Pricing Products:

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Chapter 10

• Pricing Products
• Pricing Considerations and Approaches

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Price

• Price is the sum of all the values that consumers
  exchange for the benefits of having or using the
  product or service.
• Price has been the major factor affecting buyer
  choice nonprice factors have become increasingly
  important in buyer-choice behavior.
• Price is the only element in the marketing mix
  that produces revenues all others represent
  costs.

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Factors Affecting Price Decisions ( Fig. 10.1)

External Factors Nature of the market and
demand Competition Other environmental factors
(economy, resellers, government)
Internal Factors Marketing Objectives Marketing
Mix Strategy Costs Organizational
considerations
Pricing Decisions
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Internal Factors Affecting Pricing Decisions
Marketing Objectives
Survival Low Prices to Cover Variable Costs
and Some Fixed Costs to Stay in Business.
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 R D.
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Internal Factors Affecting Pricing Decisions
Marketing Objectives

• Other specific objectives include
• Set prices low to prevent competition from
  entering the market,
• Prices might be reduced temporarily to create
  excitement or draw more customers.
• Nonprofit and public organization may have other
  pricing objectives such as
• University aims for partial cost recovery,
• Hospital may aim for full cost recovery,
• Theater may price to fill maximum number of seats.

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Internal Factors Affecting Pricing Decisions
Marketing Mix
Customers Seek Products that Give Them the Best
Value in Terms of Benefits Received for the Price
Paid.
Product Design
Nonprice Positions
Price
Distribution
Promotion
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Types of Cost Factors that Affect Pricing
Decisions

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

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Short-Run-Average Cost Curve
Cost per unit
1000
Amount
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Costs Considerations
Cost Per Unit at Different Levels of Production
Per Period
1
2
Cost per unit
SRAC
3
4
LRAC
1,000
2,000
3,000
4,000
Quantity Produced per Day
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Types of Cost Factors that Affect Pricing
Decisions

• As a firm gains experience in production, it
  learns how to do it better.
• The experience curve (or the learning curve)
  indicates that average cost drops with
  accumulated production experience.
• Strategy company should price products low
  sales increases costs continue to decrease and
  then lower prices further.
• Risks are present with this strategy.

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Organization Considerations

• Who should set prices
• Small businesses
• Large businesses
• Industrial markets
• A pricing department

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External Factors Affecting Pricing Decisions
Market and Demand
Competitors Costs, Prices, and Offers
Other External Factors Economic
Conditions Reseller Needs Government
Actions Social Concerns
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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
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Demand Curves and Price Elasticity of Demand
A Demand Curve is a Curve that Shows the Number
of Units the Market Will Buy in a Given Time
Period at Different Prices that Might be
Charged. Price Elasticity Refers to How
Responsive Demand Will be to a Change in
Price. Price Elasticity of Demand Change in
Quantity Demanded
Change in Price
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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
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Major Considerations in Setting Price (Fig. 10.5)
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Cost-Based Pricing
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Breakeven Analysis or Target Profit Pricing
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)
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Cost-Based Versus Value-Based Pricing (Fig. 10.7)
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Discussion Connections

• A few years ago, Buick pitched its
  top-of-the-line Park Avenue model as Americas
  best car value.
• Does this fit with your understanding of value?
• Pick two competing brands from a familiar product
  category (watches, perfume, etc) - one low priced
  and the other high priced.
• Which, if either, offers the greatest value?
• Does value mean the same thing as low price?
  How do these concepts differ?

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Value-Based Pricing

• Setting the price based on buyers value rather
  than on the sellers cost
• Company can not design or set price, instead,
  price is considered along with the other
  marketing mix variables before the marketing
  program is set.
• Must find out what value the buyer assigns to
  different competitive offers.

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Competition-Based Pricing
Setting Prices
Going-Rate Company Sets Prices Based on
What Competitors Are Charging.
Sealed-Bid Company Sets Prices Based on What
They Think Competitors Will Charge.
?
?
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Review of Concept Connections

• Identify and define the internal factors
  affecting a firm's pricing decisions.
• Identify and define the external factors
  affecting pricing.
• Contrast the three general approaches to setting
  prices.

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Issue For Discussion

• 1. Assume the role of the Vice President for
  Financial Affairs at a major college or
  university. For the past three years,
  enrollments and revenues have declined steadily
  at a rate of about 10 percent per year. You are
  under great pressure to raise tuition to
  compensate for the falling revenues. However,
  you suspect that raising tuition may only make
  matters worse. What internal and external
  pricing factors that you should consider before
  you make your decision? Explain.

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• 2. Discuss the typical pricing objectives
  outlined in the chapter. Which of these
  objectives do you believe is (a) the most
  commonly used (b) the most difficult to achieve
  and (c) has the greatest potential for long-term
  growth of the organization? Explain.

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Chapter 11

• Pricing Products
• Pricing Strategies

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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.

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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.

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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.

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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.

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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.

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Discount and Allowance Pricing
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Segmented Pricing
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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.

Value 22.00 Sale 14.99
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Promotional Pricing
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Discussion Connections

• Many other industries have created deal-prone
  consumers through the heavy use of promotional
  pricing - fast foods, airlines, tires, furniture,
  and others.
• Pick a company in one of these industries and
  suggest ways that it might deal with this
  problem.
• How does the concept of value relate to
  promotional pricing? Does promotional pricing
  add to or detract from customer value?

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Other Price Adjustment Strategies
Geographical Pricing

• Adjusting Prices to Account
• for the Geographical Location
• of Customers.
• i.e. FOB-Origin, Uniform-
• Delivery, Zone Pricing, Basing
• Point, Freight-Absorption.
• Adjusting Prices for
• International Markets.
• Price Depends on Costs,
• Consumers, Economic
• Conditions, Competitive
• Situations Other Factors.

International Pricing
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Initiating Price Changes
Price Increases
Price Cuts


Why? Excess Capacity Falling Market
Share Dominate Market Through Lower Costs
Why? Cost Inflation Overdemand Company Cant
Supply All Customers Needs
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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 Comes Down Further
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Assessing/Responding to Competitors Price
Changes (Fig. 11.1)
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Public Policy Issues in Pricing (Fig. 11.2)
Manufacturer A Price-fixing Predatory
pricing Manufacturer B
Retailer 1 Price-fixing Predatory
Pricing Retailer 2
Retail price maintenance. Discriminatory Pricing
Deceptive Pricing
Consumers
Deceptive Pricing
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Public Policy Issues in Pricing
Pricing Within Channel Levels
Price Fixing
Predatory Pricing
Both Are Prohibited by Law
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Pricing Across Channel Levels
Deceptive Pricing Occurs When a Seller States
Prices or Prices Savings that Available To
Consumers
Price Discrimination Ensure Sellers Offers the
Same Price Terms to a Given Level Of Trade
Resale Price Maintenance Manufacturer Cant
Require Dealers to Charge a Specified
Retail Price for Its Product
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Review of Concept Connections

• 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.