PRICE

Yes, But What Does It Cost?Price is the value that customers give up or exchange to obtain a desired productPayment may be in the form of money, goods, services, favors, votes or anything else that has value to the other party

Opportunity CostsThe value of something that is given up to obtain something else also affects the price of a decisionExample: the cost of going to college is charged in tuition and fees but also includes the opportunity cost of what a student cannot earn by working instead

The Importance of Pricing DecisionsPrice is the only P which represents revenue rather than an expensePricing and the Marketing MixPrice and PlacePrice and ProductPrice and Promotion

The price of four different purchases

Steps in setting priceIdentify objectives & constraintsEstimate demand & revenueDetermine cost, volume and profitSet an approximate price levelSet List or Quoted priceMake adjustments to list price

Identifying Pricing constraintsDemand for the Product Class, Product, and BrandNewness of the Product: Stage in the Product Life CycleSingle Product versus a Product LineCost of Producing and Marketing the ProductCost of Changing Prices & Time Period They ApplyTypes of Competitive Markets - Competitors Prices

Pricing ObjectivesSales or market share objectivesProfit objectivesCompetitive effect objectivesCustomer satisfaction objectivesImage enhancement objectives Social Responsibility

Estimating DemandDemand refers to customers desire for productsHow much of a product do consumers want?How will this change as the price goes up or down?Identify demand for an entire product category in markets the company servesPredict what the companys market share is likely to be

The Price Elasticity of DemandHow sensitive are customers to changes in the price of a product?Price elasticity of demand is a measure of the sensitivity of customers to changes in price.Price elasticity of demand = Percentage change in quantity demanded / Percentage change in price

Demand CurvesShows the quantity of a product that customers will buy in a market during a period of time at various prices if all other factors remain the sameVertical axis represents the different prices a firm might chargeHorizontal axis shows the number of units

Demand Curves

Influences on Price Elasticity of DemandAvailability of substitute goods or servicesIf a product has a close substitute, its demand will be elasticTime periodThe longer the time period, the greater the likelihood that demand will be more elasticIncome effectChange in income affects demand for a product even if its price remains the samenormal goods, luxury goods, inferior goods

Elastic and Inelastic Demand Curves

Types of Costs - 1Variable costs - per-unit costs of production that will fluctuate depending on how many units or individual products a firm producesFixed costs - do not vary with the number of units produced. Costs remain the same regardless of amount produced

Types of Costs - 2Average fixed cost is the fixed cost per unit produced (total fixed costs / number of units produced)Total costs = variable costs plus fixed costs

Break-Even AnalysisTechnique used to examine the relationship between cost and price and to determine what sales volume must be reached at a given price before the company will completely cover its total costs and past which it will begin making a profitAll costs are covered but there isnt a penny left over

Break-even analysis chart

Marginal AnalysisProvides a way for marketers to look at cost and demand at the same timeExamines the relationship of marginal cost to marginal revenuemarginal cost is the increase in total costs from producing one additional unit of a productmarginal revenue is the increase in total income or revenue that results from selling one additional unit of a product

Marginal Analysis

Pricing Strategies Based on CostAdvantagesSimple to calculateRelatively risk free

DisadvantagesFail to consider several factorstarget marketdemandcompetitionproduct life cycleproducts imageDifficult to accurately estimate costs

Cost-Plus PricingMost common cost-based approachMarketer figures all costs for the product and then adds desired profit per unitStraight markup pricing is the most frequently used type of cost-plus pricingprice is calculated by adding a pre-determined percentage to the cost

Steps in Cost-Plus PricingEstimate unit costCalculate markupMarkup on cost Markup on selling price - markup percentage is the sellers gross margingross margin is the difference between the cost to the wholesaler or retailer and the price needed to cover overhead and profit

Cost Plus Pricing ExcerptFixed costs = $2,000,000Number of jeans produced = 400,000Fixed costs per unit = $5Variable costs per unit = $15Markup as % of costs = 25%Markup on costPrice = total cost + (total cost * markup percentage)Price = $20 + ($20 * .25) = $20 + $5 = $25

Markup on Cost versus Markup on Selling Priceon CostPrice paid = $30Markup = 40%Price = total cost + (total cost * markup percentage)Price = $30 + ($30 *.40) = $42on Selling PricePrice paid = $30Markup = 40%Price = cost/1.00 markup %Price = $30/ 1-.40 = $50

Price Floor PricingMethod for calculating price that considers both costs and what can be done to assure that a plant can operate at capacityTypically used when market conditions make it impossible for a firm to sell enoughIf the price-floor price can be set above the variable costs, the firm can use the difference to increase profits or cover fixed costs

Pricing Strategies Based on Demand-1Demand-based pricing means that the selling price is based on an estimate of volume or quantity that a firm can sell in different markets at different pricesDemand-backward pricing starts with a customer-pleasing price and works backward to costs

Pricing Strategies Based on Demand-2Chain-Markup Pricing extends demand backward pricing from end consumer back to the manufacturerExample:Price customers are willing to pay = $39.99Markup required by retailer = 40%Price retailer will pay $39.99 * .60 = $23.99

Pricing Strategies Based on CompetitionCompetitive parity - price products at near the competitionPrice leadership - price products based on prices of industry leadersLoss leaders - price products below competition

Pricing Strategies Based on Customers NeedsCost of ownership strategy - price consumers pay for product, plus the cost of maintaining and using the product, less any resale value (e.g., Sanyo batteries)Value pricing (EDLP*) - offers a fair value to consumers (e.g., Kmarts blue light specials)** EDLP = everyday low pricing

New Product PricingSkimming price - firm charges a high, premium price for its new product with the intention of reducing it in future response to market pressuresPenetration pricing - new product is introduced at a very low priceTrial pricing - product carries a low price for a limited time period

Pricing TacticsPricing for Individual Productstwo-part pricing (e.g., country clubs)payment pricing (e.g., easy payments for new cars)Pricing for Multiple ProductsPrice bundling (e.g., monitor, keyboard, CPU in a computer package)Captive pricing (e.g., razors and razor blades)

More Pricing TacticsGeographic pricingF.O.B. pricingZone pricingUniform delivered pricingFreight absorption pricing

Discounting for Channel MembersTrade or functional discountsQuantity discountsCash discountsSeasonal discounts

Trade DiscountsPricing structure built around list priceList price, also called suggested retail price, is the price that the manufacturer sets as the appropriate price for the end consumerManufacturers offer discounts because channel members perform selling, credit, storage and transportation services

Pricing with Electronic CommerceDynamic pricing strategiesprice can be adjusted to meet changes in the marketplaceonline price changes can occur quickly, easily, and at virtually no costAuctionssites offer chance to bid on itemssites offer reverse-price auctions

Price DiscriminationMeans that marketers classify customers based on some characteristic that indicates what they are willing or able to payAcceptable when price differences are in response to changes in cost of productchanges in competitive activitychanges in marketplace

Psychological Issues in PricingInternal Reference Prices - consumers have a set price or price range in their mind If the actual price is higher, consumers will feel the product is overpricedIf it is too low below the internal reference price, consumers may assume its quality is inferiorCompetition as Reference Price - If the price is close, the assimilation effect will encourage the customer to think the products are similar enough and choose the lower priced product

Price-Quality InferencesIf consumers are unable to judge the quality of a product through examination or prior experience, they usually will assume that the higher-priced product is the higher-quality product

Price and QualityConsumers tend toassociate high priceswith high quality. This Belgian ad for Chat Noir coffee tries to suggest otherwise. It reads, Quality coffee. But weve really squeezed the price.

Psychological Pricing StrategiesOdd-even pricingPrice lining

Price Lining

Legal and Ethical Considerations in PricingDeceptive pricing practicesPrice discrimination

Deceptive Pricing PracticesRetailers must not claim prices are lower than competitors unless it is trueA going out-of-business sale should be the last sale before going out of businessBait-and-switch - consumers are lured into store for a very low price, but then the item is not available. A more expensive product is offered insteadTrading up is acceptable

Price DiscriminationMeans selling the same product to different wholesalers and retailers at different prices if practices lessen competition

Price FixingOccurs when two or more companies conspire to keep prices at a certain levelHorizontal price fixing occurs when competitors making the same product jointly determine what price they each will chargeVertical price fixing occurs when manufacturers attempt to force the retailer to charge the suggested retail price

Predatory PricingMeans that a company sets a very low price for the purpose of driving competitors out of business

Dumping (US) Selling in foreign market at or below costSelling in a foreign market more than 5% below price in home market