CHAPTER 11 Pricing The Product

1
CHAPTER 11Pricing The Product
M A R K E T I N G
Real People, Real Choices Fourth Edition
2
Yes, But What Does It Cost?

• Price is the value that customers give up or
  exchange to obtain a desired product
• Payment may be in the form of money, goods,
  services, favors, votes, or anything else that
  has value to the other party

3
Opportunity Costs

• The value of something that is given up to obtain
  something else also affects the price of a
  decision.
• Example 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.

4
Steps in Price Planning

• Develop pricing objectives
• Estimate demand
• Determine costs
• Evaluate the pricing environment
• Choose a pricing strategy
• Develop pricing tactics

5
Types of Pricing Objectives

• Sales or market share objectives (e.g. long
  distance telephone services)
• Profit objectives
• Work back from a desired profit level
• Competitive effect objectives (e.g. Jet Blue and
  Delta)
• Customer satisfaction objectives (e.g. Saturn and
  firm pricing)
• Image enhancement objectives prestige products
  like Rolex, Rolls Royce, etc.

6
Estimating Demand

• Demand refers to customers desire for products
• How much of a product do consumers want?
• How will this change as the price goes up or down?

7
Demand Curves

• Shows 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
  same
• Vertical axis represents the different prices a
  firm might charge
• Horizontal axis shows the number of units
  demanded
• Upward and downward shifts in demand curves

8
The Price Elasticity of Demand

• How 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
• Elastic / Inelastic demand / Unit Elasticity

9
Other types of demand elasticities

• Income elasticity of demand
• Percentage change in demand as a result of
  percentage change in incomes
• Cross elasticity of demand
• Percentage in demand for a product as a result of
  percentage change in price of a substitute (e.g.
  if price of Pepsi goes up the demand for Coke
  will increase) OR
• Percentage in demand for a product as a result of
  percentage change in price of a complementary
  product (e.g. if price of gas goes up demand for
  tires may come down)

10
Estimating Demand

• Identify demand for an entire product category in
  markets the company serves
• Predict what the companys market share is likely
  to be
• Marketing research to find out price elasticity
  of demand

11
Types of Costs_1

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

12
Types of Costs_2

• Average fixed cost is the fixed cost per unit
  produced (total fixed costs / number of units
  produced)
• Total costs variable costs plus fixed costs

13
Break-Even Analysis

• Technique used to examine the relationship
  between cost and price and to determine what
  sales volume must be reached at a given price at
  which company will completely cover its total
  costs
• Sales Variable Costs Contribution
• Losses lt BE point lt Profits
• Angle of incidence, Margin of Safety
• BE sales in units Total Fixed Costs /
  Contribution per unit

14
Evaluating the Pricing Environment

• The Economy
• Pricing in a Recession Consumers pull back on
  their spending
• Pricing in inflation Consumers desensitized to
  rising prices
• The Competition Perfect, Oligopoly, Monopolistic
  competition
• Consumer Trends Affluent people hunt for bargains

15
Cost-Plus Pricing

• Most common cost-based approach
• Marketer figures all costs for the product and
  then adds desired profit per unit
• Straight markup pricing is the most frequently
  used type of cost-plus pricing
• price is calculated by adding a pre-determined
  percentage to the cost

16
Pricing Strategies Based on Cost

• Advantages
• Simple to calculate
• Relatively risk free

• Disadvantages
• Fail to consider several factors
• target market
• demand
• competition
• product life cycle
• products image
• Difficult to accurately estimate costs

17
Steps in Cost-Plus Pricing

• Estimate unit cost
• Calculate markup
• Markup on cost
• Markup on selling price

18
Pricing Strategies Based on Demand_1

• Demand-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 prices
• Target costing find out what customers will be
  willing to pay and work backwards to design a
  product within that cost
• Yield management pricing services use this
  method to fill capacity

19
Pricing strategies

• Price leadership the biggest firm in the
  industry announces a new price and all other
  firms fall in line - oligopoly
• ELDP Every Day Low Pricing prices based on
  customer perceptions of value. No further
  discounts given e.g. Walmart, PG, etc.

20
New Product Pricing

• Skimming price firm charges a high, premium
  price for its new product with the intention of
  reducing it in future response to market
  pressures
• Penetration pricing new product is introduced
  at a very low price
• Trial pricing product carries a low price for a
  limited time period

21
Pricing Tactics

• Pricing for Individual Products
• two-part pricing (e.g., country clubs, cell phone
  services)
• payment pricing (e.g., easy payments for new
  cars)
• Pricing for Multiple Products
• Price bundling (e.g., monitor, keyboard, CPU in a
  computer package)
• Captive pricing (e.g., razors and razor blades)

22
More Pricing Tactics

• Distribution-based pricing
• FOB pricing
• CIF pricing
• Basing-point pricing
• Uniform delivered pricing
• Freight absorption pricing

23
Discounting for Channel Members

• Trade or functional discounts
• Quantity discounts
• Cash discounts
• Seasonal discounts

24
Trade Discounts

• Pricing structure built around list price
• List price, also called suggested retail price,
  is the price that the manufacturer sets as the
  appropriate price for the end consumer
• Manufacturers offer discounts because channel
  members perform selling, credit, storage, and
  transportation services

25
Pricing with Electronic Commerce

• Dynamic pricing strategies
• price can be adjusted to meet changes in the
  marketplace
• online price changes can occur quickly, easily,
  and at virtually no cost
• Auctions
• sites offer chance to bid on items
• sites offer reverse-price auctions

26
Price Discrimination

• Means that marketers classify customers based on
  some characteristic that indicates what they are
  willing or able to pay
• Acceptable when price differences are in response
  to
• changes in cost of product
• changes in competitive activity
• changes in marketplace

27
Psychological Issues in Pricing

• Internal Reference Prices consumers have a set
  price or price range in mind
• If the actual price is higher, consumers will
  feel the product is overpriced
• If it is too low below the internal reference
  price, consumers may assume its quality is
  inferior
• Competition 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

28
Price-Quality Inferences

• If 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

29
Psychological Pricing Strategies

• Odd-even pricing
• Price lining

30
Legal and Ethical Considerations

• Deceptive pricing practices
• Unfair sales act
• Price discrimination

31
Deceptive Pricing Practices

• Retailers must not claim prices are lower than
  competitors unless it is true
• A going out-of-business sale should be the last
  sale before going out of business
• Bait-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
  instead
• Trading up is acceptable

32
Unfair Sales Acts

• Laws or regulations prohibiting selling products
  below cost
• loss leader pricing
• many regulations even set a percentage markup
  below which the distributor may not sell the
  products

33
Price Discrimination

• Means selling the same product to different
  wholesalers and retailers at different prices if
  practices lessen competition
• Regulated by Robinson-Patman Act
• only applies to resellers
• discounts are legal if based on established
  policy and offered to any customer who chooses to
  buy under those conditions

34
Price Fixing

• Occurs when two or more companies conspire to
  keep prices at a certain level
• Horizontal price fixing occurs when competitors
  making the same product jointly determine what
  price they each will charge
• Vertical price fixing occurs when manufacturers
  attempt to force the retailer to charge the
  suggested retail price

35
Predatory Pricing

• Means that a company sets a very low price for
  the purpose of driving competitors out of business