1

The Importance of Price to Marketing Managers
Revenue
The price charged to customers multiplied by the number of units sold.
Profit Revenue minus expenses
Price – Cost = Profit
2

The Importance of Price
Revenue = Unit Price X Number of Units Sold
 Revenue pays for every activity.
 What’s left over is Profit.
To earn a profit, marketers must select a price that is not too high or too low, a price that equals the perceived value to target consumers
3

Trends Influencing Price Setting
Trends in the
Market
Flood of new product introductions
Increased availability of bargain-priced private and generic brands
Price cutting as a strategy to maintain or regain market share
A general decline in consumer confidence after terrorist attacks
4

Pricing Objectives
Profit-Oriented Pricing Objectives
Sales-Oriented Pricing Objectives
Status Quo Pricing Objectives
5

Profit-Oriented Pricing Objectives
Profit-Oriented Pricing Objectives
Profit
Maximization
Satisfactory
Profits
Target
Return on
Investment
6

Sales-Oriented Pricing Objectives
Sales-Oriented Pricing Objectives
Market
Share
Sales
Maximization
7

Status Quo Pricing Objectives
Status Quo Pricing Objectives
Maintain existing prices
Meet competition’s prices
8

The Cost Determinant of Price
Types of Costs
Variable
Costs
Fixed Costs
Change with changes in level of output
Do not change as level of output changes
9

The Cost Determinant of Price
• Markup pricing
Methods
Used to Set
Prices
• Key Stoning
• Profit Maximization Pricing
• Break-Even Pricing
• Introductory Price Point
10

Markup Pricing
Markup
Pricing
The cost of buying the product from the producer plus amounts for profit and for expenses not otherwise accounted for.
Keystoning
The practice of marking up prices by 100%, or doubling the cost.
11

Profit Maximization
Profit
Maximization
A method of setting prices that occurs when marginal revenue equals marginal cost.
Marginal
Revenue
The extra revenue associated with selling an extra unit of output, or the change in total revenue with a one-unit change in output.
12

Break-Even Pricing
4,000
Total Revenue
Variable Costs
Total Costs
Break-even point
2,000
Fixed costs
0 1,000 2,000 3,000 4,000 5,000 6,000
Quantity
13

Fixed and Variable Costs
 Fixed costs do not change as production or sales quantity changes.
 Variable costs change as production changes
14

Average Variable Cost (AVC)
 Assuming $2.00 AVC per unit (raw materials, labor, packaging, distribution, etc.)
 50,000 units produced = $100,000 variable costs
 250,000 units produced = $500,000 variable costs
15

Steps to Find Break Even Price
1. Total Fixed Costs + (AVC x # of Units Sold)
= Total Costs
2. Total Costs / # of Units Sold = Break Even
Price
16

Other Determinants of Price
Stages of the
Product Life Cycle
Competition
Distribution Strategy
Promotion Strategy
Perceived Quality
17

Stages in the
Product Life Cycle
Introductory
Stage
Growth
Stage
Maturity
Stage
Decline
Stage
18

Steps in Setting the Right Price
Establish pricing goals
Estimate demand, costs, and profits
Choose a price strategy
Fine tune with pricing tactics
Results lead to the right price
19

Choosing a Price Strategy
Price Skimming
Basic Strategies for
Setting Prices
Penetration Pricing
Status Quo Pricing
20

Price Skimming
Situations when
Price
Skimming
Is
Successful
Inelastic Demand
Unique Advantages/Superior
Legal Protection of Product
Technological Breakthrough
Blocked Entry to Competitors
21

Penetration Pricing
Advantages Disadvantages
 Discourages or blocks competition from market entry
 Boosts sales and provides large profit increases.
 Requires gear up for mass production
 Selling large volumes at low prices
 Strategy to gain market share may fail
22

Status Quo Pricing
Advantages Disadvantages
 Simplicity
 Safest route to longterm survival for small firms
 Strategy may ignore demand and/or cost
23

The Legality and Ethics of
Price Strategy
Unfair Trade Practices
Issues
That Limit
Pricing
Decisions
Price Fixing
Price Discrimination
Predatory Pricing
24

Price Fixing
An agreement between two or more firms on the price they will charge for a product.
25

Price Discrimination
The Robinson-Patman Act of 1936:
Prohibits any firm from selling to two or more different buyers at different prices if the result would lessen competition
26

Robinson-Patman Act Defenses
Seller Defenses
Cost
Market
Conditions
Competition
27

Predatory Pricing
The practice of charging a very low price for a product with the intent of driving competitors out of business or out of a market.
28

Tactics for Fine-Tuning the Base Price
Discounts
Geographic Pricing
Special Pricing Tactics
29

Tactics for Fine-Tuning the Base Price
Quantity Discounts
Cash Discounts
Functional Discounts
Seasonal Discounts
Promotional Allowances
Rebates
Value-Based Pricing
Zero Percent Financing
30

Geographic Pricing
FOB Origin
Pricing
Uniform
Delivered
Pricing
The buyer absorbs the freight costs from the shipping point
(“free on board”).
The seller pays the freight charges and bills the purchaser an identical, flat freight charge.
31

Geographic Pricing
Zone Pricing
The U.S. is divided into zones and a flat freight rate is charged to customers in a given zone.
Freight
Absorption
Pricing
Basing-Point
Pricing
The seller pays for all or part of the freight charges and does not pass them on to the buyer.
The seller designates a location as a basing point and charges all buyers the freight costs from that point.
32

Special Pricing Tactics
Single-Price Tactic All goods offered at the same price
Flexible Pricing
Professional
Services Pricing
Price Lining
Different customers pay different price
Used by professionals with experience, training or certification
Several line items at specific price points
Leader Pricing
Bait Pricing
Odd-Even Pricing
Price Bundling
Two-Part Pricing
Sell product at near or below cost
Lure customers through false or misleading price advertising
Odd-number prices imply bargain
Even-number prices imply quality
Combining two or more products in a single package