Pricing the Product
Chapter Objectives
• importance of pricing
• monetary & non-monetary
forms of pricing
• pricing objectives
for planning pricing strategies
2
Chapter Objectives
• using costs, demands, and
revenue
to make pricing decisions
• environmental factors
affecting pricing strategies
3
Chapter Objectives
• key pricing strategies
• pricing tactics
for single products
multiple products,
pricing on the Internet
4
Chapter Objectives
• Internet pricing strategies
• Psychological aspects of pricing
• Legal aspects of pricing
• ethical aspects of pricing
5
“Yes, but what does it cost?”
• Price:
 the assignment of value,
 or the amount the consumer must exchange
• to receive the offering
• Offerings:
Money,
goods,
services,
favors,
votes,
anything else that has value to the other party
6
Figure 11.1:
Steps in
Price Planning
7
Step 1: Develop Pricing Objectives
•
•
•
•
•
Sales or market share objectives
Profit objectives
Competitive effect objectives
Customer satisfaction objectives
Image enhancement objectives
ROLLS-ROYCE
8
Step 2
Estimate demand
Step 2: Estimate Demand
• Demand:
• customers’ desires for a
product
• How much of a product are
customers willing to buy
as its price goes up or
down?
10
Demand Curves
• Law of demand:
 as price goes up,
 quantity demanded goes down.
• For prestige products,
 a price increase may actually result in an increase in
quantity demanded.
11
Shifts in Demand Curve
1. Changes in marketing strategy
(improved product, new advertising)
or
2. non-marketing activities
can cause upward or downward
shifts in demand.
At a given price,
demand is greater or less
than before the shift.
12
Estimating Demand
• Marketers predict total demand by
estimating potential buyers for a product,
then multiplying number of buyers times
• average amount of each buyer’s purchase.
• Then they predict what the company’s
share of the total market will be.
13
Elastic Demand
• A change in price results
• in a substantial change in quantity
demanded.
If price is increased, revenues
decrease, and vice-versa.
Non-necessities (pizza)
generate elastic demand.
Availability of close substitute
products facilitates elastic demand.
14
Inelastic Demand
• A change in price
• has little or no effect on quantity
demanded.
 If price is increased, revenues increase.
The demand for necessities
• (food and electricity)
• is generally inelastic.
15
Cross-elasticity of Demand
• Changes in prices of other
products affect a product’s
demand.
Products are substitutes:
• increase in price of one will increase demand for
other (bananas vs. strawberries).
One product is essential for use of second:
• increase in price of one decreases demand for
other (increasing price of gas lowers demand for
tires).
16
Step 3
Determine costs
Step 3: Determine Costs
• Variable costs:
• costs of production that are tied to and
vary depending on the number of units
produced.
Average variable costs may change
• as the number of products produced
changes.
18
Step 3: Determine Costs
• Fixed costs:
• costs of production that don’t
change with number of units
produced
Rent,
cost of owning/maintaining factory,
utilities,
equipment,
fixed salaries of firm’s executives
19
Step 3: Determine Costs
• Fixed costs:
Average fixed cost:
fixed cost per unit (total fixed costs divided by number of
units produced)
will decrease as number of units produced increases.
20
Step 3: Determine Costs (cont’d)
• Total costs:
• total of fixed costs &
• variable costs
 for a set number of units produced.
21
Break-Even Analysis
• the number of units a firm must
produce and sell
at a given price to cover all its costs.
• Break-even point:
point at which a firm doesn’t lose any money
and doesn’t make any profit.
Song Airlines
Video
22
Break-Even Analysis (cont’d)
• Break-even point (in units)
• = (total fixed costs)
• divided by (contribution per unit)
Contribution per unit:
• the difference between the price the firm
charges for a product & the variable costs
23
Break-Even Analysis (cont’d)
• Break-even point (in dollars)
• = (total fixed costs)
• divided by [1 - (variable cost per unit
divided by price)]
24
Marginal Analysis
• A method that uses
• cost and demand
• to identify the price
• that will maximize profits.
25
Marginal Analysis
• Marginal cost:
 increase in total costs from producing one additional
unit of a product
• Marginal revenue:
 increase in total income or revenue from selling one
additional unit of a product (decreases with each
additional unit sold)
• Profit is maximized
 where marginal cost is exactly equal to marginal
revenue.
26
Step 4:
Evaluate the Pricing Environment
Step 4: Evaluate the Pricing
Environment
• The economy
Broad economic
trends
Recessions,
Inflation
• The competition
• Consumer trends
28
Step 5:
Choose a Price Strategy
Step 5: Choose a Price Strategy
• Pricing strategies
based on cost
Simple to calculate and
relatively risk free
Cost-plus pricing:
total all product costs and
add markup
30
Step 5: Choose a Price Strategy
(cont’d)
• Pricing strategies based on
demand
Based on estimate of quantity
a firm can sell at different prices
PRICELINE.COM
31
Step 5: Choose a Price Strategy
(cont’d)
• Pricing strategies based on demand
Target costing:
• identify quality and functionality
–customers need and
• price they’re willing to pay
–before designing product.
PRICELINE.COM
32
Step 5: Choose a Price Strategy
(cont’d)
• Pricing strategies based on demand
Yield management pricing:
• charge different prices
• to different customers
• to manage capacity
PRICELINE.COM
33
Step 5: Choose a Price Strategy
(cont’d)
• Pricing strategies based on the
competition
Pricing near, at, above, or below the
competition
Price leadership strategy:
• industry giant announces price, and
• competitors get in line
• or drop out
34
Step 5: Choose a Price Strategy
(cont’d)
• Pricing strategies based on customers’
needs
Value pricing or
everyday low pricing (EDLP):
• pricing strategy in which a firm sets prices
• that provide ultimate value to customers.
35
Step 5: Choose a Price Strategy
(cont’d)
• New-product pricing
Skimming price:
a very high premium price
HP FINANCIAL CALCULATORS
36
Step 5: Choose a Price Strategy
(cont’d)
• New-product pricing
Penetration pricing:
a very low price
to encourage more customers
to purchase
HP FINANCIAL CALCULATORS
37
Step 5: Choose a Price Strategy
(cont’d)
• New-product pricing
Trial pricing:
low price for a limited
period of time
HP FINANCIAL CALCULATORS
38
Step 6:
Develop Pricing Tactics
Step 6: Develop Pricing Tactics
• Pricing for individual products
Two-part pricing:
offering two separate
types of payments to
purchase the product
40
Step 6: Develop Pricing Tactics
• Pricing for individual products
Payment pricing:
breaking total price
into smaller amounts
payable over time
41
Step 6: Develop Pricing Tactics (cont’d)
• Pricing for multiple products
Price bundling:
selling two or more goods or services
as a single package
for one price
42
Step 6: Develop Pricing Tactics (cont’d)
• Pricing for multiple products
Captive pricing:
pricing two products
that work only when used together
43
Step 6: Develop Pricing Tactics (cont’d)
• Distribution-based pricing
F.O.B. (free on board) origin pricing
F.O.B delivered pricing
Basing-point pricing
Uniform delivered pricing
Freight absorption pricing
44
Step 6: Develop Pricing Tactics (cont’d)
• Discounting for channel members
List price (suggested retail price):
• price that manufacturer sets
• as appropriate
• for end consumer to pay
45
Step 6: Develop Pricing Tactics (cont’d)
• Discounting for channel members
Trade or functional discounts:
set percentage discounts
• off list price
for each channel level
46
Step 6: Develop Pricing Tactics (cont’d)
• Discounting for channel members
Quantity discounts:
reduced prices
for purchases of larger quantities
47
Step 6: Develop Pricing Tactics (cont’d)
• Discounting for channel members
Cash discounts:
enticements to customers
to pay bills quickly
(2% 10 days, net 30 days)
(2/10 net 30)
48
Step 6: Develop Pricing Tactics (cont’d)
• Discounting for channel members
Seasonal discounts:
price reductions
offered during certain times of year
49
Other pricing issues
Pricing and Electronic Commerce
• Dynamic pricing strategies:
• seller easily adjusts price
• to meet changes in marketplace.
CHEAPTICKETS.COM
51
Pricing and Electronic Commerce
• Dynamic pricing strategies:.
Cost of changing prices on Internet
is practically zero.
Firms can respond quickly and frequently
to changes in costs, supply, and/or demand.
CHEAPTICKETS.COM
52
Pricing and Electronic Commerce
• Online auctions (eBay.com)
E-commerce allows shoppers
to purchase products
through online bidding.
53
Pricing and Electronic Commerce
(cont’d)
• Pricing advantages for online shoppers
Consumers gain control.
Search engines and “shopbots”
• make customers more price-sensitive.
Consumers have more negotiating
power.
54
Psychological Issues in Pricing
• Buyer’s pricing expectation
Internal reference price:
consumers use a price/price range
to evaluate product’s cost.
• Assimilation effect
• Contrast effect
55
Psychological Issues in Pricing
• Buyer’s pricing expectation
Price/quality inferences:
• consumers assume higher-priced
product
• has higher quality.
56
Psychological Pricing Strategies
• Odd-even pricing:
 prices ending in 99 rather
than 00 lead to increased
sales.
• Price lining:
 items in a product line sell at
different price points.
57
Legal and Ethical Considerations
• Deceptive pricing practices
Going-out-of-business sale
Bait-and-switch
58
Legal and Ethical Considerations
• Unfair sales acts
Loss-leader pricing
Unfair sales acts
• Illegal business-to-business (B2B) price
discrimination
59
Legal and Ethical Considerations in
Pricing (cont’d)
• Price fixing:
two or more companies conspire
to keep prices at a certain level
Horizontal price fixing
Vertical price fixing
60
Legal and Ethical Considerations in
Pricing (cont’d)
• Predatory pricing:
• company sets a very low
price
• for purpose of driving
competitors out of business
61
The end
62
Real People, Real Choices
• Taco Bell (Danielle Blugrind)
• In order to differentiate itself
from the competition, Taco Bell
needed to update its value
pricing menu.
Option 1: price entire menu
at $1.29
Option 2: price items at 99
cents and $1.29
Option 3: price items at
99 cents, $1.19, and $1.29
TACO BELL
63
Real People, Real Choices
• Taco Bell (Danielle Blugrind)
• Danielle chose option 3:
price items at 99 cents,
$1.19, and $1.29
By carefully tuning its pricing strategy,
Taco Bell is reclaiming its position as
purveyor of fast-food value for the
money.
64
Marketing Plan Exercise
• A new seaside resort offers luxury rentals for
a few days, a week, or longer. Consider
possible pricing strategies -- cost-plus, yield
management, everyday low pricing,
skimming, and penetration and trial pricing.
 --What pricing strategy do you
 recommend for the resort ?
 --What pricing tactics do
you suggest?
65
Marketing in Action Case:
You Make the Call
• What is the decision facing True Religion?
• What factors are important in
understanding this decision situation?
• What are the alternatives?
• What decision(s) do you recommend?
• What are some ways to implement your
recommendation?
66
Keeping It Real: Fast-Forward to Next Class,
Decision Time at General Motors R*Works
• Meet Vince O’Brien, VP-Regional Managing
Director for General Motors R*Works
• R*Works: regional promotional agency for GM;
manages partnerships with sports organizations
• The decision: How to get dealers to support
R*Works ski mountain promotional
partnerships?
67
Group Activity
• Your group are marketers for a candy bar manufacturer.
You feel it’s time to increase price, but you’re concerned
the increase might not be profitable.
--How would you investigate elasticity of demand?
--What findings would lead you to increase price?
--What findings would lead you not to increase it?
68
Marketing Math Activity
• You and your friend have decided to go
into business together manufacturing
handbags.
 --You know fixed costs will be $120,000 a year, and
you expect variable costs to be $28 per bag.
 --If you plan to sell the bags to retail stores for $35,
how many must you sell to break even?
69
Discussion
• In what ways is a price leadership strategy
good or bad for consumers?
• Should governments allow price
leadership?
70
Discussion
• In pricing new products, marketers may
choose a skimming or a penetration
pricing strategy.
 --What is the advantage or disadvantage of this
practice for consumers?
 --For the industry as a whole?
71
Discussion
• Consumers often make
price-quality inferences
about products.
--What are some products for
which you make price-quality
inferences?
--Do your inferences make
sense?
72
Discussion
• In loss-leader pricing, retailers advertise
and sell an item below cost to get
customers into the store.
 --Do you consider this an unethical practice?
 --Who benefits and who is hurt by it?
 --Should the practice be made illegal (some states
have done so)?
 --How is loss-leader pricing different from bait-andswitch pricing?
73
Figure 11.3: Shift in Demand Curve
74
Figure 11.2: Demand Curves for
Normal and Prestige Products
75
Price Elasticity of Demand
• The percentage change in unit sales that
results from a percentage change in price.
Figure 11.5: Price Elastic and Inelastic Demand Curves
76
Figure 11.7: Break-Even Analysis
77
Figure 11.8: Marginal Analysis
78
Figure 11.6: Variable Costs at Different Levels of Production
79