Pricing the Product

Pricing the Product

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Chapter Objectives

• importance of pricing

• monetary & non-monetary forms of pricing

• pricing objectives for planning pricing strategies

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Chapter Objectives

• using costs, demands, and revenue to make pricing decisions

• environmental factors affecting pricing strategies

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Chapter Objectives

• key pricing strategies

• pricing tactics for single products multiple products, pricing on the Internet

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Chapter Objectives

• Internet pricing strategies

• Psychological aspects of pricing

• Legal aspects of pricing

• ethical aspects of pricing

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“Yes, but what does it cost?”

• Price: the assignment of value, or the amount the consumer must exchange

• to receive the offering

• Offerings:Money, goods, services, favors, votes,

anything else that has value to the other party

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Figure 11.1:Steps in

Price Planning

Kotler

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Solomon

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Step 1: Develop Pricing Objectives

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

ROLLS-ROYCE

http://www.rolls-royce.com/

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Step 2

Estimate demand

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Step 2: Estimate Demand

• Demand: • customers’ desires for a

product

• How much of a product are customers willing to buy as its price goes up or down?

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Demand Curves

• Law of demand: as price goes up, quantity demanded goes down.

• For prestige products, a price increase may actually result in an increase in

quantity demanded.

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Figure 11.2: Demand Curves for Normal and Prestige Products

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Shifts in Demand Curve

1. Changes in marketing strategy (improved product, new advertising) or

2. non-marketing activities

can cause upward or downward shifts in demand.

At a given price,

demand is greater or less

than before the shift.

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Figure 11.3: Shift in Demand Curve

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Estimating Demand

• Marketers predict total demand by estimating potential buyers for a product, then multiplying number of buyers times

• average amount of each buyer’s purchase.

• Then they predict what the company’s share of the total market will be.

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Elastic Demand

• A change in price results • in a substantial change in quantity

demanded.

If price is increased, revenues decrease, and vice-versa.

Non-necessities (pizza) generate elastic demand.

Availability of close substitute products facilitates elastic demand.

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Inelastic Demand

• A change in price • has little or no effect on quantity

demanded. If price is increased, revenues increase.

The demand for necessities • (food and electricity) • is generally inelastic.

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Cross-elasticity of Demand

• Changes in prices of other products affect a product’s demand.Products are substitutes:

• increase in price of one will increase demand for other (bananas vs. strawberries).

One product is essential for use of second: • increase in price of one decreases demand for

other (increasing price of gas lowers demand for cars and tires).

Step 3

Determine costs

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Step 3: Determine Costs

• Variable costs: • costs of production (raw, processed

material, parts, labor) that are tied to and vary depending on the number of units produced. Average variable costs may change

• as the number of products produced changes.

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• Fixed costs: • costs of production that don’t change

with number of units producedRent, cost of owning/maintaining factory, utilities, equipment, fixed salaries of firm’s executives

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• Fixed costs:

Average fixed cost: fixed cost per unit (total fixed costs divided by number of units produced)

will decrease as number of units produced increases.

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Step 3: Determine Costs (cont’d)

• Total costs: • total of fixed costs & • variable costs

for a set number of units produced.

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Break-Even Analysis

• the number of units a firm must produce and sell at a given price to cover all its costs.

• Break-even point: point at which a firm doesn’t lose any money

and doesn’t make any profit.

Song AirlinesVideo

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Break-Even Analysis (cont’d)

• Break-even point (in units)

• = (total fixed costs)

• divided by (contribution per unit)

Contribution per unit: • the difference between the price the firm

charges for a product & the variable costs

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Break-Even Analysis (cont’d)

• Break-even point (in dollars) • = (total fixed costs)

• divided by [1 - (variable cost per unit divided by price)]

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Marginal Analysis

• A method that uses • cost and demand• to identify the price • that will maximize profits.

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Marginal Analysis

• Marginal cost: increase in total costs from producing one additional

unit of a product

• Marginal revenue: increase in total income or revenue from selling one

additional unit of a product (decreases with each additional unit sold)

• Profit is maximized where marginal cost is exactly equal to marginal

revenue.

Step 4:

Evaluate the Pricing Environment

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Step 4: Evaluate the Pricing Environment

• The economyBroad economic

trends Recessions (Price

sensitive Consumers),

Inflation

• The competition• Consumer trends

Step 5:

Choose a Price Strategy

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Step 5: Choose a Price Strategy

• Pricing strategies based on costSimple to calculate and

relatively risk free

Cost-plus pricing:

total all product costs and add markup

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Step 5: Choose a Price Strategy (cont’d)

• Pricing strategies based on demandBased on estimate of quantity a firm can sell at different prices

PRICELINE.COM

http://www.priceline.com/

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• Pricing strategies based on demand

Target costing: • identify quality and functionality

–customers need and

• price they’re willing to pay –before designing product.

PRICELINE.COM


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• Pricing strategies based on demandYield management pricing:

• charge different prices • to different customers • to manage capacity

PRICELINE.COM


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• Pricing strategies based on the competitionPricing near, at, above, or below the

competitionPrice leadership strategy:

• industry giant announces price, and • competitors get in line • or drop out• (LCD TV and it’s competitor)

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• Pricing strategies based on customers’ needsValue pricing or everyday low pricing (EDLP):

• pricing strategy in which a firm sets prices • that provide ultimate value to customers.

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• New-product pricingSkimming price:

a very high premium price(TIVO, RIM, Mobile Phone,

Kindle)

HP FINANCIAL CALCULATORS

http://www.hp.com/calculators/financial/index.html

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• New-product pricingPenetration pricing:

a very low price

to encourage more customers to purchase



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• New-product pricingTrial pricing:

low price for a limited period of time



Step 6:

Develop Pricing Tactics

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Step 6: Develop Pricing Tactics

• Pricing for individual products

Two-part pricing: offering two separate

types of payments to purchase the product (sms extra)

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Step 6: Develop Pricing Tactics

• Pricing for individual products

Payment pricing: breaking total price

into smaller amounts

payable over time

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Step 6: Develop Pricing Tactics (cont’d)

• Pricing for multiple products

Price bundling: selling two or more goods or services

as a single package

for one price (Laptop, HP)

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• Pricing for multiple products

Captive pricing:

pricing two products

that work only when used together (Camera, razor)

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• Distribution-based pricing

F.O.B. (free on board) origin pricing

F.O.B delivered pricing

Basing-point pricing

Uniform delivered pricing

Freight absorption pricing

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• Discounting for channel membersList price (suggested retail price):

• price that manufacturer sets • as appropriate • for end consumer to pay

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• Discounting for channel membersTrade or functional discounts: set percentage discounts

• off list price

for each channel level

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• Discounting for channel members

Quantity discounts: reduced prices for purchases of larger quantities

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Cash discounts: enticements to customers

to pay bills quickly

(2% 10 days, net 30 days)

(2/10 net 30)

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Seasonal discounts:

price reductions

offered during certain times of year

Other pricing issues

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Pricing and Electronic Commerce

• Dynamic pricing strategies:

• seller easily adjusts price • to meet changes in marketplace.

CHEAPTICKETS.COM

http://www.cheaptickets.com/

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• Dynamic pricing strategies:.Cost of changing prices on Internet

is practically zero.

Firms can respond quickly and frequently

to changes in costs, supply, and/or demand.

CHEAPTICKETS.COM

http://www.cheaptickets.com/

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• Online auctions (eBay.com)E-commerce allows shoppers to purchase products through online bidding.

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Pricing and Electronic Commerce (cont’d)

• Pricing advantages for online shoppersConsumers gain control. Search engines and “shopbots”

• make customers more price-sensitive.

Consumers have more negotiating power.

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Psychological Issues in Pricing

• Buyer’s pricing expectationInternal reference price: consumers use a price/price range to evaluate product’s cost.

• Assimilation effect • Contrast effect

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Psychological Issues in Pricing

• Buyer’s pricing expectation

Price/quality inferences: • consumers assume higher-priced

product

• has higher quality.

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Psychological Pricing Strategies

• Odd-even pricing: prices ending in 99 rather

than 00 lead to increased sales.

• Price lining: items in a product line sell at

different price points.

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Legal and Ethical Considerations

• Deceptive pricing practicesGoing-out-of-business sale Bait-and-switch

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Legal and Ethical Considerations

• Unfair sales actsLoss-leader pricing Unfair sales acts

• Illegal business-to-business (B2B) price discrimination

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Legal and Ethical Considerations in Pricing (cont’d)

• Price fixing: two or more companies conspire to keep prices at a certain level

Horizontal price fixing

Vertical price fixing

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Legal and Ethical Considerations in Pricing (cont’d)

• Predatory pricing: • company sets a very low

price • for purpose of driving

competitors out of business

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The end

Documents

Pricing the Product