PRICE
Yes, But What Does It Cost?
• Price is the value that customers give up or
exchange to obtain a desired product
• Payment may be in the form of money,
goods, services, favors, votes or anything
else that has value to the other party
Opportunity Costs
• The value of something that is given up to
obtain something else also affects the
“price” of a decision
• Example: the cost of going to college is
charged in tuition and fees but also includes
the opportunity cost of what a student
cannot earn by working instead
The Importance of Pricing Decisions
• Price is the only P which represents revenue
rather than an expense
• Pricing and the Marketing Mix
– Price and Place
– Price and Product
– Price and Promotion
The price of four different purchases
Steps in setting price
Identify objectives & constraints
Estimate demand & revenue
Determine cost, volume and profit
Set an approximate price level
Set List or Quoted price
Make adjustments to list price
Identifying Pricing constraints
– Demand for the Product Class, Product, and
Brand
– Newness of the Product: Stage in the Product
Life Cycle
– Single Product versus a Product Line
– Cost of Producing and Marketing the Product
– Cost of Changing Prices & Time Period They
Apply
– Types of Competitive Markets - Competitors’
Prices
Pricing Objectives
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Sales or market share objectives
Profit objectives
Competitive effect objectives
Customer satisfaction objectives
Image enhancement objectives
– Social Responsibility
Estimating Demand
• Demand refers to customers’ desire for products
– How much of a product do consumers want?
– How will this change as the price goes up or down?
• Identify demand for an entire product category in
markets the company serves
• Predict what the company’s market share is likely
to be
The Price Elasticity of Demand
• How sensitive are customers to changes in
the price of a product?
• Price elasticity of demand is a measure of
the sensitivity of customers to changes in
price.
• Price elasticity of demand = Percentage
change in quantity demanded / Percentage
change in price
Demand Curves
• Shows the quantity of a product that
customers will buy in a market during a
period of time at various prices if all other
factors remain the same
• Vertical axis represents the different prices a
firm might charge
• Horizontal axis shows the number of units
Demand Curves
Influences on Price Elasticity of Demand
• Availability of substitute goods or services
– If a product has a close substitute, its demand will be
elastic
• Time period
– The longer the time period, the greater the likelihood
that demand will be more elastic
• Income effect
– Change in income affects demand for a product even if
its price remains the same
• normal goods, luxury goods, inferior goods
Elastic and Inelastic Demand Curves
Types of Costs - 1
• Variable costs - per-unit costs of
production that will fluctuate depending on
how many units or individual products a
firm produces
• Fixed costs - do not vary with the number
of units produced. Costs remain the same
regardless of amount produced
Types of Costs - 2
• Average fixed cost is the fixed cost per unit
produced (total fixed costs / number of units
produced)
• Total costs = variable costs plus fixed costs
Break-Even Analysis
• Technique used to examine the relationship
between cost and price and to determine
what sales volume must be reached at a
given price before the company will
completely cover its total costs and past
which it will begin making a profit
• All costs are covered but there isn’t a penny
left over
Break-even analysis chart
Marginal Analysis
• Provides a way for marketers to look at cost
and demand at the same time
• Examines the relationship of marginal cost
to marginal revenue
– marginal cost is the increase in total costs from
producing one additional unit of a product
– marginal revenue is the increase in total income or
revenue that results from selling one additional unit of a
product
Marginal Analysis
Pricing Strategies Based on Cost
• Advantages
– Simple to calculate
– Relatively risk free
• Disadvantages
– Fail to consider several
factors
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target market
demand
competition
product life cycle
product’s image
– Difficult to accurately
estimate costs
Cost-Plus Pricing
• Most common cost-based approach
• Marketer figures all costs for the product
and then adds desired profit per unit
• Straight markup pricing is the most
frequently used type of cost-plus pricing
– price is calculated by adding a pre-determined
percentage to the cost
Steps in Cost-Plus Pricing
• Estimate unit cost
• Calculate markup
– Markup on cost
– Markup on selling price - markup percentage is
the seller’s gross margin
• gross margin is the difference between the cost to
the wholesaler or retailer and the price needed to
cover overhead and profit
Cost Plus Pricing Excerpt
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Fixed costs = $2,000,000
Number of jeans produced = 400,000
Fixed costs per unit = $5
Variable costs per unit = $15
Markup as % of costs = 25%
Markup on cost
– Price = total cost + (total cost * markup percentage)
– Price = $20 + ($20 * .25) = $20 + $5 = $25
Markup on Cost versus Markup on Selling Price
• on Cost
– Price paid = $30
– Markup = 40%
– Price = total cost + (total
cost * markup percentage)
– Price = $30 + ($30 *.40) =
$42
• on Selling Price
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Price paid = $30
Markup = 40%
Price = cost/1.00 – markup %
Price = $30/ 1-.40 = $50
Price Floor Pricing
• Method for calculating price that considers both
costs and what can be done to assure that a plant
can operate at capacity
• Typically used when market conditions make it
impossible for a firm to sell enough
• If the price-floor price can be set above the
variable costs, the firm can use the difference to
increase profits or cover fixed costs
Pricing Strategies Based on Demand-1
• Demand-based pricing means that the
selling price is based on an estimate of
volume or quantity that a firm can sell in
different markets at different prices
• Demand-backward pricing starts with a
customer-pleasing price and works
backward to costs
Pricing Strategies Based on Demand-2
• Chain-Markup Pricing extends demand
backward pricing from end consumer
back to the manufacturer
– Example:
• Price customers are willing to pay = $39.99
• Markup required by retailer = 40%
• Price retailer will pay $39.99 * .60 = $23.99
Pricing Strategies Based on Competition
• Competitive parity - price products at near
the competition
• Price leadership - price products based on
prices of industry leaders
• Loss leaders - price products below
competition
Pricing Strategies Based on Customers’ Needs
• Cost of ownership strategy - price
consumers pay for product, plus the cost of
maintaining and using the product, less any
resale value (e.g., Sanyo batteries)
• Value pricing (EDLP*) - offers a fair value
to consumers (e.g., Kmart’s blue light
specials)
** EDLP = everyday low pricing
New Product Pricing
• Skimming price - firm charges a high,
premium price for its new product with the
intention of reducing it in future response to
market pressures
• Penetration pricing - new product is
introduced at a very low price
• Trial pricing - product carries a low price
for a limited time period
Pricing Tactics
• Pricing for Individual Products
– two-part pricing (e.g., country clubs)
– payment pricing (e.g., easy payments for new
cars)
• Pricing for Multiple Products
– Price bundling (e.g., monitor, keyboard, CPU in
a computer package)
– Captive pricing (e.g., razors and razor blades)
More Pricing Tactics
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Geographic pricing
F.O.B. pricing
Zone pricing
Uniform delivered pricing
Freight absorption pricing
Discounting for Channel Members
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Trade or functional discounts
Quantity discounts
Cash discounts
Seasonal discounts
Trade Discounts
• Pricing structure built around list price
– List price, also called suggested retail price, is
the price that the manufacturer sets as the
appropriate price for the end consumer
– Manufacturers offer discounts because channel
members perform selling, credit, storage and
transportation services
Pricing with Electronic Commerce
• Dynamic pricing strategies
– price can be adjusted to meet changes in the
marketplace
– online price changes can occur quickly, easily,
and at virtually no cost
• Auctions
– sites offer chance to bid on items
– sites offer reverse-price auctions
Price Discrimination
• Means that marketers classify customers
based on some characteristic that indicates
what they are willing or able to pay
• Acceptable when price differences are in
response to
– changes in cost of product
– changes in competitive activity
– changes in marketplace
Psychological Issues in Pricing
• Internal Reference Prices - consumers have a set
price or price range in their mind
– If the actual price is higher, consumers will feel the
product is overpriced
– If it is too low below the internal reference price,
consumers may assume its quality is inferior
• Competition as Reference Price - If the price is
close, the assimilation effect will encourage the
customer to think the products are similar enough
and choose the lower priced product
Price-Quality Inferences
• If consumers are unable to judge the quality
of a product through examination or prior
experience, they usually will assume that
the higher-priced product is the higherquality product
Price and Quality
Consumers tend to
associate high prices
with high quality. This
Belgian ad for Chat Noir
coffee tries to suggest
otherwise. It reads,
“Quality coffee. But
we’ve really squeezed
the price.”
Psychological Pricing Strategies
• Odd-even pricing
• Price lining
Price Lining
Legal and Ethical Considerations in Pricing
• Deceptive pricing practices
• Price discrimination
Deceptive Pricing Practices
• Retailers must not claim prices are lower than
competitors unless it is true
• A going out-of-business sale should be the last
sale before going out of business
• Bait-and-switch - consumers are lured into store
for a very low price, but then the item is not
available. A more expensive product is offered
instead
– Trading up is acceptable
Price Discrimination
• Means selling the same product to different
wholesalers and retailers at different prices
if practices lessen competition
Price Fixing
• Occurs when two or more companies
conspire to keep prices at a certain
level
– Horizontal price fixing occurs when
competitors making the same product jointly
determine what price they each will charge
– Vertical price fixing occurs when manufacturers
attempt to force the retailer to charge the
suggested retail price
Predatory Pricing
• Means that a company sets a very low price
for the purpose of driving competitors out
of business
Dumping (US)
• Selling in foreign market at or below cost
• Selling in a foreign market more than 5%
below price in home market