PRICING
2
The Meaning of Price
Price =
1. Value
2. Cost
3. Sacrifices
4. Utility
Some important pricing definitions
Utility: The attribute that makes it capable of want satisfaction
Value: The worth in terms of other products
Price: The monetary medium of exchange.
Value Example: CaterpillarTractor is $100,000 vs.
Market $90,000$90,000 if equal 7,000 extra durable 6,000 reliability 5,000 service 2,000 warranty $110,000 in benefits -
$10,000 discount!
4
The Customer Wants Value
price is not always an important factor in influencing a sale; the customer wants more than a low price, may be willing to pay more
the customer considers what he or she gets for the price paid; the seller must offer value
price of a product or service communicates a message to the consumer about quality
what causes them to conclude that they “paid too much” or “got a great deal”?
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The Consumer’s View of Price
some consumers are very interested in getting a low price and pay close attention to price; they are price sensitive. But, this is variable and personal
many are interested in other elements of the purchase, including brand, quality, etc.
there is a tendency to link quality with price
consumers are often prepared to pay more if they expect to get added value
adding value doesn’t mean dropping price
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Factors Affecting Price
Price
cost
elasticity
Product characteri
stic
Marketing mix
Competition
Goal/ objective
s
Setting Pricing Policy
1. Selecting the pricingobjective
2. Determining demand
3. Estimating costs
4. Analyzing competitors’costs, prices, and offers
5. Selecting a pricingmethod
6. Selecting final price
Setting Pricing Policy
1. Selecting the pricingobjective
SurvivalMaximum current profitMaximum market shareMaximum market skimmingProduct-quality leadership
2. Determining demand
the cost of producing or offering the product or service must be considered in setting price
while easy to calculate, cost-plus pricing is not usually practical and is not often used
occasionally, a firm will sell below cost
occasionally also, a firm will price so as to recover marginal (variable) costs only
when would such approaches be used?
3. Estimating costs
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Costs and Break-Even Analysis
cost is viewed as a floor under a firm’s price
many firms do not have particularly good cost data and may not know what it costs to produce a product or service
the break-even point is where total revenue equals total costs; will be different for each price -- lets a firm see what it will need to sell
break-even analysis is not a pricing strategy, but can offer useful information
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Estimating Costs:
Fixed costs - are those costs that do not vary with production or sales revenue.
Variable costs - are those costs that vary directly with production.
Total costs = Fixed Cost + Variable Cost
(for a given level of production.)
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Break-Even Analysis
Assumptions:total fixed costs are constantvariable costs remain constant
per unit of output.B/E = Total Fixed CostsPrice - Average Variable Costs
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Figure 15-2 Break-Even Chart for Futon Factory
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Pricing Strategy
how does a company decide what price to charge for its products and services?
what is “the price” anyway? doesn’t price vary across situations and over time?
some firms have to decide what to charge different customers and in different situations
they must decide whether discounts are to be offered, to whom, when, and for what reason
Penetration Pricing
Penetration Pricing
Price set to ‘penetrate the market’‘Low’ price to secure high volumesTypical in mass market products –
chocolate bars, food stuffs, household goods, etc.
Suitable for products with long anticipated life cycles
May be useful if launching into a new market
Market Skimming
Market Skimming
High price, Low volumes Skim the profit from the
market Suitable for products that
have short life cycles or which will face competition at some point in the future (e.g. after a patent runs out)
Examples include: Playstation, jewellery, digital technology, new DVDs, etc.
Many are predicting a firesale in laptops as supply exceeds demand.Copyright: iStock.com
Value Pricing
Value Pricing
Price set in accordance with customer perceptions about the value of the product/service
Examples include status products/exclusive products
Companies may be able to set prices according to perceived value.
Copyright: iStock.com
Loss Leader
Loss Leader
Goods/services deliberately sold below cost to encourage sales elsewhere
Typical in supermarkets, e.g. at Christmas, selling bottles of gin at £3 in the hope that people will be attracted to the store and buy other things
Purchases of other items more than covers ‘loss’ on item sold
e.g. ‘Free’ mobile phone when taking on contract package
Psychological Pricing
Psychological Pricing
Used to play on consumer perceptions
Classic example - £9.99 instead of £10.99!
Links with value pricing – high value goods priced according to what consumers THINK should be the price
Going Rate (Price Leadership)
Going Rate (Price Leadership)
In case of price leader, rivals have difficulty in competing on price – too high and they lose market share, too low and the price leader would match price and force smaller rival out of market
May follow pricing leads of rivals especially where those rivals have a clear dominance of market share
Where competition is limited, ‘going rate’ pricing may be applicable – banks, petrol, supermarkets, electrical goods – find very similar prices in all outlets
Tender Pricing
Tender Pricing
Many contracts awarded on a tender basis Firm (or firms) submit their price for carrying
out the work Purchaser then chooses which represents best
value Mostly done in secret
Price Discrimination
Price Discrimination
Charging a different price for the same good/service in different markets
Requires each market to be impenetrable
Requires different price elasticity of demand in each market
Prices for rail travel differ for the same journey at different times of the day
Copyright: iStock.com
Destroyer Pricing/Predatory Pricing
Destroyer/Predatory Pricing
Deliberate price cutting or offer of ‘free gifts/products’ to force rivals (normally smaller and weaker) out of business or prevent new entrants
Anti-competitive and illegal if it can be proved
Absorption/Full Cost Pricing
Absorption/Full Cost Pricing
Full Cost Pricing – attempting to set price to cover both fixed and variable costs
Absorption Cost Pricing – Price set to ‘absorb’ some of the fixed costs of production
Marginal Cost Pricing
Marginal Cost Pricing
Marginal cost – the cost of producing ONE extra or ONE fewer item of production
MC pricing – allows flexibility
Particularly relevant in transport where fixed costs may be relatively high
Allows variable pricing structure – e.g. on a flight from London to New York – providing the cost of the extra passenger is covered, the price could be varied a good deal to attract customers and fill the aircraft
Marginal Cost Pricing
Example:
Aircraft flying from Bristol to Edinburgh – Total Cost (including normal profit) = £15,000 of which £13,000 is fixed cost*
Number of seats = 160, average price = £93.75
MC of each passenger = 2000/160 = £12.50
If flight not full, better to offer passengers chance of flying at £12.50 and fill the seat than not fill it at all! *All figures are estimates only
Contribution Pricing
Contribution Pricing
Contribution = Selling Price – Variable (direct costs)
Prices set to ensure coverage of variable costs and a ‘contribution’ to the fixed costs
Similar in principle to marginal cost pricing
Break-even analysis might be useful in such circumstances
Target Pricing
Target Pricing
Setting price to ‘target’ a specified profit level
Estimates of the cost and potential revenue at different prices, and thus the break-even have to be made, to determine the mark-up
Mark-up = Profit/Cost x 100
Cost-Plus Pricing
Cost-Plus Pricing
Calculation of the average cost (AC) plus a mark up
AC = Total Cost/Output
Influence of Elasticity
Influence of Elasticity
Any pricing decision must be mindful of the impact of price elasticity
The degree of price elasticity impacts on the level of sales and hence revenue
Elasticity focuses on proportionate (percentage) changes PED = % Change in Quantity
demanded/% Change in Price
Influence of Elasticity
Price Inelastic:% change in Q < % change in Pe.g. a 5% increase in price would be
met by a fall in sales of something less than 5%
Revenue would riseA 7% reduction in price would lead to a
rise in sales of something less than 7%Revenue would fall
Influence of Elasticity
Price Elastic:% change in quantity demanded > %
change in pricee.g. A 4% rise in price would lead to sales
falling by something more than 4%Revenue would fallA 9% fall in price would lead to a rise in
sales of something more than 9%Revenue would rise
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