CHAPTER 11 Pricing The Product

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CHAPTER 11Pricing The Product
M A R K E T I N G
Real People, Real Choices Fourth Edition
Michael R. Solomon Greg W. Marshall
Elnora W. Stuart
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Chapter Objectives_1

• Explain the importance of pricing and understand
  how prices can take both monetary and
  non-monetary forms
• Understand the pricing objectives that marketers
  typically have in planning pricing strategies
• Describe how marketers use costs, demands, and
  revenue to make pricing decisions
• Understand some of the environmental factors that
  affect pricing strategies

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Chapter Objectives_2

• Understand key pricing strategies
• Explain pricing tactics for single and multiple
  products and for pricing on the Internet
• Understand the opportunities for pricing
  strategies
• Describe the psychological, legal, and ethical
  aspects of pricing

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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

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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

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The Importance of Pricing Decisions

• Price is the only P which represents revenue
  rather than an expense
• Pricing and the Marketing Mix
• Price and Place
• Price and Product
• Price and Promotion

Video Song Airlines pricing strategy
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Figure 11.1 Steps in Price Planning
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Types of Pricing Objectives

• Sales or market share objectives
• Profit objectives
• Competitive effect objectives
• Customer satisfaction objectives
• Image enhancement objectives

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Pricing Objectives
Purexs pricing objectives focus on the
competition
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Value

• People may be willing to pay a premium because
  they believe it makes a statement about their own
  worth

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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?

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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

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Figure 11.2 Demand Curves
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Figure 11.3 Shifts in Demand

• An upward shift in the demand curve means that at
  any given price, demand is greater than before
  the shift occurs

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Estimating Demand

• Identify demand for an entire product category in
  markets the company serves
• Predict what the companys market share is likely
  to be

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Table 11.2 Estimating Demand for Pizza
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Estimating Demand
The iPod has a 6-week waiting list
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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

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Inelastic Demand
In the short run, demand for gas is inelastic.
In the long run, cars that run on electricity
(like the Prius) may change that.
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Influences on Price Elasticity of Demand

• Availability of substitute goods or services
• If a product has a close substitute, its demand
  will be elastic
• Time period
• The longer the time period, the greater the
  likelihood that demand will be more elastic
• Income effect
• Change in income affects demand for a product
  even if its price remains the same

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Figure 11.5 Elastic/Inelastic Demand Curves
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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

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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

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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
  before the company will completely cover its
  total costs and past which it will begin making a
  profit
• All costs are covered but there isnt a penny
  left over

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Figure 11.7 Break-Even Analysis
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Marginal Analysis

• Provides a way for marketers to look at cost and
  demand at the same time
• Examines the relationship of marginal cost to
  marginal revenue
• marginal cost
• marginal revenue

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Figure 11.8 Marginal Analysis
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Evaluating the Pricing Environment

• The Economy
• Trimming the Fat Pricing in a Recession
• Increasing Prices Responding to Inflation
• The Competition
• Consumer Trends
• International Environmental Influences

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Daffys
When the economy is down, consumers are more
interested in lower prices
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• Consumers like getting luxury goods

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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

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Pricing Strategies Based on Cost

• Advantages
• Simple to calculate
• Relatively risk free

• Disadvantages
• Fails to consider
• target market
• demand
• competition
• product life cycle
• products image
• Difficult to accurately estimate

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• Business purchasers try to get the supplies they
  need at the lowest price

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Steps in Cost-Plus Pricing

• Estimate unit cost
• Calculate markup
• Markup on cost
• Markup on selling price - markup percentage is
  the sellers gross margin
• gross margin is the difference between the cost
  to the wholesaler or retailer and the price
  needed to cover overhead and profit

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Table 13.1 Cost Plus Pricing Excerpt

• Fixed costs 2,000,000
• Number of jeans produced 400,000
• Fixed costs per unit 5
• Variable costs per unit 20
• Markup on cost
• Price total cost (total cost markup
  percentage)
• Price 25 (25 .20) 25 5 30

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Table 13.2 Markup on Cost vs. Markup on
Selling Price

• On Cost
• Price paid 30
• Markup 40
• Price total cost (total cost markup
  percentage)
• Price 30 (30 .40) 42

• On Selling Price
• Price paid 30
• Markup 40
• Price cost/1.00 - markup percentage
• Price 30/ 1-.40 50

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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
• Yield management pricing

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Demand Pricing
Dell regularly reviews sales performance and
adjusts its prices
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Communicating Competitive Pricing
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Pricing Strategies

• Value pricing (EDLP) - offers a fair value to
  consumers (e.g., Kmarts blue light specials)

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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

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Pricing Tactics

• Pricing for Individual Products
• two-part pricing (e.g., country clubs)
• 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/blades)

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Easy Monthly Payments
Companies like Suzuki understand that they can
prevent sticker shock by emphasizing the
monthly price of a car rather than the total
price
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Captive Pricing
Gillette practices captive pricing.
Once customers have bought the razor, they are a
captive of the companys blade prices.
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More Pricing Tactics

• Distribution-based pricing
• F.O.B. pricing
• International distribution pricing terms of sale
• Basing-point pricing
• Uniform delivered pricing
• Freight absorption pricing

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Discounting for Channel Members

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

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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

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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

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Online Auctions
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First Price Auction Strategy
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Psychological Issues in Pricing

• Internal Reference Prices - consumers have a set
  price or price range in their 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

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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

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Price and Quality
Consumers tend to associate high prices with high
quality
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Psychological Pricing Strategies
Odd-Even
Price Lining
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Price Lining
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Legal and Ethical Considerations

• Deceptive pricing practices
• Unfair sales act
• Price discrimination

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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

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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

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Price Discrimination_1

• 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

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Price Discrimination_2

• Acceptable when price differences are in response
  to
• changes in cost of product
• changes in competitive activity
• changes in marketplace

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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

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Predatory Pricing

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

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Issues for Discussion_1

• Governments sometimes provide price subsidies to
  specific industries so that they can sell
  products on the international market at a lower
  price. Why do governments use these subsidies?
  What are the benefits and disadvantages in the
  long run for domestic industries? To
  international customers? Who would benefit and
  who would lose if all price subsidies were
  eliminated?

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Issues for Discussion_2

• How do you feel about businesses setting prices
  far above the cost of producing a good or
  service? What reasons might a manufacturer have
  for setting very high prices? Why might a
  pharmaceutical firm set the prices of its
  life-saving medicines higher than the cost of
  production?

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Issues for Discussion_3

• Do you consider loss-leader pricing an unethical
  practice? Who benefits and who is hurt by such
  practices? Should it be illegal?
• Consumers often make price-quality inferences
  about products. What does this mean? What
  products do you make price-quality inferences
  for? Do they make sense?

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Issues for Discussion_4

• Retailers sometimes display similar products,
  hoping for assimilation effects or contrast
  effects. Give some examples of products youve
  seen displayed in this way. What factors make
  this more likely? Do such practices help or hurt
  the consumer?