PRICINGPRODUCTS AND

SERVICES

CHAPTER

NATURE AND IMPORTANCE OF PRICE

• The Many Names of Price - ???• Hotel• Doctor• Insurance• apartment

• What Is Price?

To the seller...To the seller...Price is revenuePrice is revenueand profit sourceand profit source

To the seller...To the seller...Price is revenuePrice is revenueand profit sourceand profit source

To the consumer...To the consumer...Price is what you give Price is what you give

up to get what you wantup to get what you want

To the consumer...To the consumer...Price is what you give Price is what you give

up to get what you wantup to get what you want

THE PRICING EQUATION FOR CONSUMERS

PRICE = LIST PRICE - INCENTIVES & ALLOWANCES + EXTRA FEES

THE PROFIT EQUATION FOR SELLERS

Profit = Total revenue - Total cost or

Profit = (Unit price × Quantity sold) −Total cost

WAYS TO SELECT BASE PRICE LEVELS

Demand oriented – focus on consumer preference

Cost oriented – focus on business’s expenses

Profit oriented – focus on profit

Competition oriented – focus on the marketplace players

DEMAND ORIENTED APPROACHES

Skimming Pricing – high initial price

Penetration Pricing – low initial price

Prestige Pricing – high price = quality and status

Target Pricing-make product fit price market will pay

Bundle Pricing- 2 products priced as one. helps poorer seller

Yield Management Pricing – peak and non peak prices

PROFIT ORIENTED APPROACHES

Target Profit Pricing-set annual dollar volume or profit

If I need to make $5000, & I can make 5 units, selling price is $1000.

Target Return-on-Sales Pricing-

Want to receive 1% of sales as my profit – actors & directors

Target Return-on-Investment Pricing –

I can make 5 % on my money in the bank. Set price so I make 6% on my investment if I invest it in my business.

COST ORIENTED APPROACHES

• Cost-Oriented Approaches

Standard Markup Pricing add the standard industry fixed % to my costs. Easy to implement.

Cost-Plus Pricing add a standard dollar amount to my costs- like $5.00 for shipping and handling

COMPETITION ORIENTED APPROACHES

Customary Pricing

Adjust product to fit costs & maintain price 75¢ candy bar in a vending machine

Above-, At-, or Below-Market Pricing Use largest competitor as a benchmark to set your price. Rolex watches (above) or Value City Furniture (below)

Loss-Leader Pricing- Price below cost to lure buyers in Want buyer purchasing other things you sell at high mark ups

Lots of choices, but when to use which one?

Profit-Oriented Pricing Objectives-Profit-Oriented Pricing Objectives-Sales revenue Sales revenue

Profit-Oriented Pricing Objectives-Profit-Oriented Pricing Objectives-Sales revenue Sales revenue

Sales-Oriented Pricing Objectives-Sales-Oriented Pricing Objectives-

Sales-Oriented Pricing Objectives-Sales-Oriented Pricing Objectives-

Status Quo Pricing Objectives-Status Quo Pricing Objectives-Survival, social responsibilitySurvival, social responsibility

Status Quo Pricing Objectives-Status Quo Pricing Objectives-Survival, social responsibilitySurvival, social responsibility

Market share, unit volume

PRICING OBJECTIVES

PRICING CONSTRAINTS

Demand for the Product Class, Product, & Brand

Newness of the Product: Stage in the Product Life Cycle

Cost of Producing and Marketing the Product

Competitors’ Prices

ESTIMATING DEMANDAND REVENUE

• Consumer Tastes

• Price and Availability of Similar Products

• Consumer Income levels

• Changes in external environment

Always use price first, but must adjust for:

demand curve for Newsweek (initial conditions)

demand curve for Newsweek (shift in demand)

HOW MUCH MORE WILL THEY BUY WHEN I LOWER PRICE?

Price Elasticity of Demand

InelasticInelasticDemandDemandInelasticInelasticDemandDemand

An increase or decrease in price will not significantly affect demand

Elastic Elastic Demand Demand Elastic Elastic

Demand Demand

Consumers buy more or lessof a product when the price changes

But price set depends on costs, so how to value them?

Total revenue is the total money received from the sale of a product

Total Revenue = Price X Quantity

FUNDAMENTAL REVENUE CONCEPT

Deviate with changes in level of output

Deviate with changes in level of output

Total CostsTotal CostsTotal CostsTotal Costs

VariableVariableCostsCosts

VariableVariableCostsCosts Fixed CostsFixed CostsFixed CostsFixed Costs

Do not deviate as level of output changes

Do not deviate as level of output changes

FUNDAMENTAL COST CONCEPT

How do you know when you’re making money?

CALCULATING A BREAK EVEN POINT

Issues Issues That That LimitLimitPricing Pricing DecisionsDecisions

Issues Issues That That LimitLimitPricing Pricing DecisionsDecisions

Deceptive pricing- can’t bait and switchDeceptive pricing- can’t bait and switch

Price Fixing-Manufacturer can’t agree with competitors or resellers to

set price

Price Fixing-Manufacturer can’t agree with competitors or resellers to

set price

Price Discrimination-can’t set a different price for the same item for two

different customers

Price Discrimination-can’t set a different price for the same item for two

different customers

Predatory Pricing-can’t sell an item at a loss to bankrupt

the competition

Predatory Pricing-can’t sell an item at a loss to bankrupt

the competition

LEGAL AND ETHICAL CONSIDERATIONS

SETTING A FINAL PRICE

• Step 1: Set an Approximate Price Level pick a starting range using demand and break even analysis

One-Price Policy – Dollar Store or no haggling

• Step 2: Set the Specific List or Quoted Price

Flexible-Price Policy- different prices for different buyers and buying situations

SETTING A FINAL PRICE

• Step 3: Make Special Adjustments to the List or Quoted Price

Discounts

• Quantity Discounts

• Seasonal Discounts

• Trade Discounts to resellers

• Cash Discounts

SETTING A FINAL PRICE

Promotional Allowances – if you sell 12, 13th is free

Trade-In Allowances - like for cars

Allowances

• Everyday Low Pricing-reduce promotional allowances but also reduce price of item so reseller sells more

Uniform Delivered Pricing – seller pays shipping and charges it to all buyers equally, but holds title during transit

FOB Origin Pricing – buyer pays shipping owns goods in transit

Geographical Adjustments

SETTING A FINAL PRICE

Price (P)

Price (P) is the money or other considerations (including other goods and services) exchanged for the ownership or use of a good or service.

Price (P) is the money or other considerations (including other goods and services) exchanged for the ownership or use of a good or service.

Demand Curve

A demand curve is a graph relating the quantity sold and price, which shows the maximum number of units that will be sold at a given price.

A demand curve is a graph relating the quantity sold and price, which shows the maximum number of units that will be sold at a given price.

Total Cost (TC)

Total cost (TC) is the total expense incurred by a firm in producing and marketing a product. Total cost (TC) equals the sum of fixed cost (FC) and variable cost (VC) or TC = FC + VC.

Total cost (TC) is the total expense incurred by a firm in producing and marketing a product. Total cost (TC) equals the sum of fixed cost (FC) and variable cost (VC) or TC = FC + VC.

Fixed Cost (FC)

Fixed cost (FC) is the sum of the expenses of the firm that are stable and do not change with the quantity of a product that is produced and sold.

Fixed cost (FC) is the sum of the expenses of the firm that are stable and do not change with the quantity of a product that is produced and sold.

Variable Cost (VC)

Variable cost (VC) is the sum of the expenses of the firm that vary directly with the quantity of a product that is produced and sold.

Variable cost (VC) is the sum of the expenses of the firm that vary directly with the quantity of a product that is produced and sold.

Break-Even Analysis

Break-even analysis is a technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output.

Break-even analysis is a technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output.

Pricing Objectives

Pricing objectives involve specifying the role of price in an organization’s marketing and strategic plans.

Pricing objectives involve specifying the role of price in an organization’s marketing and strategic plans.

Pricing Constraints

Pricing constraints involve factors that limit the range of prices a firm may set.Pricing constraints involve factors that limit the range of prices a firm may set.