Pricing Products:

1
Chapter 10

• Pricing Products
• Pricing Considerations and Strategies

2
Road Map Previewing the Concepts

• Identify and explain the external and internal
  factors affecting a firm's pricing decisions.
• Contrast the three general approaches to setting
  prices.
• Describe the major strategies for pricing
  imitative and new products.
• Explain how companies find a set of prices that
  maximizes the profits from the total product mix.
• Discuss how companies adjust their prices to take
  into account different types of customers and
  situations.
• Discuss the key issues related to initiating and
  responding to price changes.

3
Factors Affecting Price Decisions (Fig. 10-1)

4
Internal Factors Affecting Pricing Decisions
Marketing Objectives
Survival Low Prices Hoping to Increase Demand.
Current Profit Maximization Choose the
Price that Produces the Maximum Current Profit,
Etc.
Marketing Objectives
Market Share Leadership Low as Possible Prices to
Become the Market Share Leader.
Product Quality Leadership High Prices to Cover
Higher Performance Quality and RD.
5
Four Seasons Hotel

• Four Seasons uses the product quality leadership
  strategy.
• It starts with very high quality service, then
  charges a price to match.
• http//www.fourseasons.com

6
Internal Factors Affecting Pricing Decisions
Marketing Mix Strategy
Customers Seek Products that Give Them the Best
Value in Terms of Benefits Received for the Price
Paid.
7
Types of Cost Factors that Affect Pricing
Decisions

• Total Costs
• Sum of the Fixed and Variable Costs for Any Given
  
• Level of Production

8
External Factors Affecting Pricing Decisions
Market and Demand
Competitors Costs, Prices, and Offers
Other External Factors Economic
Conditions Reseller Reactions Government
Actions Social Concerns
9
Market and Demand Factors Affecting Pricing
Decisions
Pricing in Different Types of Markets
Pure Monopoly Single Seller
Pure Competition Many Buyers and Sellers Who
Have Little Effect on the Price
Oligopolistic Competition Few Sellers Who
Are Sensitive to Each Others Pricing/ Marketing
Strategies
Monopolistic Competition Many Buyers and Sellers
Who Trade Over a Range of Prices
10
Demand Curve (Fig. 10-2)
11
Price Elasticity of Demand
A. Inelastic Demand - Demand Hardly Changes
With a Small Change in Price.
Price
P2
P1
Q1
Q2
Quantity Demanded per Period
B. Elastic Demand - Demand Changes Greatly
With a Small Change in Price.
Price
P2
P1
Q1
Q2
Quantity Demanded per Period
12
Major Considerations in Setting Price (Fig. 10-3)
13
Cost-Based Pricing
14
Breakeven Analysis or Target Profit Pricing (Fig.
10-4)
Tries to Determine the Price at Which a Firm
Will Break Even or Make a Certain Target Profit.
Total Revenue
Target Profit (2 million)
Cost in Dollars (millions)
Total Cost
Fixed Cost
Sales Volume in Units (thousands)
15
Cost-Based Versus Value-Based Pricing (Fig. 10-5)
16
Discussion Question

• After examining Figure 10-5, compare and contrast
  cost-based pricing and value-based pricing.
• What are situations that favor each pricing
  method?

17
Competition-Based Pricing
18
New-Product Pricing Strategies

• Use Under These Conditions
• Products Quality and Image Must Support Its
  Higher Price.
• Costs Cant be so High that They Cancel the
  Advantage of Charging More.
• Competitors Shouldnt be Able to Enter Market
  Easily and Undercut the High Price.

• Market-Skimming
• Setting a High Price for a New Product to Skim
  Maximum Revenues from the Target Market.
• Results in Fewer, But More Profitable Sales.
• I.e. Intel

19
New-Product Pricing Strategies

• Use Under These Conditions
• Market Must be Highly Price-Sensitive so a Low
  Price Produces More Market Growth.
• Production/Distribution Costs Must Fall as Sales
  Volume Increases.
• Must Keep Out Competition Maintain Its Low
  Price Position or Benefits May Only be Temporary.

• Market Penetration
• Setting a Low Price for a New Product in Order to
  Penetrate the Market Quickly and Deeply.
• Attract a Large Number of Buyers and Win a Larger
  Market Share.
• I.e. Dell

20
Interactive Student Assignments

• Form students into groups of three to five. Which
  pricing strategy--market skimming or market
  penetration--does each of the following companies
  use?
• McDonalds,
• Sony (television and other home electronics),
• Bic Corporation (pens, lighters, shavers, and
  related products), and
• IBM (personal computers).

21
Product Mix-Pricing StrategiesProduct Line
Pricing

• Involves setting price steps between various
  products in a product line based on
• Cost differences between products,
• Customer evaluations of different features, and
  
• Competitors prices.

22
Product Mix-Pricing Strategies

• Optional-Product
• Pricing optional or accessory products sold with
  the main product. i.e camera bag.
• Captive-Product
• Pricing products that must be used with the main
  product. i.e. film.

23
Product Mix-Pricing Strategies

• By-Product
• Pricing low-value by-products to get rid of them
  and make the main products price more
  competitive.
• I.e. sawdust, Zoo Doo

• Product-Bundling
• Combining several products and offering the
  bundle at a reduced price.
• I.e. theater season tickets.

24
Discount and Allowance Pricing
25
Segmented Pricing
26
Psychological Pricing

• Considers the psychology of prices and not simply
  the economics.
• Customers use price less when they can judge
  quality of a product.
• Price becomes an important quality signal when
  customers cant judge quality price is used to
  say something about a product.

Retail 100.00 Cost 3.00
27
Promotional Pricing
28
Other Price Adjustment Strategies
Geographical Pricing

• Pricing products for customers
• located in different parts of
• the country or world.
• i.e. FOB-Origin, Uniform-
• Delivered, Zone, Basing-
• Point, Freight-Absorption.
• Adjusting prices for customers
• in different counties.
• Price Depends on Costs,
• Consumers, Economic
• Conditions, Competitive
• Situations, Other Factors.

International Pricing
29
Initiating Price Changes
30
Reactions to Price Changes
Being Replaced by Newer Models
Price Cuts Are Seen by Buyers As
Current Models Are Not Selling Well
Company is in Financial Trouble
Quality Has Been Reduced
Price May Come Down Further
31
Assessing/Responding to Competitors Price
Changes (Fig. 10-6)
32
Public Policy Issues in Pricing (Fig. 10-7)
33
Rest Stop Reviewing the Concepts

• Identify and explain the external and internal
  factors affecting a firm's pricing decisions.
• Contrast the three general approaches to setting
  prices.
• Describe the major strategies for pricing
  imitative and new products.
• Explain how companies find a set of prices that
  maximizes the profits from the total product mix.
• Discuss how companies adjust their prices to take
  into account different types of customers and
  situations.
• Discuss the key issues related to initiating and
  responding to price changes.