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Pricing the Product Chapter Eleven. Chapter Objectives Explain the importance of pricing and how prices marketers set objectives for pricing strategies.

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Presentation on theme: "Pricing the Product Chapter Eleven. Chapter Objectives Explain the importance of pricing and how prices marketers set objectives for pricing strategies."— Presentation transcript:

1 Pricing the Product Chapter Eleven

2 Chapter Objectives Explain the importance of pricing and how prices marketers set objectives for pricing strategies Describe how marketers use costs, demands, revenue and the pricing environment to make pricing decisions Understand key pricing strategies and tactics Understand the opportunities for Internet pricing strategies Describe the psychological, legal, and ethical aspects of pricing © 2012 Pearson Education, Inc. publishing as Prentice-Hall. 11-2

3 What is the Price? Price: The assignment of value, or the amount the consumer must exchange to receive the offering Includes money, goods, services, favors, votes, or anything else that has value to the other party Opportunity costs must also be considered (the value of something we give up to obtain somthing else) © 2012 Pearson Education, Inc. publishing as Prentice-Hall. 11-3

4 Figure Steps of Price Planning © 2012 Pearson Education, Inc. publishing as Prentice-Hall. 11-4

5 Figure 11.2 Step 1- Pricing Objectives © 2012 Pearson Education, Inc. publishing as Prentice-Hall. 11-5

6 Figure 11.3 Factors in Price Setting © 2012 Pearson Education, Inc. publishing as Prentice-Hall. 11-6

7 Figure 11.4 Step 2-Estimate Demand: Demand Curves for Normal and Prestige Products © 2012 Pearson Education, Inc. publishing as Prentice-Hall. 11-7

8 Figure 11.5 Shift in Demand © 2012 Pearson Education, Inc. publishing as Prentice-Hall. 11-8

9 Figure 11.7 Price Elastic and Inelastic Demand Curves © 2012 Pearson Education, Inc. publishing as Prentice-Hall. 11-9

10 Elasticity of demand is defined as the % change in unit sales that results from a % change in price When changes in price have large effects on the amount demanded, demand is elastic. Thus an increase in price can negatively impact revenues when the percentage increase in price cannot compensate for the revenue lost through lower unit sales. When changes in price have little or no effect on the amount demanded, demand is inelastic. Such situations make it much easier for marketers to change price without negatively impacting the volume of sales. © 2011 Pearson Education, Inc. publishing as Prentice-Hall Elastic versus Inelastic Demand

11 Factors affecting Elasticity-1 What factors influence the price elasticity of demand? How would you classify the following in terms of price elasticity? Gasoline Air travel Movie ticketsBaby diapers What alternatives to a price increase might marketers of an elastic product consider? © 2012 Pearson Education, Inc. publishing as Prentice-Hall

12 Factors affecting Elasticity-2 Whether or not the product is considered by consumers to be a necessity, and the degree to which close substitutes are available. Non-necessities such as pizza generate elastic demand. If pizza restaurants raise prices, we can buy frozen pizza from the store or eat elsewhere. However, demand for necessities such as food and electricity is generally inelastic. There will always be some people who view gasoline or air travel as a necessity, but a large proportion of demand is elastic. Thus when prices get TOO high, people try to use less. Baby diapers are likely to be price inelastic as they are viewed as necessities by new parents. ? © 2012 Pearson Education, Inc. publishing as Prentice-Hall

13 Factors affecting Elasticity-3 Marketers of products that are highly price elastic often disguise price increases by leaving the price of the product the same, but reducing the quantity or size of the product provided. Thus the consumer ends up paying more per ounce, for example, due to the smaller quantity. Another method of disguising a price increase is to eliminate something from the product something that was previously included with prior versions. For example, when the market for printers became more price competitive AND price elastic, manufacturers stopped including cables, and full in cartridges. © 2012 Pearson Education, Inc. publishing as Prentice-Hall

14 Cross-Elasticity of Demand When changes in the prices of other products affect a products demand If products are substitutes, an increase in the price of one will increase demand for the other (competing brands) If one product is essential for use of second, an increase in the price of one decreases demand for another © 2012 Pearson Education, Inc. publishing as Prentice-Hall

15 Figure 11.8 Step 3-Setting Costs: Variable Costs at Different Levels of Production © 2012 Pearson Education, Inc. publishing as Prentice-Hall

16 Figure 11.9 Break-Even Analysis (Assuming a Price of $100) © 2012 Pearson Education, Inc. publishing as Prentice-Hall

17 Calculating Break-Even total fixed costs Break-even point (units) contribution per unit to fixed costs total fixed costs Break-even point ($) variable cost per unit price © 2012 Pearson Education, Inc. publishing as Prentice-Hall ()

18 Figure Marginal Analysis © 2012 Pearson Education, Inc. publishing as Prentice-Hall

19 Markups and Margins: Pricing Through the Channel Markup An amount added to the cost of the product to create a price at which the channel member will sell the product Gross margin Retailer margin Wholesaler margin List price © 2012 Pearson Education, Inc. publishing as Prentice-Hall

20 Steps in Price Planning Step 4: Evaluate the Pricing Environment T The Economy Economic trends Recession Inflation © 2012 Pearson Education, Inc. publishing as Prentice-Hall Competition Government regulation Consumer trends International environment

21 Figure Pricing Strategies and Tactics © 2012 Pearson Education, Inc. publishing as Prentice-Hall

22 Steps in Price Planning Step 5: Choose a Price Strategy Pricing strategies based on the competition (Dominos, Pizza Hut) Pricing strategies based on customers needs (gasoline) New product pricing (iPhone) Based on demand (UGGs) Based on your cost (Hangables) © 2012 Pearson Education, Inc. publishing as Prentice-Hall

23 Wal-Mart Wal-Mart is well known for its everyday low pricing strategy. How do they do it? Wal-Mart achieves discounts through volume purchasing Wal-Mart squeezes profits and concessions from suppliers in an attempt to lower prices year after year Consumers want low prices-but… Critics feel that the costs to suppliers are too high Suppliers end up closing plants and laying off workers Jobs are sent overseas to lower costs What do you think about Wal-Marts pricing strategy? © 2012 Pearson Education, Inc. publishing as Prentice-Hall

24 Steps in Price Planning Step 6: Develop Pricing Tactics Pricing for individual products Two-part pricing Payment pricing Pricing for multiple products Price bundling Captive pricing © 2012 Pearson Education, Inc. publishing as Prentice-Hall

25 Steps in Price Planning Step 6: Develop Pricing Tactics 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 © 2012 Pearson Education, Inc. publishing as Prentice-Hall

26 Steps in Price Planning Step 6: Develop Pricing Tactics Discounting for channel members Trade or functional discounts Quantity discounts Cash discounts Seasonal discounts © 2012 Pearson Education, Inc. publishing as Prentice-Hall

27 Figure Internet Pricing Strategies © 2012 Pearson Education, Inc. publishing as Prentice-Hall Ticketmaster and Dynamic Pricing Visit skoreit.comskoreit.com Visit Wired.comWired.com

28 Figure Psychological Pricing © 2012 Pearson Education, Inc. publishing as Prentice-Hall

29 Psychological Issues in Pricing © 2012 Pearson Education, Inc. publishing as Prentice-Hall Psychological Issues in Pricing Buyers Expectations International Reference Prices Price-Quality inferences Psychological Pricing Strategies Odd-Even Pricing Price Lining Prestige Pricing

30 Legal and Ethical Issues: B2C © 2012 Pearson Education, Inc. publishing as Prentice-Hall

31 Legal and Ethical Issues: B2B © 2012 Pearson Education, Inc. publishing as Prentice-Hall

32 In Conclusion: Legal and Ethical Issues in Pricing Legal issues in business-to-business pricing Price discrimination Price fixing: Two or more companies conspire to keep prices at a certain level Horizontal vs. vertical price fixing Predatory pricing: Firm sets a very low price for purpose of driving competitors out of business © 2012 Pearson Education, Inc. publishing as Prentice-Hall


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