Presentation on theme: "PRICING PRODUCTS AND SERVICES"— Presentation transcript:
1 PRICING PRODUCTS AND SERVICES CHAPTERPRICING PRODUCTS AND SERVICES
2 NATURE AND IMPORTANCE OF PRICE The Many Names of Price - ???HotelDoctorInsuranceapartmentWhat Is Price?To the seller... Price is revenueand profit sourceTo the consumer... Price is what you giveup to get what you want
3 THE PRICING EQUATION FOR CONSUMERS PRICE = LIST PRICE - INCENTIVES & ALLOWANCES + EXTRA FEES
4 Profit = Total revenue - Total cost or THE PROFIT EQUATION FOR SELLERSProfit = Total revenue Total costorProfit = (Unit price × Quantity sold) −Total cost
5 WAYS TO SELECT BASE PRICE LEVELS Demand oriented – focus on consumer preferenceCost oriented – focus on business’s expensesProfit oriented – focus on profitCompetition oriented – focus on the marketplace players
6 DEMAND ORIENTED APPROACHES Skimming Pricing – high initial pricePenetration Pricing – low initial pricePrestige Pricing – high price = quality and statusTarget Pricing-make product fit price market will payBundle Pricing- 2 products priced as one. helps poorer sellerYield Management Pricing – peak and non peak prices
7 PROFIT ORIENTED APPROACHES Target Profit Pricing-set annual dollar volume or profitIf I need to make $5000, & I can make 5 units,selling price is $1000.Target Return-on-Sales Pricing-Want to receive 1% of sales as my profit – actors & directorsTarget Return-on-Investment Pricing –I can make 5 % on my money in the bank. Set price soI make 6% on my investment if I invest it in my business.
8 COST ORIENTED APPROACHES Standard Markup Pricingadd the standard industry fixed % to my costs. Easyto implement.Cost-Plus Pricingadd a standard dollar amount to my costs- like $5.00for shipping and handling
9 COMPETITION ORIENTED APPROACHES Customary PricingAdjust product to fit costs & maintain price75¢ candy bar in a vending machineAbove-, At-, or Below-Market PricingUse largest competitor as a benchmark to set your price.Rolex watches (above) or Value City Furniture (below)Loss-Leader Pricing-Price below cost to lure buyers inWant buyer purchasing other things you sell at high mark upsLots of choices, but when to use which one?
10 PRICING OBJECTIVES Profit-Oriented Pricing Objectives- Sales revenueSales-Oriented Pricing Objectives-Status Quo Pricing Objectives-Survival, social responsibilityMarket share, unit volume
11 PRICING CONSTRAINTS Demand for the Product Class, Product, & Brand Newness of the Product: Stage in the Product Life CycleCost of Producing and Marketing the ProductCompetitors’ Prices
12 ESTIMATING DEMAND AND REVENUE Always use price first, but must adjust for:Consumer TastesPrice and Availability of Similar ProductsConsumer Income levelsChanges in external environment
15 HOW MUCH MORE WILL THEY BUY WHEN I LOWER PRICE? Price Elasticity of DemandInelastic DemandAn increase or decrease in price will not significantly affect demandElastic DemandConsumers buy more or less of a product when the price changes
16 FUNDAMENTAL REVENUE CONCEPT Total revenue is the total money receivedfrom the sale of a productTotal Revenue = Price X QuantityBut price set depends on costs, so how to value them?
17 FUNDAMENTAL COST CONCEPT Deviate with changesin level of outputTotal CostsVariableCostsFixed CostsDo not deviateas level of output changesHow do you know when you’re making money?
18 CALCULATING A BREAK EVEN POINT Copyright2007 by The McGraw-Hill Companies, Inc. All Rights Reserved.Slide 12-32
19 LEGAL AND ETHICAL CONSIDERATIONS Deceptive pricing- can’t bait and switchIssuesThatLimitPricingDecisionsPrice Fixing-Manufacturer can’t agreewith competitors or resellers toset pricePrice Discrimination-can’t set a differentprice for the same item for twodifferent customersPredatory Pricing-can’t sell anitem at a loss to bankruptthe competition
20 Step 1: Set an Approximate Price Level SETTING A FINAL PRICEStep 1: Set an Approximate Price Levelpick a starting range using demand andbreak even analysisStep 2: Set the Specific List or Quoted PriceOne-Price Policy – Dollar Store or no hagglingFlexible-Price Policy- different prices for differentbuyers and buying situations
21 Step 3: Make Special Adjustments to the List or Quoted Price SETTING A FINAL PRICEStep 3: Make Special Adjustments to the List or Quoted PriceDiscountsQuantity DiscountsSeasonal DiscountsCash DiscountsTrade Discounts to resellers
22 SETTING A FINAL PRICE Allowances Trade-In Allowances - like for cars Promotional Allowances – if you sell 12, 13th is freeEveryday Low Pricing-reduce promotional allowancesbut also reduce price of item so reseller sells more
23 Geographical Adjustments SETTING A FINAL PRICEGeographical AdjustmentsFOB Origin Pricing – buyer pays shippingowns goods in transitUniform Delivered Pricing – seller pays shippingand charges it to all buyers equally,but holds title during transit
24 Price (P)Price (P) is the money or other considerations (including other goods and services) exchanged for the ownership or use of a good or service.
25 Demand CurveA demand curve is a graph relating the quantity sold and price, which shows the maximum number of units that will be sold at a given price.
26 Total Cost (TC)Total cost (TC) is the total expense incurred by a firm in producing and marketing a product. Total cost (TC) equals the sum of fixed cost (FC) and variable cost (VC) or TC = FC + VC.
27 Fixed Cost (FC)Fixed cost (FC) is the sum of the expenses of the firm that are stable and do not change with the quantity of a product that is produced and sold.
28 Variable Cost (VC)Variable cost (VC) is the sum of the expenses of the firm that vary directly with the quantity of a product that is produced and sold.
29 Break-Even AnalysisBreak-even analysis is a technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output.
30 Pricing ObjectivesPricing objectives involve specifying the role of price in an organization’s marketing and strategic plans.
31 Pricing ConstraintsPricing constraints involve factors that limit the range of prices a firm may set.