Pricing Concepts
Chapters 13
Price and Value
• Value = perceived benefits/price
• Price = perception of quality
• Price = consumer perception of
prestige
• Example:
– Swiss firm TAG HEUER
– Changed prices from $250 to $1000
– Sales volume increased sevenfold
Step 1: Pricing Objectives
• Survival
• Maximum current profit/profit
oriented pricing
• Maximum market share/sales
oriented pricing
• Maximum market skimming
• Product quality leadership
Step 2: Determining
Demand
2.50
S
Surplus
D
Price
2.00
Price
Equilibrium
1.50
1.00
Shortage
S
.50
0
20
40
60
80
Quantity demanded
100
D
120
Elasticity of Demand
Consumers sensitivity to price
changes
Price Goes...
Revenue Goes...
Demand is...
Down
Up
Elastic
Down
Down
Inelastic
Up
Up
Inelastic
Up
Down
Elastic
Up or Down
Stays the Same
Unitary Elasticity
Factors that Affect
Elasticity
• DEMAND LESS ELASTIC IF:
– Few or no substitutes
– Buyers don’t notice higher price
– Buyers are slow to change habits
– Buyers think higher prices are
justified
Step 3: Estimating Cost
• Variable costs – changes with level of output
• Fixed costs – no change with output level
• Marginal costs – the change in total costs
associated with a 1 unit change in output
• Average variable costs – total variable costs
divided by quantity of output
• Average total costs – total costs divided by
quantity of output
Step 4: Analyzing
Competition
• Analyze competitors costs, prices
and offers
Step 5: Methods of Setting
Prices
• Markup pricing
– Keystoning
•
•
•
•
•
•
Target return pricing
Perceived value pricing
Value pricing
Going Rate pricing
Auction type pricing
Group pricing
Step 6: Selecting Final
Price
• Psychological pricing
• Marketing mix
• Company policies
Fine Tuning the Base Price
• Geographical pricing
• Quantity discounts
• Cash discounts
• Functional discounts
• Seasonal discounts
• Promotional discounts
• Rebates
Special Pricing Tactics
Single-Price Tactic
All goods offered at the same price
Flexible Pricing
Different customers pay different price
Professional
Services Pricing
Used by professionals with experience,
training or certification
Price Lining
Several line items at specific price points
Leader Pricing
Sell product at near or below cost
Bait Pricing
Price Bundling
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
Two-Part Pricing
Two separate charges to consume a single good
Odd-Even Pricing