1.  Copyright 1999 Prentice Hall 10-1 Chapter 10 Pricing Products: Pricing Considerations and Approaches PRINCIPLES OF MARKETING Eighth Edition Philip Kotler and Gary Armstrong

2.  Copyright 1999 Prentice Hall 10-2 Factors to Consider When Setting Prices Internal Factors Pricing Decisions Pricing Decisions External Factors Target Market Positioning Objectives

3.  Copyright 1999 Prentice Hall 10-3 Internal Factors Affecting Pricing Decisions Marketing Objectives Marketing-Mix Strategy Costs Organizational Considerations

4.  Copyright 1999 Prentice Hall 10-4 Marketing Objectives that Affect Pricing Decisions Marketing Objectives Marketing Objectives Survival Low Prices to Cover Variable Costs and Some Fixed Costs to Stay in Business. Survival Low Prices to Cover Variable Costs and Some Fixed Costs to Stay in Business. Current Profit Maximization Choose the Price that Produces the Maximum Current Profit, Cash Flow or ROI. Current Profit Maximization Choose the Price that Produces the Maximum Current Profit, Cash Flow or ROI. Market Share Leadership Low as Possible Prices to Become the Market Share Leader. Market Share Leadership Low as Possible Prices to Become the Market Share Leader. Product Quality Leadership High Prices to Cover Higher Performance Quality Product Quality Leadership High Prices to Cover Higher Performance Quality

5.  Copyright 1999 Prentice Hall 10-5 Marketing Mix Variables that Affect Pricing Decisions Marketing-Mix Strategy Product Design and Quality Product Design and Quality Distribution Promotion Non-Price Factors Non-Price Factors

6.  Copyright 1999 Prentice Hall 10-6 Types of Cost Factors that Affect Pricing Decisions Total Costs Sum of the Fixed and Variable Costs for a Given Level of Production Total Costs Sum of the Fixed and Variable Costs for a Given Level of Production Variable Costs Costs that do vary directly with the level of production. Raw materials Variable Costs Costs that do vary directly with the level of production. Raw materials Fixed Costs (Overhead) Costs that don’t vary with sales or production levels. Executive Salaries Rent Fixed Costs (Overhead) Costs that don’t vary with sales or production levels. Executive Salaries Rent

7.  Copyright 1999 Prentice Hall 10-7 Costs Considerations Cost per unit 1 2 3 4 SRAC LRAC Quantity Produced per Day 1,0002,0003,0004,000 Cost Per Unit at Different Levels of Production Per Period

8.  Copyright 1999 Prentice Hall 10-8 External Factors Affecting Pricing Decisions Market and Demand Competitors’ Costs, Prices, and Offers Other External Factors Economic Conditions Reseller Needs Government Actions Social Concerns

9.  Copyright 1999 Prentice Hall 10-9 The Market and Demand Factors that Affect Pricing Decisions Pure Competition Many Buyers and Sellers Who Have Little Affect on the Price. Pure Competition Many Buyers and Sellers Who Have Little Affect on the Price. Monopolistic Competition Many Buyers and Sellers Trading Over a Range of Prices. Monopolistic Competition Many Buyers and Sellers Trading Over a Range of Prices. Oligopolistic Competition Few Sellers Each Sensitive to Other’s Pricing/ Marketing Strategies Oligopolistic Competition Few Sellers Each Sensitive to Other’s Pricing/ Marketing Strategies Pure Monopoly Single Seller Pure Monopoly Single Seller Different Types of Markets

10.  Copyright 1999 Prentice Hall 10-10 Demand Curves Price Quantity Demanded per Period A. Inelastic Demand - Demand Hardly Changes With a Small Change in Price. P2P2 P1P1 Q1Q1 Q2Q2 Price Quantity Demanded per Period P’ 2 P’ 1 Q1Q1 Q2Q2 B. Elastic Demand - Demand Changes Greatly With a Small Change in Price.

11.  Copyright 1999 Prentice Hall 10-11 Minimizes Price Competition Minimizes Price Competition What is Cost-Plus Pricing and Why is it Popular? Perceived Fairness to Both Buyers and Sellers Perceived Fairness to Both Buyers and Sellers Sellers Are More Certain About Costs Than Demand Sellers Are More Certain About Costs Than Demand Adding a Standard Markup to the Cost of the Product

12.  Copyright 1999 Prentice Hall 10-12 Breakeven Analysis or Target Profit Pricing 200 400 600 800 1,000 1,200 1020304050 Total Revenue Total Cost Fixed Cost Target Profit ($200,000) Sales Volume in Units (thousands) Cost in Dollars (thousands) Tries to Determine the Price at Which a Firm Will Break Even or Make a Target Profit

13.  Copyright 1999 Prentice Hall 10-13 Value-Based Pricing Product Cost Price Value Customers Customer Value Price Cost Product Cost-Based PricingValue-Based Pricing

14.  Copyright 1999 Prentice Hall 10-14 Competition-Based Pricing Setting Prices Sealed-Bid Company Sets Prices Based on What They Think Competitors Will Charge. Sealed-Bid Company Sets Prices Based on What They Think Competitors Will Charge. Going-Rate Company Sets Prices Based on What Competitors Are Charging. Going-Rate Company Sets Prices Based on What Competitors Are Charging. ? ?