Part 4
PRODUCT AND PRICE
DECISIONS
Dr. Chen, Principle of Marketing
10: Product, Branding, and
Packing Concepts
11: Business Markets and Buying
Behavior
12: Developing and Managing
Prices
13: Marketing Channels and
Supply-Chain Management
14: Retailing, Direct Marketing,
and Wholesaling
Dr. Chen, Principle of Marketing
Chapter 12
Pricing Concepts and
Management
Professor Jason C. H. Chen, Ph.D.
School of Business Administration
Gonzaga University
Spokane, WA 99258
chen@jepson.gonzaga.edu
Dr. Chen, Principle of Marketing
Learning Objectives
 To explore issues related to developing pricing objectives
 To understand the assessment of the target market’s
evaluation of price
 To understand demand and the price elasticity of demand
 To become familiar with demand cost, and profit
relationships
 To examine how marketers analyze competitors’ prices
 To describe the bases used for setting prices
 To explain the different types of pricing strategies
 To understand the selection of a specific price
 To explore the pricing of business products
Dr. Chen, Principle of Marketing
4
The Nature of Price
 The purpose of marketing is to facilitate
satisfying exchange relationships between
buyer and seller
 Price – The value paid for a product in a
marketing exchange
 Barter – The trading of products
 The
oldest form of exchange
 Corporate barter still occurs and amounts to an
estimated $12 billion in annual U.S. sales
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5
Nature of Price
Price is a key element in the marketing mix
because it relates directly to the generation of
total revenue
Profit = Total Revenue – Total Costs
Profit = (Price x Quantity Sold) – Total Costs
 Because price has a psychological impact on
customers, marketers can use it symbolically

Pricing high – emphasizes quality

Pricing low – emphasizes a bargain
Dr. ©
Chen,
of Marketing
Copyright
2014Principle
South-Western,
Cengage Learning. ALL RIGHTS RESERVED.
20-6
Basis for Competition
Price competition
________
• A seller emphasizes a product’s low price and sets a price
that equals or beats the competitors’ prices
• It is a major drawback of price competition that
competitors can meet or outdo an organization’s price cuts.
Nonprice competition
__________
• Emphasizing factors other than price to distinguish
products through their distinctive features from competing
brands
• Advantage: Once customers have chosen a brand for nonprice reasons such as unique features, they may not be
attracted as easily to competing firms and brands.
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Figure 12.1 - Stages for Establishing Prices
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1. Development of Pricing Objectives
 Pricing objectives: Goals that describe what a
firm wants to achieve through pricing
 Form
the basis for decisions for other stages of the
pricing process
 Must be stated explicitly and in measurable
__________ terms
 Should include a time frame for accomplishing
them
 Influence decisions in many functional areas of a
business
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9
Pricing Objectives
Survival
Profit
Return on
investment
Market share
Cash flow
Status quo
Product quality
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10
2. Assessment of the Target Market’s
Evaluation of Price
 Importance of price varies depending on:

Type of product and target market
Buyers are more sensitive to gasoline prices than luggage prices.
Why?

situation (and affects the buyer’s view of price)
Purchase _________
Moviegoers would never pay in other situations the prices
charged for soft drinks, popcorn, and candy at concession stands.
 Helps marketers decide the emphasis on price in the
overall marketing strategy (e.g., convenience and time saving)
 Manufacturers focus on the value of products in
communications with customers as consumers shop
more selectively
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3. Analysis of Demand –
Demand Curve
 Graphical representation of the quantity of products
expected to be sold at different prices holding other
factors constant
 Demand
is inversely related to price for most products
 Demand depends on factors in the marketing mix
 Quality
 Promotion
 Distribution
(Place + Time)
 Not all types of demand conform to the demand
curve
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Figure 12.2 - Demand Curve Illustrating the Typical
Price/Quantity Relationship
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13
Demand Fluctuations
 Factors that can influence demand




Changes in buyers’ needs
Variations in the effectiveness of other marketing mix
variables
Presence of substitutes
Dynamic environment
 Changes in demand for some products (flowers,
restaurants) is predictable but with other products
(both from inside the company and outside the
companies) demand may be less predictable
 Organizations can develop new products and prices
anticipating demand fluctuations
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14
Assessing Price Elasticity
Price elasticity of demand – A measure of the sensitivity of
consumer demand (for a product or product category) to changes
in price
inelastic when price increases from P1 to P2,
 Demand for electricity is ________,
demand decreases a small amount
elastic , when price goes up from
 Demand for recreational vehicles is ________
P1 to P2, quantity demanded decreases a great deal
Fig 12.3 Elasticity of Demand
Dr. ©
Chen,
of Marketing
Copyright
2014Principle
South-Western,
Cengage Learning. ALL RIGHTS RESERVED.
20-15
Assessing Price Elasticity



If marketers can determine the price elasticity of
demand, setting a price is much easier
By analyzing total revenues as prices change,
marketers can determine whether a product is price
elastic
inelastic total revenue changes in the same
 If demand is _________,
direction (note: with positive sign)
elastic a change in price causes and
 If demand is _______,
opposite change in total revenue (with negative sign)
Price elasticity of demand = % change in quantity demanded
% change in price
Dr. ©
Chen,
of Marketing
Copyright
2014Principle
South-Western,
Cengage Learning. ALL RIGHTS RESERVED.
20-16
Exercise – Multiple Choice
If Carnival Cruise Lines increased the price of its
seven-day cruise package by 10 percent and, as a
result, experienced a 20 percent decline in customer
bookings, Carnival's demand would be:
a. steady.
b. inelastic.
What is the Price elasticity of demand ?
c. elastic.
-20%
d. prestige.
------- = - 2
e. marginal.
10%
c
ANSWER: _____
Dr. Chen, Principle of Marketing
The negative sign indicating the inverse
relationship between price and demand
(i.e., demand is elastic)
17
4. Demand, Cost, and Profit Relationships
 Customers are becoming less tolerant of price
increases forcing manufacturers to find new
ways to control costs
 Companies must set prices that cover costs and
meet customers’ expectations
 Two approaches to understanding demand, cost,
and profit relationships:
Marginal
 __________
analysis
Break-even
 ______
____ analysis
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Marginal Analysis
 Examines what happens to a firm’s costs and
one unit
revenues when production changes by ____
 Types of potential costs
 Fixed
costs: Do not vary with changes in the
number of units produced or sold
 Average fixed cost: Fixed cost per unit produced
 Variable cost: Vary directly with changes in the
number of units produced or sold
 Average variable cost: Variable cost per unit
produced
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Marginal Analysis (cont.)
 Total
cost: Sum of average fixed and average
variable costs times the quantity produced
 Average total cost: Sum of the average fixed cost
and the average variable cost
 Marginal cost (MC): Extra cost incurred by
producing one more unit of a product
 Marginal revenue (MR) – the change in total
revenue resulting from the sale of an additional
unit of product
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Marginal Analysis (cont.)
 Any unit for which MR exceeds MC adds to a firm’s
profits
 Any unit for which MC exceeds MR subtracts from
profits
 The firm should produce at the point where MR equals
MC because that is the most profitable level of
production
 However, marginal analysis is only a model


Marginal analysis offers little help in pricing new products
Marketers can benefit by understanding the
relationship between marginal cost and marginal
revenue in setting prices of existing products
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21
Table 12.1 - Costs and Their Relationships
6(b)-6(a)
($20)
AVC is
lowest
ATC is
lowest
Dr. Chen, Principle of Marketing
continue
to fall
until the
MC is to
increase
22
Figure 12.4 - Typical Marginal Cost and
Average Total Cost Relationship
The marginal cost curve crosses the average total cost curve at its lowest point,
which is the point where production is the most efficient (e.g., economy of
scale) in terms of costs.
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23
Dr. Chen, Principle of Marketing
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Figure 12.5 - Typical Marginal Revenue and Average
Revenue Relationship
• Each additional unit of product sold provides the firm with less revenue than
the previous unit sold.
• Marginal revenue decreases as price decreases and quantity sold increases.
• Eventually, marginal revenue will reach zero, and the sale of additional units
actually causes the firm to lose money.
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25
Table 12.2 - Marginal Analysis Method for
Determining the Most Profitable Price
3(b)-3(a)
6(b)-6(a)
• Which point is with the highest profit?
• Profit is the highest at the point where MC=MR (i.e., price is 33) – next
slide (Fig 12.6)
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Figure 12.6 - Combining the Marginal Cost and
Marginal Revenue Concepts
Most marketers can benefit by understanding the relationship between
marginal cost and marginal revenue in setting prices of existing products.
Dr. Chen, Principle of Marketing
27
Break-Even Analysis
 Break-even point: Point at which costs of
producing a product equal the revenue made
from selling the product
 Knowing the number of units necessary to break
price
even is important in setting the ______
 Helps
a firm to calculate how long it will take to
recoup expenses at different price points
Break-even point =
=
Dr. Chen, Principle of Marketing
fixed costs
per-unit contribution to fixed costs
fixed costs
price-variable costs
28
Figure 12.7 - Determining the Break-Even Point
Dr. Chen, Principle of Marketing
29
Break-Even Analysis (An example) (p.340)
Knowing the number of units necessary to break-even is important
in setting the price


If a product priced at $100 per unit

Has an average variable cost of $60 per unit

The contribution to fixed cost is $40

If total fixed costs are $120,000, the break-even point in units is
determined as follows
Break-even point
=
fixed costs
per-unit contribution to fixed costs
In terms of dollar
sales volume is
3,000 * $100 or
$300,000
=
fixed costs
=
price – variable costs
$120,000
$40
=
3,000 units
Dr. ©
Chen,
of Marketing
Copyright
2014Principle
South-Western,
Cengage Learning. ALL RIGHTS RESERVED.
20-30
Q/A – Multiple Choice
The Highland Racquet Club found that with annual
fixed costs of $60,000, its break-even point is 2,000
members
when the membership charge is $60 per person per year.
What is the variable cost per person for Highland?
a. $45
b. $50
c. $30
d. $25
How?
e. $40
2000 = 60,000 / (60-X)
ANSWER: ______
c
Dr. Chen, Principle of Marketing
Solve for X
31
Break-Even Analysis
 To use break-even analysis effectively, marketers
should determine the break-even point for each of
several alternative prices


Helps compare the relative effects on total revenue, total
costs, and the break-even point
Helps identify highly undesirable prices that should
definitely be avoided
 Can be used to determine whether and when a product
will achieve a break-even volume
 This approach assumes the quantity demanded is
basically fixed and the major task is to set prices to
recover costs
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32
Factors Affecting Pricing Decisions
Organizational
and marketing
objective
Pricing
objectives
Costs
Other
marketing mix
variables
Competition
Legal and
regulatory
issues
Pricing
decisions
Channel
member
expectations
Dr. Chen, Principle of Marketing
Customer
interpretation
and response
33
5. Evaluation of Competitors’ Prices
 Marketers should use competitors’ prices to
establish their own prices
 Competitors’
prices may be closely guarded
 Pricing above competition creates an exclusive
________
image (eg, Apple brand products)
 Pricing below competition can ________
increase
market share
Dr. Chen, Principle of Marketing
34
6. Selection of a Basis for Pricing
 Establishing prices involves selecting a basis for
pricing
 Cost
and demand
 Competition
 Appropriate pricing basis is affected by:
 Type
of product
 Market structure of the industry
 Brand’s market share position relative to competing
brands
 Customer characteristics
Dr. Chen, Principle of Marketing
35
Cost-Based Pricing
 Adding a dollar amount or percentage to the cost
of the product
 Cost-plus pricing: Seller’s costs are determined
and a specified dollar amount or percentage of the
cost is added to the seller’s cost
 Markup pricing: Product’s price is derived by
adding a markup to the cost of the product
 Markup
- Predetermined percentage of the cost
Markup as percentage of cost = Markup/Cost
Markup as percentage of selling price = Markup/Selling
price
Dr. Chen, Principle of Marketing
36
Markup Pricing
 Markup can be stated as a percentage of cost of
making the product or a percentage of selling price
 Assume a retailer purchases a can of tuna at 45
cents and adds a 15 cent markup to the cost
making the price 60 cents.
Markup as
% of Cost
=
Markup as %
of Selling Price
Dr. ©
Chen,
of Marketing
Copyright
2014Principle
South-Western,
Cengage Learning. ALL RIGHTS RESERVED.
Markup 15
= 45
Cost
=
= 33.3%
Markup
15
=
Selling Price
60
= 25.0%
21-37
Demand-Based and Competition-Based Pricing
 Demand-based pricing: Customers pay a
higher price at times when demand for the
product is strong and a lower price when
demand is weak
 Marketers
must be able to calculate how much
customers will buy at different price points
 Competition-based pricing: Organization
considers costs to be secondary to competitors’
prices
 Importance
of this method increases when
competing products are homogeneous
Dr. Chen, Principle of Marketing
38
7. Selection of a Pricing Strategy
 Pricing strategy - Course of action designed to
achieve pricing objectives
 Helps
marketers to solve the practical problems of
setting prices
 Extent to which a business uses the pricing
strategies depends on:
 Pricing
and marketing objectives
 Markets for its products
 Degree of product differentiation
 Product’s life-cycle stage
Dr. Chen, Principle of Marketing
39
Figure 12.8 - Types of Pricing Strategies
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40
New-Product Pricing
Price skimming
• Charging the highest possible price for a product during the
introduction stage of its life-cycle (no competition)
Penetration pricing
• Setting a low price for a new product (and look for
market share)
Economy pricing
• Keep costs low and the service basic (no frills), set price low
Premium pricing
• unique product, set price high
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41
Pricing Strategies Matrix
PRICE
High
Skimming
Economy
Premium
Penetration
Low
Low
QUALITY
High
Figure: Pricing Strategies Matrix
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Differential Pricing
Differential pricing
• Charging different prices to different buyers for the same quality and
quantity of product
Negotiated pricing
• Final price is established through bargaining between the seller and the
customer
Secondary-market pricing
• Setting one price for the primary target market and a different price for
another market
Periodic discounting pricing
• Temporary reduction of prices on a patterned or systematic basis
Random discounting pricing
• Reducing prices temporarily on a nonsystematic basis
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43
Psychological Pricing
Encourages purchases based on
consumers’ emotional responses
Odd-number pricing
• Setting prices using odd numbers that are slightly below wholedollar amounts
Multiple-unit pricing
• Packaging together two or more identical products and selling
them at a single price
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44
Psychological Pricing
Reference pricing
• Pricing a product at a moderate level and displaying it next to a
more expensive model or brand
Bundle pricing
• Packaging together two or more complementary products and
selling them at a single price
Everyday low prices (EDLP)
• Pricing products low on a consistent basis
Customary pricing
• Pricing certain goods on the basis of tradition
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45
Product-Line Pricing
Establishing and adjusting the prices of multiple
products within a product line
Captive pricing
• Basic product in a product line is priced low
• Price on the items required to operate or enhance it
are higher
Premium pricing
• Highest-quality product or the most-versatile and
most desirable version of a product in a product line is
assigned the highest price
Price lining
• Selling goods only at certain predetermined prices that
reflect explicit price breaks
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46
Promotional Pricing
Price is often coordinated with promotion as a marketing mix
Price leader
• Products priced below the usual markup, near cost, or below cost
Special-event pricing
• Advertised sales or price cutting linked to a holiday, season, or
event
Comparison discounting
• Pricing of a product at a specific level and simultaneously
comparing it to a higher price
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Determination of a Specific Price
 Pricing strategy - Yields a certain price that
may need refining
 Helps
in setting final price
 Marketers may need to refine this price in order to
make it consistent with circumstances
 In order to set prices, marketers must:
Establish pricing objectives
Have considerable knowledge about target market
customers
Determine demand, price elasticity, costs, and
competitive factors
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48
Pricing for Business Markets
 Establishing prices for business markets differ
from setting prices for consumers due to:
 Size
of purchases
 Transportation considerations
 Geographic issues
 Types of pricing associated with business
products
 Geographic
pricing
 Transfer pricing
 Discounting
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49
Geographic Pricing
 Deals with delivery costs
 F.O.B. origin pricing - Price of merchandise at
the factory before shipment
 F.O.B. destination - Price indicating the
producer is absorbing shipping costs
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50
Transfer Pricing
 One unit in an organization sells a product to
another unit
 Determined
by calculating the cost of the product
which can vary depending on the types of costs
included in the calculations
 Choice of the costs to include when calculating
the transfer price depends on:
 Company’s
management strategy
 Nature of the units’ interaction
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51
Table 12.3 - Discounts Used for Business Markets
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52
Price Discounting
 Trade (functional) discounts – a reduction off the list price a
producer gives to an intermediary for performing certain
functions
 Cash discounts – price reduction given to buyers for prompt
payment or cash payment
 Seasonal discounts – price reduction given to buyers for
purchasing goods or services out of season
 Allowances – concession in price to achieve a desired goal
 Quantity discounts – Deductions from the list price for
purchasing in large quantities. Can be either:

Cumulative discounts which are quantity discounts aggregated over a
stated time period

Noncumulative discounts which are one-time price reductions based
on the number of units purchased, the dollar value of the order, or the
product mix purchased
Dr. ©
Chen,
of Marketing
Copyright
2014Principle
South-Western,
Cengage Learning. ALL RIGHTS RESERVED.
20-53
Video Case 12.1
 PRICING AT THE FARMERS’
MARKET
Dr. Chen, Principle of Marketing
54
 Summary

 This case examines the issues associated with direct selling
and pricing for farmers at local markets. Selling directly to
the public enables farmers to build relationships with local
shoppers and encourage repeat buying week after week as
different items are harvested. It also allows farmers to
realize a larger profit margin than if they sold to wholesalers
and retailers because there are no intermediaries. In
addition, consumers are willing to pay a higher price for
top-quality local products, and even more for products that
have been certified organic by a recognized authority.
However, competition between farmers, markets, and
traditional grocery stores is a factor that influences pricing.
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55
 1. In the pursuit of profits, how might Urban Farmz
use a combination of cost-based, demand-based,
and competition-based pricing for the products it
sells? Explain your answer.

 Encourage students to be creative. Cost-based pricing
adds a dollar amount or percentage to the cost of the
product. Demand-based pricing is based on the level
of demand for the product.
 Competition-based pricing is influenced primarily by
competitors’ prices. Urban Farmz should be using all
of these strategies and tailoring them to specific
products.
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56
 2. Urban Farmz wants to price the organic soap at $15.95
per bar, while the soap maker prices the same soap at $14
per bar. What perceptions do you think consumers will
have of each price? What recommendations do you have
regarding this price difference?

 Consumers may have different perceptions—they may
believe that the Urban Farmz bar is fairly priced since they
can buy it directly without ordering it online, or they may
believe that Urban Farmz is adding an unfair market.
 However, given the requests of the soap maker, Urban
Farmz should charge the higher price. Consumers may not
want to buy online or pay for shipping, and Urban Farmz
will still make a profit.
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57
 3. Would you recommend that Urban Farmz use
promotional pricing at the farmers’ markets
where it regularly sells its products? If so, which
techniques would you suggest, and why?

 Generally, Urban Farmz should not use
promotional pricing because it sends a signal to
consumers about the quality of their unique
products. However, bulk discounts or similar
promotions may help stimulate business.
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58