Benefits

Price &

Other

Costs

Value


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Internal Factors of Price

1. Marketing Objectives

to to gain

to infer a level of

to survive


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Internal Factors of Price

2. Marketing Mix Strategy

price needs to be consistent with other3Ps (needs to reflect advertising, etc.)

3. Costs

your costs affect your profit, so set the

optimal price


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External Factors of Price

1. Demand for your product

2. Competition

Competitors prices

Strength of competition

3. Economy

Cost of components (natural resources)

Economic conditions


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maintaining pricemeeting competitions price

-Oriented

profit maximizationsatisfactory profits

return on investment

PricingObjectives

-Oriente

market sharesales maximization


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Price Elasticity

Tells us how much the demand for a

product will change with a change inprice

% CHANGE IN

% CHANGE

E =


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Factors That Affect Elasticity

Availability of

Price relative to purchasing power

Product durability

A products other uses


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Elasticity of Demand

DemandDemandDemandDemand

Consumers buy more or lessof a product when theprice changes

DemandDemand

DemandDemand

An increase or decrease inprice will not significantlyaffect demand

UnitaryUnitaryElasticityElasticity

UnitaryUnitaryElasticityElasticity

An increase in sales exactlyoffsets a decrease in prices,and revenue is unchanged


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Elasticity of Demand

Price Goes...Price Goes... Revenue Goes...Revenue Goes... Demand is...Demand is...

Down Up

Down Down

Up Up

Up Down

Up or Down Stays the Same


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Inelastic Demand

If demand hardly changes with a price

change, the demand is inelastic

This describes products that are less

price-sensitive and have very few

substitutesEx:


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Inelastic Demand

RelativelyInelastic

Quantity

Price

Demand

A relatively large increase in

price results in only a small

decrease in quantitydemanded.

E is less than 1.0


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Elastic Demand

Relatively Elastic

Quantity

Price

A relatively small decrease

in price results in a

substantial increase inquantity demanded.

Demand

E is greater than 1.0


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Methods of Cost-based Pricing

Profit Revenue Costs

Price x

unitssold

Fixed Costs +Variable Costs


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Methods of Cost-based Pricing

Methods for determining an initial price for the

product or service

1. Markup pricing

keystoning ( )

2. Break-even pricing

3. Profit maximization pricing


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Setting price where price = markup + cost

Markup on selling price = (selling price - cost)

selling price

Cost = (1-markup on selling price) (selling price)

Selling price = cost(1-markup on selling price)

1. Markup Pricing


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Markup Pricing: Example ofMarkup Chains

Cost = $47.60

Markup = $8.40

Selling price

= $56.00

Cost = $56.00

Markup = $14.00

Selling price= $70.00

Selling price

= $100.00

Cost = $70.00

Markup = $30.00

Producer

15%

Producer

15%

Wholesaler

20%

Wholesaler

20%

Retailer

30%

Retailer

30%

Markup

on Selling

Price

Markup

on Selling

Price


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Markup Chain Pricing

Given the following information what is theretailers cost? Producers selling price? Andproducers dollar markup?

Retailers selling price = $ 30.00

Wholesalers markup on selling price = 20%

Retailers markup on selling price = 33.33%

Manufacturers cost = $12.00


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Cost = $12.00

Markup = $

Selling price

= $

Cost =

Markup =

Selling price

= $

Selling price

= $30.00$30.00

Cost =

Markup =

ProducerProducer Wholesaler

20%

Wholesaler

20%

Retailer

33.33%

Retailer

33.33%

Markup

on Selling

Price

Markup

on Selling

Price


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Markup Chain Pricing

Given the following information what is theretailers selling price?

Manufacturers cost = $1.80

Wholesalers markup on selling price = 20%

Retailers markup on selling price = 30%

Manufacturers markup on selling price = 10%


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Cost = $1.80

Markup = $

Selling price

= $

Cost = $

Markup = $

Selling price

= $

Selling price

= $

Cost = $

Markup = $

Producer

10%

Producer

10%

Wholesaler

20%

Wholesaler

20%Retailer

30%

Retailer

30%

Markup

on Selling

Price

Markup

on Selling

Price


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Markup Pricing: Practice

1. If selling price is $120, cost is $75, what is markup on selling price?

2. If selling price is $200, cost is $120, what is markup on selling price?

3. If markup on selling price is 45%, selling price is $150, what is the

cost? 4. If markup on selling price is 60%, selling price is $325, what is cost?

5. Cost is $125, markup on selling price is 40%, selling price =?

6. Cost is $95, markup on selling price is 35%, selling price =?

1. 37.5%2. 40%3. $82.50

4. $130.005. $208.336. $146.15


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So now

Selling Price

Cost

Markup

Cost %

Markup %

+

100 %

=

Selling Price =Markup $ + Cost $


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Three Variables: SP, MU%, Cost

Selling Price =$1000

Cost = $700

Markup

Cost %

Markup %

+

100 %

=



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Selling Price =$

Cost = $100

Markup

Cost %

Markup % = 75%

+

100 %

=



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Selling Price =$300

Cost = $

Markup

Cost %

Markup % = 66.7%

+

100 %

=


2 B k E A l i S tti


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2. Break-Even Analysis: Setting

price to cover fixed costs

Quantity (units)

Price

($)

Fixed Costs

TotalR

even

ue

TotalCo

sts

Profits

Losses

Break Even

$15,000

$20,000

10,000


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Break-Even Pricing

Break-EvenQuantity

=Total Fixed Costs

Fixed cost Contribution

Fixed cost

Contribution = Price - Avg. Variable Cost


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Break-even Point Calculations

Fixed cost (FC) = $15,000

Selling Price (SP) = $2.00

Variable cost per unit (VC) = .50

Fixed cost contribution = $1.50

Break even point in units = FC(SP - VC)

Break even point in dollars = BEP units * SP

BEP units = units

BEP dollars = $

BEP units = units

BEP dollars = $

3 P fit M i i ti3 P fit M i i ti


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In an ideal situation, marketers will operate at the pointwhere marginal costs (MC) equal marginal revenue(MR).

MC

MR

COSTS &

REVENUES

UNITS PRODUCED & SOLD

3. Profit Maximization3. Profit Maximization:Marginal Cost = Marginal Revenue


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Profit Maximization

( )1 ( )1 ( )1 ( )1 ( )1 ( )1 ( )1 ( )1

Total Total Marginal Marginal Mrginal

Quantity Price Revenue Cost Profit Revenue Cost Profit

Q P TR TC (TR - TC) MR MC (MR - MC)

1 $111 $1 $111 ($ )111

1 $111 $111 $111 ($ )111 $111 $11 $11

1 $111 $111 $111 ($ )11 $111 $11 $111

1 $111 $111 $111 $11 $11 $11 $11

1 $111 $111 $111 $11 $11 $11 $11

1

$11

$111

$111

$111

$11

$11

$11

1 $11 $111 $111 $111 $11 $11 $1

1 $11 $111 $111 $11 ($ )11 $11 ($ )11

1 $11 $111 $111 $1 ($ )11 $11 ($ )11

1 $11 $111 $111 ($ )111 ($ )11 $11 ($ )111

11$11

$111

$111

($ )111

($ )11

$111

($ )111


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Other Determinants of Price

Perceived QualityPerceived Quality

Promotion StrategyPromotion Strategy


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The Competition

High prices may induce firms to

Competition can lead to

Global competition may force firms to


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Distribution Strategy

ManufacturersManufacturers Wholesalers/RetailersWholesalers/Retailers

Offer a larger profitmargin or trade

allowanceUse exclusive distribution

Franchising

Avoid business withprice-cutting discounters

Develop brand loyalty

Sell against thebrand

Buy gray-marketgoods


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Distribution Strategy

Stocking well-known

branded items at

Selling againstthe brand


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Given: a certain level of demand

elasticity of demand and costs,

marketers estimate revenues/profitsthat can be generated at variousprices

Setting the Right Price

S d


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Fine tune with pricing tacticsFine tune with pricing tactics

Choose a price strategyChoose a price strategy

Results lead to the right price

How to Set a Price on a Product orService


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New-Product Pricing Strategies

Market- pricing

High initial price

Innovators and early adopters

Market- pricing

Low initial price

Attract large number of buyers quickly

.

Suggest similar quality and value as competition


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Skimming

Price Skimming


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Penetration

Penetration Pricing


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New-Product Pricing Strategies

Strategy

Strategy

Price

StrategyStrategy

Strategy

Strategy

Strategy

Strategy

Higher Lower

Higher

Quality

Lower

Skimming Penetration


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Which Price Strategy?

.

When the pricing objective foran inelastic product is to attract

new customers based onquality, THIS strategy should beused


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Establishpricegoals

Estimate demand,

costs, and profits

Choose aprice strategy

Fine-tunebase price

Set price$x.yy

Evaluateresults

Skimming

Status quo

Penetration

Low $

High $

Setting the Price


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1. pricing

Levels of PricePoints

Pay more for

extras

Hotel rooms Customers willingnessto pay

Priceceiling $$$

Pricefloor

$

Product1

Product2

Product3

Price

range

for

brand/productline


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2. Captive-product pricing

mentality

3. Price bundling

Combine related goods, sell for one

price, package deals

Could be example of co-branding


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1. Discounts, Allowances, Rebates

Cash - pay cash upfront

Quantity - buy in bulk

Seasonal - buy during non-peak times

Promotional allowance - $ to dealer for

promoting products


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2. Flexible (variable) pricing

Different segments pay different rates

Off-peak daily rate changes


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3. Psychological (odd-even) pricing

The 99 principle

Reference pricing

What you expect to pay for a product in that category

(SUV = ?)

Unit pricing states price in a recognized unit of measurement


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4. Other pricing tactics

Single-price tactic (Everything $1)Bait pricing

Two-part pricing - country club

Loss leaders (leader pricing)


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A Summary of Pricing

1. How do you set your price?

Markup pricing

Break-even pricing

Profit maximization pricing

2. How do you adjust your price?

Tactics


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In summary, what affects price?

1 The

2 Distribution strategy

3 Promotion strategy

4 The relationship of price to quality

5

6


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Substitute or Complement?

When a decrease in priceonone product results in a

decrease in salesof asecond product, the two

products are said to be THIS.

Fall Ch13 Notes

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