PRICE

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

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

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

The price of four different purchases

Steps in setting price

Identify objectives & constraints
Estimate demand & revenue
Determine cost, volume and profit
Set an approximate price level
Set List or Quoted price
Make adjustments to list price

Identifying Pricing constraints

Demand for the Product Class, Product, and
Brand
Newness of the Product: Stage in the Product
Life Cycle
Single Product versus a Product Line
Cost of Producing and Marketing the Product
Cost of Changing Prices & Time Period They
Apply
Types of Competitive Markets - Competitors
Prices

Pricing Objectives

Sales or market share objectives

Profit objectives
Competitive effect objectives
Customer satisfaction objectives
Image enhancement objectives
Social Responsibility

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?

Identify demand for an entire product category in

markets the company serves
Predict what the companys market share is likely
to be

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

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

Demand Curves

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
normal goods, luxury goods, inferior goods

Elastic and Inelastic Demand Curves

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

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

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

Break-even analysis chart

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 is the increase in total costs from
producing one additional unit of a product
marginal revenue is the increase in total income or
revenue that results from selling one additional unit of a
product

Marginal Analysis

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

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

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

Cost Plus Pricing Excerpt

Fixed costs = $2,000,000

Number of jeans produced = 400,000
Fixed costs per unit = $5
Variable costs per unit = $15
Markup as % of costs = 25%
Markup on cost
Price = total cost + (total cost * markup percentage)
Price = $20 + ($20 * .25) = $20 + $5 = $25

Markup on Cost versus 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 %
Price = $30/ 1-.40 = $50

Price Floor Pricing

Method for calculating price that considers both
costs and what can be done to assure that a plant
can operate at capacity
Typically used when market conditions make it
impossible for a firm to sell enough
If the price-floor price can be set above the
variable costs, the firm can use the difference to
increase profits or cover fixed costs

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
Demand-backward pricing starts with a
customer-pleasing price and works
backward to costs

Pricing Strategies Based on Demand-2

Chain-Markup Pricing extends demand
backward pricing from end consumer
back to the manufacturer
Example:
Price customers are willing to pay = $39.99
Markup required by retailer = 40%
Price retailer will pay $39.99 * .60 = $23.99

Pricing Strategies Based on Competition

Competitive parity - price products at near
the competition
Price leadership - price products based on
prices of industry leaders
Loss leaders - price products below
competition

Pricing Strategies Based on Customers Needs

Cost of ownership strategy - price
consumers pay for product, plus the cost of
maintaining and using the product, less any
resale value (e.g., Sanyo batteries)
Value pricing (EDLP*) - offers a fair value
to consumers (e.g., Kmarts blue light
specials)
** EDLP = everyday low pricing

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

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 and razor blades)

More Pricing Tactics

Geographic pricing
F.O.B. pricing
Zone pricing
Uniform delivered pricing
Freight absorption pricing

Discounting for Channel Members

Trade or functional discounts

Quantity discounts
Cash discounts
Seasonal discounts

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

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

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

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

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 higherquality product

Price and Quality

Consumers tend to
associate high prices
with high quality. This
Belgian ad for Chat Noir
coffee tries to suggest
otherwise. It reads,
Quality coffee. But
weve really squeezed
the price.

Psychological Pricing Strategies

Odd-even pricing
Price lining

Price Lining

Legal and Ethical Considerations in Pricing

Deceptive pricing practices
Price discrimination

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

Price Discrimination
Means selling the same product to different
wholesalers and retailers at different prices
if practices lessen competition

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

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

Dumping (US)
Selling in foreign market at or below cost
Selling in a foreign market more than 5%
below price in home market