Pricing ConceptsChapters 13
Price and Value
• Value = perceived benefits/price• Price = perception of quality• Price = consumer perception of
prestige• Example:
– Swiss firm TAG HEUER– Changed prices from $250 to $1000– Sales volume increased sevenfold
Step 1: Pricing Objectives
• Survival• Maximum current profit/profit
oriented pricing• Maximum market share/sales
oriented pricing• Maximum market skimming• Product quality leadership
Step 2: Determining Demand
Quantity demanded
S
S
Pri
ce
.50
1.00
1.50
2.00
2.50
0 20 40 60 80 100 120
D
D
SurplusSurplus
ShortageShortage
PricePriceEquilibriumEquilibrium
Elasticity of DemandConsumers sensitivity to price
changes
Price Goes...Price Goes...Price Goes...Price Goes... Revenue Goes...Revenue Goes...Revenue Goes...Revenue Goes... Demand is...Demand is...
Down Up Elastic
Down Down Inelastic
Up Up Inelastic
Up Down Elastic
Up or Down Stays the Same Unitary Elasticity
Factors that Affect Elasticity
• DEMAND LESS ELASTIC IF:– Few or no substitutes– Buyers don’t notice higher price– Buyers are slow to change habits– Buyers think higher prices are
justified
Step 3: Estimating Cost• Variable costs – changes with level of output• Fixed costs – no change with output level• Marginal costs – the change in total costs
associated with a 1 unit change in output• Average variable costs – total variable costs
divided by quantity of output• Average total costs – total costs divided by
quantity of output
Step 4: Analyzing Competition
• Analyze competitors costs, prices and offers
Step 5: Methods of Setting Prices
• Markup pricing– Keystoning
• Target return pricing• Perceived value pricing• Value pricing• Going Rate pricing• Auction type pricing• Group pricing
Step 6: Selecting Final Price
• Psychological pricing• Marketing mix• Company policies
Fine Tuning the Base Price
• Geographical pricing• Quantity discounts• Cash discounts• Functional discounts• Seasonal discounts• Promotional discounts• Rebates
Special Pricing TacticsSingle-Price Tactic Single-Price Tactic
Flexible PricingFlexible Pricing
Professional Services PricingProfessional Services Pricing
Price LiningPrice Lining
Leader PricingLeader Pricing
Bait PricingBait Pricing
Odd-Even PricingOdd-Even Pricing
Price Bundling Price Bundling
Two-Part PricingTwo-Part Pricing
All goods offered at the same price All goods offered at the same price
Different customers pay different priceDifferent customers pay different price
Used by professionals with experience,training or certificationUsed by professionals with experience,training or certification
Several line items at specific price pointsSeveral line items at specific price points
Sell product at near or below costSell product at near or below cost
Lure customers through false or misleading price advertisingLure customers through false or misleading price advertisingOdd-number prices imply bargainEven-number prices imply qualityOdd-number prices imply bargainEven-number prices imply qualityCombining two or more products in a single package Combining two or more products in a single package
Two separate charges to consume a single goodTwo separate charges to consume a single good
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