Student Notes Pages
Marketing
Chapter 20: Pricing Concepts
Introduction
Marketing
• Price is the marketing element that
generates revenue
• To the consumer price it is cost - to the
seller it is revenue
• Price is an indication of value
• Price is what is given up in an exchange
• Prices replaced barter trading
Second SA edition
Charles W. Lamb, Jr.
Joseph F. Hair, Jr.
Carl McDaniel
Christo Boshoff
Nic S.Terblanche
Chapter 13:
Pricing Concepts and
Setting the Right Price
13-1
The Importance of Pricing
13-2
The Importance of Price (cont)
Comparisons with New
Products
• Prices must represent value to buyers to
facilitate exchange
• Prices must not be too low or too high
• Prices can:
Price
Concerns of
Marketing
Managers
– influence perceptions and positioning
– be a competitive advantage
Comparisons Against
Private Label and
Generic Brands
Consumer Price
Sensitivity
Market Share
Pressures on Price
13-3
Pricing Objectives
13-4
Price Objectives (cont)
PriceOriented
SalesOriented
• Profit-orientated price objectives
– profit maximisation
– satisfactory profits
– target return on investment
• Sales-orientated price objectives
– market share
– sales maximisation
• Status-quo price objectives
Status
Quo
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© 1997 South-Western College Publishing
13-6
Student Notes Pages
Marketing
Chapter 20: Pricing Concepts
The Demand Determinant of Price
The Demand Determinant of Price
(cont)
Price (R)
D
D
Quantity
13-7
Elasticity of Demand
• Demand: quantity of a product that will be
sold at a given price level
• Economic theory: as price increases
demand declines - and vice versa
• Supply: quantity of a product that will be
supplied to the market at a given price
level
• Economic theory: as supply increases
prices decline - and vice versa
• Demand and supply determine prices
13-8
Factors that Affect Elasticity
Elastic
Demand
Inelastic
Demand
D
D
Price (R)
Price (R)
D
•
•
•
•
Availability of substitutes
Price relative to purchasing power
Product durability
A product’s other uses
D
Quantity
Quantity
13-9
Cost Determinants of Price
The Cost Determinants of Price
(cont)
200
150
Rands
13-10
• Costs can be used to set prices in three
ways:
MC
ATC
AVC
100
– mark-up pricing
– profit-maximisation pricing
– break-even pricing
50
AFC
0
1
2
3
4
5
Quantity
6
7
8
9
10
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© 1997 South-Western College Publishing
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Student Notes Pages
Marketing
Chapter 20: Pricing Concepts
BreakBreak-Even Analysis
Other Determinants of Price
Total Revenue
• Stage in the Product Life Cycle
Profits
Break Even
– introduction: price skimming or market penetration
– growth: stabilisation of prices
– maturity: prices tend lower as new competitors enter the
market
– decline: prices normally decline further
Price (R)
Total Costs
Fixed Costs
•
•
•
•
Losses
Quantity (units)
The competition
The distribution strategy
The promotion strategy
The relationship between price and quality
13-13
Steps in Setting the Right Price
13-14
Legal and Ethical Issues in Pricing
Establish Pricing Objectives
Estimate Demand, Costs,
and Profits
Price Fixing
Key Legal
and Ethical
Issues
Related to
Price
Choose Strategy
Predatory Pricing
Fine-Tune Base Price
$ $ $Right
$ Price
$$$$
13-15
13-16
Geographic Pricing
Discounts, Allowances, and Rebates
FOB Origin
Quantity
Discount
EDLP
Cash
Discount
Promotional
Allowances
Uniform Delivered
Functional
Discount
Price
Reductions
Seasonal
Discounts
Pricing
Tactics
Based on
Geography
Zone Pricing
Freight-Absorption
Trade Loading
Rebates
Basing-Point
13-17
© 1997 South-Western College Publishing
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Student Notes Pages
Marketing
Chapter 20: Pricing Concepts
Special Pricing Tactics
Product Line Pricing
Single
Price
Two-Part
Pricing
Flexible
Pricing
Common
Special Pricing
Tactics
Bundle
Pricing
Professional
Services
Odd-Even
Pricing
Price
Lining
Bait
Pricing
• Product line pricing sets the price(s) for an entire
product line
• Relationships among products will influence price
levels:
– demand for complementary products in a
product line will influence each other
– products in a product line can be substitutes
which can influence demand for each product
– a neutral relationship can exist
Leader
Pricing
13-19
Pricing During Difficult Economic
Times
13-20
Pricing During Difficult Economic
Times (cont)
• Pricing during inflation
• Pricing during recession - reduced
demand
– cost orientated pricing tactics
– value pricing
– bundling pricing
» deleting products form the product line
» delayed quotation pricing
» escalator pricing
• Pressurising suppliers
– demand orientated pricing tactics
–
–
–
–
» price shading
• cultivate selected demand
• create unique offerings
• change the packaging
• heighten buyer dependence
renegotiate contracts
offering help
pressurise for improvements, better deals
paring down suppliers
13-21
© 1997 South-Western College Publishing
13-22