Honors Marketing - Mr. Sherpinsky
Council Rock School District
Presentation Objectives
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To cover topics like what is price and pricing.
Recognize the different forms of pricing.
Identify the goals of pricing.
Explain the importance of pricing.
Factors influencing pricing decision/policy.
Analyze methods of pricing/approaches to pricing.
What is price?
• Price: The value in money or its
equivalent placed on a good or service.
• Usually expressed in monetary terms like
$15.00 for a movie ticket.
• Can be expressed in nonmonetary terms.
• Free goods or services in exchange for the purchase of
product
• Price forms the essential basis of a
commercial transaction
What is price?
• Price: Oldest form- “bartering”
• Involves the exchange of goods or services for
other goods and services
• Not money!
• Example: I’ll trade you my bag of chips for your chees
crackers
• Today’s methods are more sophisticated, but
principle the same
• Example: Exchange products for advertising space in
a magazine or newspaper
• Website ads exchanged between complimentary
vendors
What Connects
Money & Value?
Why Trade & Barter?
What is value?
• Price: Value is a matter of anticipated
satisfaction
• If customers believe they will gain a great deal of
satisfaction from a product, they place a high value on
the item
• =High Price
• Sellers MUST be able to gauge a customer’s satisfaction
• Directly effects pricing decisions
• GOAL: Set the price high enough to make a profit,
while NOT exceeding the value potential customer place
on the product
BARTERING CHALLENGE
THERE CAN BE ONLY ONE!!
BARTERING CHALLENGE
THERE CAN BE ONLY ONE!!
ROUND 1
BARTERING RULES
Round 1: Objective-Get to at least
three full sets of the cards:
1-Tomoatoes, onions, & carrots,
1-Plantains, cassava, & corn,
1-Cumin, garlic, & cilantro, and
1-Chicken
• Once we begin to draw cards from bag,
NO talking or showing your cards to
anyone else, or trading until I say “trade
now.” This is timed.
• You may trade only one ingredient card for
one other card. NO trading one card for
multiple cards
• Once you obtain three full sets you will
return to your seat
BARTERING CHALLENGE
THERE CAN BE ONLY ONE!!
ROUND 2
BARTERING RULES
Round 2: Objective-Acquire full sets of
ingredients and/or more money:
1-Tomoatoes, onions, & carrots,
1-Plantains, cassava, & corn,
1-Cumin, garlic, & cilantro, and
1-Chicken
• Once we begin to draw cards from bag, NO
talking or showing your cards to anyone else,
or begin trading until I say “trade now.”
• You may trade only one ingredient card for
one MONEY card. NO trading ingredient card
for ingredient card
• Once you obtain full sets or more money you
will return to your seat
• We will total out your bartering score and
money score at the end.
Forms of Pricing?
• Price: is involved in every marketing
exchange
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Fees to have the Dentist clean you teeth
Amount paid for a new pair of shoes
Bridge tolls and bus fares are the costs of use
Rent is the monthly price for an apartment
Interest is the price of a loan
Dues are the price for membership
Tuition is the price you pay for education
Wages, salaries, commissions, and bonuses are
the various costs of labor
Importance of Price
• A Well-planned pricing
strategies can:
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Result in fair and appropriate prices
Maintain firm’s image
Competitive edge
Profit
• Customer often use pricing to
judge products and value
• High price = High quality
• Always True or False?
Goal of Pricing
Main Goal: Earn profits or ROI (Return on Investment):
PROFIT=RETURN
Rate of Return = Profit/Investment
Assume we sell watches:
Price $9.00 each Cost to make: $7.50 per unit
Formula: $9.00 - $7.50 = $1.50 (profit)
Calculation: $1.50/$7.50 = .20 or 20%
What cost
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sell
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down to make
25 25% ROI?
the watches
at make
Goal of Pricing
Main Goal: Earn profits or ROI
(Return on Investment:
PROFIT=RETURN
Assume we sell
watches:
Price $9.00 each
Calculated: Rate of Return = Profit/Investment
Cost to make: $7.50 per
unit
• Other goals:
$9.00 - $7.50 = $1.50
$1.50/$7.50 = .20 or 20%
• Market share
• Competition
Pricing Strategy
• The first thing which we must define, is what is meant
by price. Price is defined as:
“The amount in money for which something is
offered for sale.”
• Formally Defined: Price may be defined as the value
of product attributes expressed in monetary terms which
a consumer pays or is expected to pay in exchange and
anticipation of the expected or offered utility.
Pricing Strategy
• A Pricing Strategy is defined as:
• A plan which determines the best (at the
time of making) pricing decision.
• Pricing is the function of determining product value
in monetary terms by the marketing management of
a company before it is offered to the target
consumer for sale.
DETERMINANTS OF PRICING DECISION
INTERNAL
FACTORS
EXTERNAL
FACTORS
OTHER
OBJECTIVES
Internal factors
External factors
• Objectives of pricing –Survival
• Pricing in different types of
markets
• Consumer perceptions of
price and value
• Competitors Price and offers
• Other external factors like
economic position in the
country, resellers reactions
and government.
• Current profit maximization
• Market share leadership
• Product quality leadership
• Marketing mix strategy
• Costs
• Organizational considerations
Pricing Strategy
• When setting prices we must consider:
Whether to discount or not.
The price that the competition charges.
The cost of providing the product or service.
The company’s market position e.g. is it a market leader.
The type and nature of demand e.g. if an increase or a
decrease in price will effect amounts purchased.
The market segments we are seeking to attract.
Pricing Strategy
• It must be remembered, that price is a key element in the
marketing mix because • for a profit motivated company, it relates directly to the total revenue,
and ultimately the profit of the business.
Profits = Total Revenues – Total Costs
OR
Profits = (Prices x Quantities sold) – Total Costs
Key Determinants for Pricing
Strategy
• The key determinants of pricing decisions are:
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Cost, Demand, Competition
Skimming, Penetration, Discounts, Markup
Legal and regulatory issues
Flexible, lining, one-price, bundling
Buyers perceptions
Consideration of intermediaries (retailers, wholesalers)
Trade & Quantity
Leadership
Cost Orientated Pricing
• This is where the price of a product or
service is calculated and a margin applied
to derive a selling price
• This is the simplest method of pricing and is
often used by companies for calculating prices.
• It has the disadvantage of not taking into
account the economic aspects of supply and
demand and often does not relate to pricing
objectives
Cost Pricing Factors:
• Fixed and variable costs are the major concerns
of a marketer.
• In addition, the marketer may sometimes need to consider
other types of costs, such as out-of-pocket costs, incremental
costs, opportunity costs, controllable costs, and replacement
costs.
• To study the impact of costs on pricing strategy, the
following three relationships may be considered:
• The ratio of fixed costs to variable costs
• The economies of scale available to a firm.
• The cost structure of a firm vis-à-vis
competitors.
Other Pricing Factors : Competition
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Published competitive price lists and advertising
Competitive reaction to price moves in the past
Timing of competitors’ price changes and initiating factors
Information on competitors’ special campaigns
Competitive product line comparison
Assumptions about competitors’ pricing/marketing objectives
Competitors’ reported financial performance
Estimates of competitors’ costs—fixed and variable
Strategic posture of competitors
Overall competitive aggressiveness
Competition
• Companies who are selling products and services in
competitive markets try to win customers over from
rival companies.
• This is achieved in one of two ways:
• PRICE COMPETITION
• NON PRICE COMPETITION
Price Competition
• This involves offering the product or
service at a lower price than that of its
competitors products or services.
Non Price Competition
• This involves the company trying to increase
market share of its product or service by
• leaving the price of its product or service
unchanged but by persuading the target
customers of the superiority or
advantages associated with it.
Pricing Competition Concerns
• Whether a firm uses price competition or non price
competition, depends on the state of the market.
• Very competitive market place, the firm is more likely to
have to resort to intense price competition to sell their
products and services.
• Non-competitive market there is little to be gained from price
competition and firms tend to concentrate much more on
non price competition (example)
• Always important for a firm to predict what the
competition may do if prices are changed.
• Example: You are in charge of pricing of hotel rooms in a
large group in a highly competitive market. You are
considering a tactical price reduction in an attempt to
gain market share. What may the competition do to
respond?
Pricing Competition Concerns
Response to your tactical price reduction in a
number of ways:
• Do nothing (highly unlikely).
• Reduce prices to same level as yours (or even lower!).
• Stress their advantages/superiority in market place.
Their reaction will depend on:
• Position they are in particularly in relation to cost structure
and market power.
• It is important, however, that you predict the likely
outcome of your temporary price reduction.
• If the competition is very responsive, it may do little to
your overall long term market position
• merely generate some extra short term cash flow.
Demand Orientated Pricing
• This method allows for high prices when the
demand is high and lower prices when the
demand is low, regardless of the cost of the
product or services.
• Demand orientated pricing allows a firm to make
higher profits as long as the buyers value the
products above the cost price.
Demand Pricing Factors:
• Ability of customers to buy.
• Willingness of customers to buy.
• Place of the product in the customer’s lifestyle (whether
a status symbol or a product used daily).
• Benefits that the product provides to customers.
• Prices of substitute products.
• Potential market for the product (is demand unfulfilled or
is the market saturated?).
New Products: Skimming Strategy
• Definition: Setting a relatively high price during
the initial stage of a product’s life.
• Purpose/Objective
• To serve customers who are not price conscious
while the market is at the upper end of the
demand curve and competition has not yet
entered the market.
• To recover a significant portion of promotional
and research and development costs through a
high margin.
New Products: Skimming Strategy
• Requirements: Use of marketing mix variables, especially design and
communication efforts.
• Heavy promotional expenditure to introduce product, educate
consumers, and induce early buying.
• Relatively inelastic demand at the upper end of the demand curve.
• Lack of direct competition and substitutes.
• Expected Results:
• Market segmented by price-conscious and not so price conscious
customers.
• High margin on sales that will cover promotion and research and
development costs.
• Opportunity for the firm to lower its price and sell to the mass market
before competition enters.
New Products: Penetration Strategy
• Definition: Setting a relatively low price
during the initial stages of a product’s life.
• Purpose/Objectives: To discourage
competition from entering the market by
quickly taking a large market share and
by gaining a cost advantage through
realizing economies of scale
New Products: Penetration Strategy
• Requirements: Use of marketing mix variables,
especially design and communication efforts.
• Product must appeal to a market large
enough to support the cost advantage.
• Demand must be highly elastic in order for
the firm to guard its cost advantage
• Expected Results:
• High sales volume and large market share.
• Low margin on sales.
• Lower unit costs relative to competition due
to economies of scale.
Established Products: Maintain Price
• Definition: To maintain position in the marketplace
(i.e., market share, profitability, etc)
• Purpose/Objectives: Maintain Status Quo
Established Products: Maintain Price
• Requirements:
• Firm’s served market is not significantly
affected by changes in the environment.
• Uncertainty exists concerning the need for
or result of a price change.
• Firm’s public image could be enhanced by
responding to government requests or
public opinion to maintain price.
• Expected Results:
• Status quo for the firm’s market position.
• Enhancement of the firm’s public image.
Quantity or Trade Discount
• Quantity discounts:
• Deductions from a seller’s list price
that are offered to encourage
customers to buy in bulk
• eg. Buy a particular resort
package – children fly free
• Trade discounts:
• Reductions from the list price
offered to buyers in payment for
marketing functions that they will
perform
Cash Discounts
• A deduction granted to buyers for
paying by cash or within a specified
time.
• They are usually calculated on a net amount
due after first deducting trade and quantity
discounts from the base price.
Cash Discounting
• This is also known as a tactical
price reduction and may be
introduced for a short period of
time, even if it does not cover
all costs.
• To temporarily match
the competitor's prices
• To generate substantial
cash flow.
• To increase market
share.
Buyers Perceptions
• The marketer must consider the
importance of price to the customer in the
target market segments when setting
prices.
• Try the following activity to illustrate this:
Activity
• You have been given the job of pricing two new products
as follows:
• Product A – Budget hotel room  Target – Families ( lower middle to low
income)
• Product B – Luxury hotel room Target – Business People ( High to
middle income )
• How important will the price be to the target customers?
• PRODUCT A
• PRODUCT B
Considerations
• Price will be very important in both markets as follows:
• PRODUCT A
• Price must be reasonable or cheap to reflect the nature of
the product on offer.
• Price will often be the first consideration of the target
customers – value for money is key.
Considerations
• Price will be very important in both markets
• PRODUCT B
• Prices here will be much higher but price is just as
important to the business traveller
• It must be high enough to give a “quality” impression
but competitive in relation to other luxury hotels.
Legal and Regulatory Issues
• The marketeer is often restricted in the setting
of prices by legal and regulatory issues.
• Government intervention. Price controls.
• Legal restrictions on price fixing and collusion
• The Commerce Act 1986
• Consumer Legislation
• Fair Trading Act 1986
Flexible Price Strategy
• With a flexible – price strategy, similar customers may each pay
a different price when buying similar quantities of a product.
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Trade-in values
Customer ability to negotiate
Established routines
History
Flexible Price Strategy: Price Lining
• Involves selecting a limited number of prices at
which a business will sell related products.
• A sneaker shop which will sell several styles of shoes
at $69.95 and another group at $89.95.
Flexible Price Strategy: One Price
• Definition: Charging the same price to all customers
under similar conditions and for the same quantities.
• Objectives:
• To simplify pricing decisions.
• To maintain goodwill among customers.
• Requirements:
• Detailed analysis of the firm’s position and cost
structure as compared with the rest of the industry.
• Information on competitive prices; information on
the price that customers are ready to pay.
Flexible Price Strategy: One Price
• Expected Results:
• Decreased administrative and selling costs.
• Constant profit margins.
• Favorable and fair image among customers.
• Stable market.
Bundling-Pricing Strategy
• Definition: Inclusion of an extra margin in the price to
cover a variety of support functions and services needed
to sell and maintain the product throughout its useful life.
• Purpose/Objective:
• In a leasing arrangement, to have assurance that the
asset will be properly maintained and kept in good
working condition so that it can be resold or re-leased.
• To generate extra revenues to cover the anticipated
expenses of providing services and maintaining the
product.
• To develop an ongoing relationship with the customer.
Bundling-Pricing Strategy
• Requirements: This strategy is ideally suited for
technologically sophisticated products that are susceptible
to rapid technological obsolescence because these products
are generally sold in systems and usually require the
following:
• Extra technical sales assistance.
• Custom design and engineering concept for the
customer,
• Peripheral equipment and applications,
• Training of the customer’s personnel, and
• Strong service/maintenance department offering prompt
responses and solutions to customer problems.
Bundling-Pricing Strategy
• Expected Results:
• Asset is kept in an acceptable condition for resale or
release.
• Positive cash flow.
• Instant information on changing customer needs.
• Increased sales due to “total package” concept of
selling because customers feel they are getting their
money’s worth.
Price Leadership Strategy
• Definition: This strategy is used by the leading firm in
an industry in making major pricing moves, which are
followed by other firms in the industry.
• Purpose/Objectives: To gain control of pricing
decisions within an industry in order to support the
leading firm’s own marketing strategy (i.e., create
barriers to entry, increase profit margin, etc.).
Price Leadership Strategy
• Requirements:
• An oligopolistic situation.
• An industry in which all firms are affected by the same
price variables (i.e., cost, competition, demand).
• An industry in which all firms have common pricing
objectives.
• Perfect knowledge of industry conditions; an error in
pricing means losing control.
• Expected Results:
• Prevention of price wars, which are liable to hurt all
parties involved.
• Stable pricing moves.
• Stable market share.
Activity
• You own a fast food restaurant chain and are
considering selling your product at below cost price
for a short period of time. Why would you do this?
Pricing Considerations: Marketing
• Pricing under Normal Conditions
• Under normal circumstances, the prices are based upon total cost of
sales so as to cover both fixed as well as variable cost and in addition
to this, provide for certain desired margin of profit.
• But prices can also be fixed on the basis of marginal cost by adding a
sufficiently high margin to marginal cost so as to cover the fixed cost
and profits.
• However, under other circumstances, products may have to be sold at
a price below the total cost.
• In such circumstances, the prices should be fixed on the basis of marginal cost in
such a manner so as to cover the marginal cost and contribute something
towards the fixed expenses.
Pricing Considerations: Marketing
• Selling Price below the Marginal Cost
• Sometimes it may become necessary to reduce the selling
prices to the level of marginal cost or even below the
marginal cost. In the following circumstances, the selling
price may be fixed even below the marginal cost:
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To introduce a new product in the market,
To explore foreign markets,
To eliminate the competitor from the market,
To avoid the retrenchment of workers,
To dispose off perishable products,
To avoid extra losses by closing down the business,
To dispose off surplus stocks,
To utilize idle capacity.
Pricing Considerations: Marketing
The marginal cost of a product is $15 and fixed expenses amount
to $225,000. Selling price per unit is $17 and 40,000 units can be
sold at this price. Should the company sell the product or not?
• Solution:Total marginal cost =
• 40,000 units @ $15 per unit
• Fixed cost
• Total cost
= $600,000
= $225,000
= $825,000
• Total cost per unit = $825,000/40,000 = $20.625
Pricing Considerations: Marketing
Even though the selling price of $17 is below the total cost, yet it is
advantageous to sell the product at the selling price of $17 which
is more than the marginal cost of $15. This will reduce the loss on
account of fixed expenses (if the product is discontinued) by
$80,000 as shown below:
• Sales = 40,000 units @ $17 per unit = $680,000
• Loss = Total Cost - Sales = $825,000 - $680,000 = $145,000
• Loss if the product is discontinued (fixed expenses) = $225,000
• Thus, loss of $80,000 (i.e. $225,000 - $145,000) will be
reduced if product is sold at $17 per unit.
Supply & Demand
• Supply and Demand are one of the most fundamental
concepts in Economics and is the backbone of market
economy.
• Demand is defined as the willingness to buy a product which is backed
up by money required to buy it. Put it simply, demand is the desire to
buy a product at a certain price.
• Supply refers to the quantity of product which is available in the
market. The amount of goods the producer is willing to sell in the
market at a certain price.
• As we can observe that price is the common factor in both the
demand and supply, it is therefore the reflection of supply and
demand.
Law of Demand
• The Law of Demand
states that if all other
things are constant, when
the price of a product
increases, the demand for
the product decreases.
• And when the price of the
product decreases, the
demand of the product
increases.
Law of Demand
• Demand and price of the product share an
inversely proportional relationship.
• Why? This is because as money is a limited
resource and all the people cant spend the money
on just one thing alone.
• So, people try to strike balance between the money
they possess and the costs that they can incur.
• Ex: The cost of flight ticket from point A to point B
is $1000 and the same journeyed in a train will cost
$150, what will you choose? Naturally, people will
choose the train.
Law of Supply
• The Law of Supply
states that the producer
wants to supply more of
his product when there is
an increase in the price of
the product.
• As manufacturers
produce more output,
their total costs increase
proportionately.
Law of Supply
• The ratio to the total cost and the quantity of the
product increases.
• This is the firm’s marginal cost of production.
• As marginal cost is the additional cost
incurred to produce a good, the price of the
product also rises and the firms will definitely
charge more for the additional products produced.
Equilibrium
• A market attains
equilibrium when both the
demand and the supply
intersect each other. This
can be shown in a curve.
Here in the curve, as we can
see, the demand and the
supply meet at the point X.
Equilibrium
• This is the point where the
market attains equilibrium.
This is the optimum point
where both the consumer
and the supplier get
maximum satisfaction and
profit out of the product
respectively. It is the point
where the market is in a
stable condition..