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Pricing Concepts Setting the Right Price. The Importance of Price To the consumer... Price is the cost of something In the broadest sense, price allocates.

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Presentation on theme: "Pricing Concepts Setting the Right Price. The Importance of Price To the consumer... Price is the cost of something In the broadest sense, price allocates."— Presentation transcript:

1 Pricing Concepts Setting the Right Price

2 The Importance of Price To the consumer... Price is the cost of something In the broadest sense, price allocates resources in a free-market economy What is Price? To the seller... Price is revenue and profit source To the seller... Price is revenue and profit source

3 The Importance of Price Revenue = Unit Price * Number of units sold Revenue pays for every activity. Whats left over is Profit. Marketers must select a price that is not too high or not too low, or not too low, a price that equals the perceived value to target consumers

4 Demand and Supply Demand The quantity of a product that will be sold in the market at various prices for a specified period. Supply The quantity of a product that will be offered to the market by a supplier at various prices for a specific period. The quantity of a product that will be offered to the market by a supplier at various prices for a specific period.

5 The Demand Curve D D Price Quantity demanded

6 The Supply Curve Quantity supplied S S Price

7 Equilibrium Price Quantity demanded S S Price D D Surplus Shortage Price Equilibrium

8 Elasticity of Demand Elastic Demand Consumers buy more or less of a product when the price changes Inelastic Demand An increase or decrease in price will not significantly affect demand Unitary Elasticity An increase in sales exactly offsets a decrease in prices, and revenue is unchanged

9 Elasticity of Demand Price Goes... Revenue Goes... Demand is... DownUpElastic Down Inelastic Up Inelastic UpDownElastic Up or DownStays the SameUnitary Elasticity

10 Elasticity of Demand Elastic Demand D D Quantity Price D D Quantity PriceCompletely Inelastic Demand

11 Factors that Affect Elasticity Factors That Affect ElasticityofDemand ElasticityofDemand Availability of Substitutes Price relative to Purchasing Power Price relative to Purchasing Power Product Durability Products Other Uses

12 The Cost Determinant of Price Deviate with changes in level of output Deviate with changes in level of output Types of Costs VariableCostsVariableCosts Fixed Costs Do not deviate as level of output changes Do not deviate as level of output changes

13 The Cost Determinant of Price Target-Return Pricing Target-Return Pricing Break-Even Pricing Break-Even Pricing Profit Maximization Pricing Keystoning Markup pricing Methods Used to Set Prices Methods Used to Set Prices

14 Markup Pricing Markup Pricing Markup Pricing The cost of buying the product from the producer plus amounts for profit and for expenses not otherwise accounted for. Keystoning The practice of marking up prices by 100%, or doubling the cost. The practice of marking up prices by 100%, or doubling the cost. Profit Maximization Profit Maximization Profit Maximization A method of setting prices that occurs when marginal revenue equals marginal cost. Marginal Revenue Marginal Revenue The extra revenue associated with selling an extra unit of output, or the change in total revenue with a one-unit change in output.

15 Break-Even Pricing Quantity Price 2,000 01,0002,000 3,0004,0005,0006,000 4,000 Fixed costs Loss Profit Total Revenue Total Costs Break-even point

16 Break-Even Pricing Break-Even Quantity = Total Fixed Costs Fixed cost Contribution Fixed cost Contribution =Price -- Avg. Variable Cost

17 Other Determinants of Price Perceived Quality Promotion Strategy Distribution Strategy Competition Stages of the Product Life Cycle Stages of the Product Life Cycle Other Factors ThatInfluencePrice ThatInfluencePrice

18 Stages in the Product Life Cycle IntroductoryStageGrowthStageDeclineStage$High$Stable$DecreaseMaturityStage$ Decrease Stable High

19 Distribution Strategy Offer a larger profit margin Offer a larger profit margin Convincing Distributors to Carry Product Convincing Distributors to Carry Product Give dealers a large trade allowance Give dealers a large trade allowance

20 Regaining Price Control DEVELOP BRAND LOYALTY Package marked with selling price Avoid business with price-cutting discounters Avoid business with price-cutting discounters Franchising Exclusive distribution system Methods Used to Regain Price Control Methods Used to Regain Price Control

21 The Impact of the Internet Allows price and product comparisons Prices are coming down Data collection allows sellers to tailor products and prices Extranet A private electronic network that links a company with its suppliers and customers.

22 Indicators of Quality Brand Name Price Appearance Retailer Reputation

23 Steps in Setting the Right Price Results lead to the right price Fine tune with pricing tactics Choose a price strategy Estimate demand, costs, and profits Establish pricing goals

24 Pricing Objectives Profit-Oriented Pricing Objectives Sales-Oriented Pricing Objectives Status Quo Pricing Objectives

25 Price Strategy A basic, long-term pricing framework, which establishes the initial price for a product and the intended direction for price movements over the product life cycle. Choosing a Price Strategy Basic Strategies for Setting Prices Basic Strategies for Setting Prices Status Quo Pricing Price Skimming Penetration Pricing

26 Price Skimming Situationswhen is Successful Situationswhen Price Skimming is Successful Superior Product Legal Protection of Product Limited Production Technological Breakthrough Inelastic Demand

27 Penetration Pricing AdvantagesAdvantages Discourages or blocks competition from market entryDisadvantagesDisadvantages Requires gear up for mass production Selling large volumes at low prices Strategy to gain market share may fail

28 Status Quo Pricing AdvantagesAdvantages Simplicity Safest route to long- term survival for small firmsDisadvantagesDisadvantages Strategy may ignore demand or cost

29 Tactics for Fine-Tuning the Base Price Fine-TuningPricingTacticsFine-TuningPricingTactics Special Pricing Tactics Discounts Geographic Pricing

30 Tactics for Fine-Tuning the Base Price Common Tactics forFine-Tuning the Base Price Common Tactics forFine-Tuning the Base Price Quantity Discounts Cash Discounts Functional Discounts Seasonal Discounts Promotional Allowances Rebates Value-Based Pricing

31 The price is set at a level that seems to the customer to be a good price compared to the prices of other options. Trade Loading The practice of temporarily lowering the price to induce wholesalers and retailers to buy more goods than can be sold in a reasonable time.

32 Geographic Pricing Basing-Point Pricing Basing-Point Pricing Freight Absorption Pricing Freight Absorption Pricing Zone Pricing Uniform Delivered Pricing Uniform Delivered Pricing FOB Pricing Common Methods of GeographicPricingCommon GeographicPricing

33 Geographic Pricing FOB Origin Pricing FOB Origin Pricing The buyer absorbs the freight costs from the shipping point (free on board). Uniform Delivered Pricing Uniform Delivered Pricing The seller pays the freight charges and bills the purchaser an identical flat freight charge. Zone Pricing The U.S. is divided into zones and a flat freight rate is charged to customers in a given zone. Freight Absorption Pricing Freight Absorption Pricing The seller pays for all or part of the freight charges and does not pass them on to the buyer. Basing-Point Pricing Basing-Point Pricing The seller designates a location as a basing point and charges all buyers the freight costs from that point.

34 Special Pricing Tactics Single-Price Tactic Flexible Pricing Professional Services Pricing Professional Services Pricing Price Lining Leader Pricing Bait Pricing Odd-Even Pricing Price Bundling Two-Part Pricing All goods offered at the same price Different customers pay different price Used by professionals with experience, training or certification Used by professionals with experience, training or certification Several line items at specific price points Sell product at near or below cost Lure customers through false or misleading price advertising Lure customers through false or misleading price advertising Odd-number prices imply bargain Even-number prices imply quality Odd-number prices imply bargain Even-number prices imply quality Combining two or more products in a single package Combining two or more products in a single package Two separate charges to consume a single good


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