Pricing
What Is a Price?
• The amount of money charged for a product
or service, or the sum of the values that
customers exchange for the benefits of having
or using the product or service.
• Pricing: the only part of the marketing mix
that is revenue generating, all the others are
costs.
FACTORS TO CONSIDER WHEN
SETTING PRICES
CUSTOMER PERCEPTIONS OF VALUE
Considerations in Setting Price
Other internal & external
considerations
---------------------------------------------------
Customer
perception
of value
Price ceiling
No demand
above this price
Marketing strategy, objectives,
and mix
Nature of the market and
demand
Competitors’ strategies and
prices
Product
costs
Price floor
No profits below
this price
Value-Based Pricing Versus
Cost-Based Pricing
Cost-based pricing
Not that
good
way
Design a good
product
Determine
product costs
Set price based
on cost
Convince buyers
of product’s
value
Setting prices based on the costs for producing, distributing, and
selling the product plus a fair rate of return for effort and risk.
Value-based pricing
Good
pricing
starts with
customer
Assess customer
needs & value
perceptions
Set target price
to match
customer
perceived value
Determine costs
that can be
incurred
Setting price based on buyers’ perceptions of
value rather than on seller’s cost.
Design product
to deliver
desired value at
target price
GOOD VALUE = LOW PRICE ?
Value-based Pricing
2 types of value-based pricing:
• Good value pricing
Offering just the right combination of quality and good
service at a fair price to match with changing economic
conditions and consumer price perception.
• Value-added pricing
Attaching value-added features and services to
differentiate a company’s offer and charging higher
prices to increase company’s pricing power.
Type of good-value pricing
in the retail level
• Everyday Low Pricing (EDLP) involves charging
a constant, everyday low price with few or no
temporary price discounts.
• High-low pricing involves charging higher
prices on an everyday basis but running
frequent promotions to lower prices
temporarily on selected items.
COMPANY & PRODUCT COSTS
Company & Product Costs
Types of Costs
• Fixed costs (overhead)
Costs that do not vary with production or sales level e.g. each
month’s bills for rent, interest, employee salaries.
• Variable costs
Costs that vary directly with the level of production e.g. raw
materials are needed in production process.
• Total costs = Fixed costs + Variable costs
The sum of the fixed and variable costs for any given level of
production.
Pricing Method
 Cost-plus pricing
Adding a standard markup to the cost of the
product.
Cost-plus pricing (Markup Pricing)
• Suppose a toaster manufacturer had the
following costs and expected sales:
– Variable cost
– Fixed costs
– Expected unit sales
$10
$300,000
50,000
Unit Cost
• Then the manufacturer’s cost per toaster is
given by the following:
Unit cost = Variable Cost + Fixed costs
Unit Sales
Unit Cost
• Then the manufacturer’s cost per toaster is
given by the following:
Unit cost = Variable Cost + Fixed costs
Unit Sales
= $10 + $300,000
50,000
= $16
Markup Price
• Suppose the manufacturer wants to earn a 20%
markup on sales. The manufacturer’s markup price is
given by the following:
 Markup Price
=
Unit Cost
(1 – Desired Return on Sales)
Markup Price
• Suppose the manufacturer wants to earn a 20% markup
on sales. The manufacturer’s markup price is given by
the following:
 Markup Price
=
Unit Cost
(1 – Desired Return on Sales)
=
$16
(1 - 0.2)
= $20
The manufacturer would charge dealers $20 per toaster and
make profit of $4 ($20 - $16) per unit.
Pricing Method (con’t)
 Break-Even Pricing (Target Profit Pricing)
Setting price to break even on the costs of
making and marketing product, or setting
price to make a target profit.
(No pain, no gain)
• Break-Even Volume =
Fixed Cost
Price – Variable Cost
Break-Even Volume
• Break-Even Volume =
Fixed Cost
Price – Variable Cost
= $300,000
$20-$10
= 30,000
If the company wants to make a target profit, it
must sell more than 30,000 units at $20 each.
In-class Assignment (pair work)
•
•
•
•
You are opening a “Chicken Rice Restaurant”
Unit sales 6,000 serves/month
Price (per serve) Bht 20
Raw materials cost
– Bht 6,000/1,000 serves
• Costs (per month)
– Renting Bht 5,000
– Tables + Chairs + Utensils Bht 500
– Waiter wages Bht 4,500
Calculate
*Suppose you open restaurant everyday (30 days a
month)
• Total cost (per month)
• Profit (per month)
Fixed Cost
• Break even volume (per month) Price – Variable Cost
• If there’s a new location has cheaper renting (Bht
2,000 per month) but can sell only 100 serves a
day, is it worth enough to move to this new
location compare to the current one?
Total Costs (TC) = TFC + TVC
• TFC = Renting+Equipments+Wages = 5,000 +
500+ 4,500 = Bht 10,000 ----- 1
• VC = Raw materials = 6,000/1,000 = Bht 6
• TVC = 6,000*6 = Bht 36,000 ----- 2
• TC = 10,000 + 36,000 = Bht 46,000 ----- 3
Profit = Total Sales – Total Costs
• Total Sales = Unit Sales*Price = 6,000*20 =
Bht 120,000 ---- 4
• Profits = 120,000 – 46,000 = Bht 74,000
• Break-Even Volume =
Fixed Cost
Price – Variable Cost
= 10,000/ (20-6)
= 714.29
= 715 serves
New Location
• New Renting = Bht 2,000 (currently is Bht 5,000)
• New TFC = 2,000 + 500 + 4,500 = Bht 7,000
• New Unit Sales = 100 serves a day
= 100*30 = 3,000 serves a months
New TVC = Unit Sales*VC = 3,000*6 = Bhts 18,000
• New Total Sales = Unit Sales*Price = 3,000*20
= Bht 60,000 ---- 1
• New TC = New TFC + New TVC = 7,000 + 18,000
= Bhts 25,000 ---- 2
New profit = 1 – 2 = 60,000 -25,000
= Bht 35,000
Pricing Strategies
New-Product Marketing Strategies
The major strategies for pricing imitative and
new products.
 Market-Skimming Pricing
 Market-Penetration Pricing
Market-Skimming Pricing
• Setting a high price for a new product to skim
maximum revenues layer by layer from the
segments willing to pay the high price; the
company makes fewer but more profitable
sales.
Sony HDTV
New movie or audio CD
Christian Louboutin
Spring/Summer 2011
Market-Penetration Pricing
• Setting a low price for a new product in order
to attract a large number of buyers and a large
market share quickly and deeply.
BTS sky train in BKK
Dell selling high-quality
computer products
through lower-cost direct
channels once it entered
the PC market.
Product Mix Pricing Strategies
How companies find a set of prices that maximizes the
profits from the total product mix.
1. Product Line Pricing
2. Optional-Product Pricing
3. Captive-Product Pricing
4. By-Product Pricing
5. Product Bundle Pricing
1.Product Line Pricing
• Setting the price steps between various
products in a product line based on cost
differences between the products, customer
evaluations of different features, and
competitors’ prices.
2.Optional-Product Pricing
• The pricing of optional or accessory products
along with a main product.
• When you order a new PC, you can select your
own hard drives, software options, service
plans, and carrying cases.
3.Captive-Product Pricing
• Setting a price for products that must be used
along with a main product, such as blades for
razor and SD card for a digital camera.
+
+
4.By-Product Pricing
• Setting a price for by-products in order to
make the main product’s price more
competitive.
• MeadWestvaco, papermaker company, turned
what was once considered chemical waste of
wood-processing activities into profit-making
products in paving industry.
5.Product Bundle Pricing
• Combining several products and offering the
bundle at a reduced price.
Burger King Whopper Combo
Price-Adjustment Strategies
How companies adjust their prices to take into
account different types of customers and
situations.
1.
2.
3.
4.
5.
6.
7.
Discount and Allowance Pricing
Segmented Pricing
Psychological Pricing
Promotional Pricing
Geographical Pricing
Dynamic Pricing
International Pricing
1.Discount and Allowance Pricing
• Discount: a straight reduction in price on
purchases during a stated period of time.
Forms of Discounts
• Cash discount: a price reduction to buyers who
pay their bills promptly
• Quantity discount: a price reduction to buyers
who buy large volumes
• Functional discount (trade discount): is offered
by the seller to trade-channel members who
perform certain functions, such as selling, storing,
and record keeping
• Seasonal discount: a price reduction to buyers
who buy merchandise or services out of season
Samples of Discounts
• Cash discount: “2/10, net 30” means the
payment is due within 30 days, the buyer can
deduct 2% if the bill is paid within 10 days.
• Quantity discount: if you buy Bht 50,000100,000, you’ll get 1% off. Bht 100,001-200,000
=> 2% off.
• Functional discount (trade discount): producer
give 10% discount to wholesalers. Then,
wholesalers give 5% discount to retailers.
• Seasonal discount: the beach hotels give 50%
discount for customers who reserve the room on
Mon-Thurs.
1.Discount and Allowance Pricing
• Allowance: promotional money paid by
manufacturers to retailers in return for an
agreement to feature the manufacturer’s
products in some way.
Sample of Promotional Allowance
• ThaiNamThip Company give a financial
support of publishing Carrefour’s brochure to
its customer & give 10% discount for 1,000
boxes of Coca Cola to use for discount
promotion at Carrefour.
2.Segmented Pricing
• Selling a product or service at 2 or more
prices, where the difference in prices is not
based on differences in costs but on
differences in customers, products, or
locations.
Bus charges lower for
students and senior
citizens
5-ounce aerosol can
= $11.39
1 liter bottle
= $1.59
3.Psychological Pricing
• A pricing approach that considers the
psychology of prices and not simply the
economics; the price is used to say something
about the product.
Smirnoff
BEFORE
Wolfschmidt
AFTER
($1 higher)
Smirnoff
Relska
(Same price)
Popov
($1 cheaper)
($1 cheaper)
• Reference prices: price that buyers carry in
their minds and refer to when they look at a
given product
• Sales sign “Now 2 for only…!”
• Price ending in “9”
4.Promotional Pricing
• Temporarily pricing products below the list
price, and sometimes even below cost, to
increase short-run sales.
5.Geographical Pricing
• Setting prices for customers located in different parts
of the country or world.
 FOB-origin pricing: customers pays the freight from the
factory to the destination
 Uniform-delivered pricing: company charges the same
price plus freight to all customers
 Zone pricing: customers in different zones pay for different
prices
 Basing-point pricing: sellers selects some city as a basing
point & charges all customers the freight cost from that
city to the customer
 Freight-absorption pricing: sellers absorbs all or part of
the freight charges in order to get the desired business
6.Dynamic Pricing
• Adjusting prices continually to meet the
characteristics and needs of individual
customers and situations.
7.International Pricing
• Adjusting prices for international markets to
reflect local market conditions and cost
considerations depending on economic
conditions, competitive situations, law &
regulations, and development of the
wholesaling & retailing system.
$140 in Milan, Italy
$240 in Brazil