Part Eight Pricing Decisions

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Part EightPricing Decisions

21. Pricing Concepts

22. Setting Prices

Chapter 21Pricing Decisions


Objectives

• Understand nature and importance of price• Identify characteristics of price and nonprice

competition• Explore demand curves and price elasticity of

demand• Examine relationships among demand, costs,

and profits• Describe key factors that may influence pricing

decisions• Consider issues affecting pricing of products for

business markets


The Nature of Price

The value exchanged for products in a marketing exchange


Terms Used To Describe Price

• Tuition

• Premium

• Fine

• Fee

• Fare

• Toll

• Rent

• Commission

• Dues

• Deposit

• Tips

• Interest

• Taxes


The Importance of Price to Marketers

Profit = Total Revenue – Total CostsProfits = (Price x Quantity Sold) – Total Costs


Price and Nonprice Competition

• Price Competition Emphasizes price as an issue and matches

or beats competitors’ price To compete effectively- firm should be the

low-cost seller Standardized products Frequent price changes Provides flexibility


Nonprice Competition

Emphasizes distinctive product:• Features• Quality• Promotion• Packaging• Other

Distinction must be effective


Analysis Of Demand

• Demand Curve

• Demand Fluctuations

• Assessing Price Elasticity


Demand Curve

A graph of the quantity expected to be sold at various prices if other factorsremain constant


Demand Curve, Price-Quantity Relationship and Increase in Demand


Demand Curve, Relationship Between Price and Quantity for Prestige Products


Demand Fluctuations

• Changes in buyers’ needs

• Variations in effectiveAness of other marketing mix variables

• Presence of substitutes

• Environment factors


Elasticity Of Demand


Price/Demand Elasticity

Elastic- change in price causes opposite change in total revenue• Price = Total Revenue • Price = Total Revenue

Inelastic- change in price causes same change in total revenue• Price = Total Revenue • Price = Total Revenue


Price Elasticity Of Demand

Price Elasticity of

Demand= (% Change In Quantity Demanded)

% Change in Price


Demand, Cost, and Profit Relationships

• Marginal Analysis– Fixed costs– Average fixed cost– Variable costs– Average variable cost– Total cost– Average total cost– Marginal cost (MC) – Marginal revenue (MR)


Costs AndTheir Relationships


Typical Marginal Costs And Average Total Cost Relationship


Typical Marginal Revenue And Average Revenue Relationship


Marginal Analysis Method For Determining Most Profitable Price


Combining Marginal Cost And Marginal Revenue Concepts For Optimal Profit


Demand, Cost, and Profit Relationships

• Break-Even Analysis– Break-even point – point at which the costs of

producing a product equal the revenue made from selling the product


Determining TheBreak-Even Point


Breakeven Point

Breakeven Point =

Fixed CostsPer-Unit Contribution to Fixed Costs

(Price – Variable Costs)


Factors ThatAffect Pricing Decisions


Organizational AndMarketing Objectives

• Set prices consistent with organization’s goals and mission

• Pricing decisions should be compatible with firm’s marketing objectives


Costs

• Why price below cost?

– Match competition

– Generate cash flow

– Increase market share

• Focus on cost reduction

• Costs shared with others in product line


Pricing Decisions Influence Other Mix Variables

• Demand

• Distribution– Intensive

– Selective

– Exclusive

• Promotion– Premium = little advertising, personal selling

– Complex = potential buyer confusion


Channel Member Expectations

• Profit

• Competing product

• Time/resources required

• Discounts

• Support activities- associated costs


Reference Prices

• Internal- developed in buyer’s mind through experience with product

• External- comparison price provided by others


Context Of Price-Buyers Characterized

• Value-conscious - concerned about price and quality

• Price-conscious - want to pay low prices

• Prestige-sensitive - purchase products that signify prominence and status


Competition

• Monopoly– Whatever market will bear– Government regulation

• Oligopoly– Barriers to entry– Little advantage in price cuts

• Monopolistic Competition– Distinguishable product– Usually nonprice competition

• Perfect competition– All products the same– No flexibility in pricing


Business-To-BusinessPrice Discounting


Trade (Functional) Discount

A reduction off the list price by a producer to an intermediary for performing certain functions


Quantity Discount

Deduction from list price that reflect(s) the economies of purchasing in large quantities


Cumulative Discount

A quantity discount aggregated over a stated time period


Noncumulative Discounts

A one-time price reduction based on the number of units purchased, the dollar value of the order, or the product mix purchased


Cash Discount

A price reduction given to buyer for prompt payment or cash payment


Seasonal Discount

A price reduction to buyers that purchase goods or services out of season


Allowance

A concession in price to achieve a desired goal


Geographic Pricing

• F.O.B.– Factory– Destination

• Uniform geographic (Postage-Stamp)

• Zone

• Base-point

• Freight Absorption

Part Eight Pricing Decisions

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