2 What Is a Price?The amount of money charged for a product or service, or the sum of the values that customers exchange for the benefits of having or using the product or service.Pricing: the only part of the marketing mix that is revenue generating, all the others are costs.
5 Considerations in Setting Price Customer perception of valueProduct costsOther internal & external considerationsMarketing strategy, objectives, and mixNature of the market and demandCompetitors’ strategies and pricesPrice ceilingNo demand above this pricePrice floorNo profits below this price
6 Value-Based Pricing Versus Cost-Based Pricing Design a good productDetermine product costsSet price based on costConvince buyers of product’s valueAssess customer needs & value perceptionsSet target price to match customer perceived valueDetermine costs that can be incurredDesign product to deliver desired value at target priceCost-based pricingValue-based pricingThe wrong way!Good pricing starts with customerSetting prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for effort and risk.Setting price based on buyers’ perceptions of value rather than on seller’s cost.
8 Value-based Pricing 2 types of value-based pricing: Good value pricing Offering just the right combination of quality and good service at a fair price to match with changing economic conditions and consumer price perception.Value-added pricingAttaching value-added features and services to differentiate a company’s offer and charging higher prices to increase company’s pricing power.
9 Type of good-value pricing in the retail level Everyday Low Pricing (EDLP) involves charging a constant, everyday low price with few or no temporary price discounts.High-low pricing involves charging higher prices on an everyday basis but running frequent promotions to lower prices temporarily on selected items.
11 Company & Product Costs Types of CostsFixed costs (overhead)Costs that do not vary with production or sales level e.g. each month’s bills for rent, interest, employee salaries.Variable costsCosts that vary directly with the level of production e.g. raw materials are needed in production process.Total costs = Fixed costs + Variable costsThe sum of the fixed and variable costs for any given level of production.
12 Pricing Method Cost-plus pricing Adding a standard markup to the cost of the product.
13 Cost-plus pricing (Markup Pricing) Suppose a toaster manufacturer had the following costs and expected sales:Variable cost $10Fixed costs $300,000Expected unit sales 50,000
14 Unit CostThen the manufacturer’s cost per toaster is given by the following:Unit cost = Variable Cost +Fixed costsUnit Sales
15 Unit CostThen the manufacturer’s cost per toaster is given by the following:Unit cost = Variable Cost += $10 += $16Fixed costsUnit Sales$300,00050,000
16 Markup PriceSuppose the manufacturer wants to earn a 20% markup on sales. The manufacturer’s markup price is given by the following:Markup Price = Unit Cost(1 – Desired Return on Sales)
17 Markup PriceSuppose the manufacturer wants to earn a 20% markup on sales. The manufacturer’s markup price is given by the following:Markup Price = Unit Cost(1 – Desired Return on Sales)= $16( )= $20The manufacturer would charge dealers $20 per toaster and make profit of $4 ($20 - $16) per unit.
18 In turn, the dealer will markup the toaster If dealers want to earn 50% on the sales price, they will mark up the toaster to $40$20 + (50% of $40) = $40
19 Pricing Method (con’t) Break-Even Pricing (Target Profit Pricing)Setting price to break even on the costs of making and marketing product, or setting price to make a target profit (No pain, no gain)Break-Even Volume =Fixed CostPrice – Variable Cost
20 Break-Even Volume Break-Even Volume = = $300,000 $20-$10 = 30,000 Fixed CostPrice – Variable CostBreak-Even Volume == $300,000$20-$10= 30,000If the company wants to make a target profit, it must sell more than 30,000 units at $20 each.
22 Calculate *Suppose you open restaurant everyday (30 days a month) Total cost (per month)Profit (per month)Break even volume (per month)If there’s a new location has cheaper renting (Bht 2,000 per month) but can sell only 100 serves a day, is it worth enough to move to this new location compare to the current one?Fixed CostPrice – Variable Cost
28 New-Product Marketing Strategies The major strategies for pricing imitative and new products.Market-Skimming PricingMarket-Penetration Pricing
29 Market-Skimming Pricing Setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price; the company makes fewer but more profitable sales.Sony HDTVChristian Louboutin Spring/Summer 2011New movie or audio CD
30 Market-Penetration Pricing Setting a low price for a new product in order to attract a large number of buyers and a large market share quickly and deeply.BTS sky train in BKKDell selling high-quality computer products through lower-cost direct channels once it entered the PC market.
31 Pricing Decision Market-Skimming Market-Penetration Where the prices are high usually during introductionHigh price charged‘just’ worthwhile for some segments to adopt new productAs competitors enter market, price is lowerede.g. new albums/films on releaseOffers low-price to gain market share – then increases priceLow initial price chargedAttract volume sales quicklyLarge market shareHigh volume sales save costsEconomies of scale on production and distributione.g. France Telecom – to attract new corporate clients
32 Economies of scaleEconomies of scale arise when the cost per unit falls as output increases. Economies of scale are the main advantage of increasing the scale of production and becoming ‘big’.
33 Product Mix Pricing Strategies How companies find a set of prices that maximizes the profits from the total product mix.Product Line PricingOptional-Product PricingCaptive-Product PricingBy-Product PricingProduct Bundle Pricing
34 Product Line PricingSetting the price steps between various products in a product line based on cost differences between the products, customer evaluations of different features, and competitors’ prices.
35 Optional-Product Pricing The pricing of optional or accessory products along with a main product.When you order a new PC, you can select your own hard drives, software options, service plans, and carrying cases.
36 Captive-Product Pricing Setting a price for products that must be used along with a main product, such as blades for razor and SD card for a digital camera.+
37 By-Product PricingSetting a price for by-products in order to make the main product’s price more competitive.MeadWestvaco, papermaker company, turned what was once considered chemical waste of wood-processing activities into profit-making products in paving industry.
38 Product Bundle Pricing Combining several products and offering the bundle at a reduced price.Burger King Whopper Combo
39 Price-Adjustment Strategies How companies adjust their prices to take into account different types of customers and situations.Discount and Allowance PricingSegmented PricingPsychological PricingPromotional PricingGeographical PricingDynamic PricingInternational Pricing
40 Discount and Allowance Pricing Discount: a straight reduction in price on purchases during a stated period of time.
41 Forms of DiscountsCash discount: a price reduction to buyers who pay their bills promptlyQuantity discount: a price reduction to buyers who buy large volumesFunctional discount (trade discount): is offered by the seller to trade-channel members who perform certain functions, such as selling, storing, and record keepingSeasonal discount: a price reduction to buyers who buy merchandise or services out of season
42 Samples of DiscountsCash discount: “2/10, net 30” means the payment is due within 30 days, the buyer can deduct 2% if the bill is paid within 10 days.Quantity discount: if you buy Bht 50, ,000, you’ll get 1% off. Bht 100, ,000 => 2% off.Functional discount (trade discount): producer give 10% discount to wholesalers. Then, wholesalers give 5% discount to retailers.Seasonal discount: the beach hotels give 50% discount for customers who reserve the room on Mon-Thurs.
43 Discount and Allowance Pricing Allowance: promotional money paid by manufacturers to retailers in return for an agreement to feature the manufacturer’s products in some way.
44 Sample of Promotional Allowance ThaiNamThip Company give a financial support of publishing Carrefour’s brochure to its customer & give 10% discount for 1,000 boxes of Coca Cola to use for discount promotion at Carrefour.
45 Bus charges lower for students and senior citizens Segmented PricingSelling a product or service at 2 or more prices, where the difference in prices is not based on differences in costs but on differences in customers, products, or locations.Bus charges lower for students and senior citizens5-ounce aerosol can = $11.391 liter bottle = $1.59
46 Psychological Pricing A pricing approach that considers the psychology of prices and not simply the economics; the price is used to say something about the product.SmirnoffBEFOREAFTER($1 higher)WolfschmidtSmirnoffRelska(Same price)Popov($1 cheaper)($1 cheaper)
47 Reference prices: price that buyers carry in their minds and refer to when they look at a given productSales sign “Now 2 for only…!”Price ending in “9”
48 Promotional PricingTemporarily pricing products below the list price, and sometimes even below cost, to increase short-run sales.
49 Geographical PricingSetting prices for customers located in different parts of the country or world.FOB-origin pricing: customers pays the freight from the factory to the destinationUniform-delivered pricing: company charges the same price plus freight to all customersZone pricing: customers in different zones pay for different pricesBasing-point pricing: sellers selects some city as a basing point & charges all customers the freight cost from that city to the customerFreight-absorption pricing: sellers absorbs all or part of the freight charges in order to get the desired business
50 Dynamic PricingAdjusting prices continually to meet the characteristics and needs of individual customers and situations.
51 International Pricing Adjusting prices for international markets to reflect local market conditions and cost considerations depending on economic conditions, competitive situations, law & regulations, and development of the wholesaling & retailing system.$140 in Milan, Italy$240 in Brazil