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Pricing Products: Pricing Considerations and Approaches

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1 Pricing Products: Pricing Considerations and Approaches
Chapter 10 Pricing Products: Pricing Considerations and Approaches

2 Price Price is the sum of all the values that consumers exchange for the benefits of having or using the product or service. Price has been the major factor affecting buyer choice; nonprice factors have become increasingly important in buyer-choice behavior. Price is the only element in the marketing mix that produces revenues; all others represent costs.

3 More Factors to Consider when Setting Prices
Stage of the PLC Decision Maker Industry Conditions Threat of new entrants Market power Substitutes Capacity Government Social Concerns Marketing Objectives Psychological Aspects Survival ST Profit Max Market Share Quality Leadership Reference Price Price/Perceived Quality Price points

4 Internal Factors Affecting Pricing Decisions: Marketing Objectives
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, Etc. Marketing Objectives Market Share Leadership Low as Possible Prices to Become the Market Share Leader. Product Quality Leadership High Prices to Cover Higher Performance Quality and R & D.

5 Internal Factors Affecting Pricing Decisions: Marketing Objectives
Other specific objectives include: Set prices low to prevent competition from entering the market, Prices might be reduced temporarily to create excitement or draw more customers. Nonprofit and public organization may have other pricing objectives such as: University aims for partial cost recovery, Hospital may aim for full cost recovery, Theater may price to fill maximum number of seats.

6 Internal Factors Affecting Pricing Decisions: Marketing Mix
Customers Seek Products that Give Them the Best Value in Terms of Benefits Received for the Price Paid. Product Design Nonprice Positions Price Distribution Promotion

7 Types of Cost Factors that Affect Pricing Decisions
Fixed Costs (Overhead) Costs that don’t vary with sales or production levels. Executive Salaries, Rent Variable Costs Costs that do vary directly with the level of production. Raw materials Total Costs Sum of the Fixed and Variable Costs for a Given Level of Production

8 Costs Considerations Cost Per Unit at Different Levels of Production Per Period 1 2 Cost per unit 3 SRAC 4 LRAC 1,000 2,000 3,000 4,000 Quantity Produced per Day

9 Types of Cost Factors that Affect Pricing Decisions
As a firm gains experience in production, it learns how to do it better. The experience curve (or the learning curve) indicates that average cost drops with accumulated production experience. Strategy: company should price products low; sales increases; costs continue to decrease; and then lower prices further. Risks are present with this strategy.

10 External Factors Affecting Pricing Decisions
Market and Demand External Factors Affecting Pricing Decisions Competitors’ Costs, Prices, and Offers Other External Factors Economic Conditions Reseller Needs Government Actions Social Concerns

11 Market and Demand Factors Affecting Pricing Decisions
Pricing in Different Types of Markets Pure Monopoly Single Seller Pure Competition Many Buyers and Sellers Who Have Little Effect on the Price Oligopolistic Competition Few Sellers Who Are Sensitive to Each Other’s Pricing/ Marketing Strategies Monopolistic Competition Many Buyers and Sellers Who Trade Over a Range of Prices

12 Demand Curves and Price Elasticity of Demand
A Demand Curve is a Curve that Shows the Number of Units the Market Will Buy in a Given Time Period at Different Prices that Might be Charged. Price Elasticity Refers to How Responsive Demand Will be to a Change in Price. Price Elasticity of Demand = % Change in Quantity Demanded % Change in Price

13 Price Elasticity of Demand
A. Inelastic Demand - Demand Hardly Changes With a Small Change in Price. Price P2 P1 Q2 Q1 Quantity Demanded per Period B. Elastic Demand - Demand Changes Greatly With a Small Change in Price. Price P’2 P’1 Q2 Q1 Quantity Demanded per Period

14 Cost-Based Pricing Certainty About Costs Factors Situational Unexpected Attitudes of Others Ethical Ignores Current Demand & Competition Cost-Plus Pricing is an Approach That Adds a Standard Markup to the Cost of the Product. Simplest Pricing Method Pricing is Simplified Price Competition Is Minimized Much Fairer to Buyers & Sellers

15 Break-even Chart for Determining Target Price
Total revenue Target profit $2 million 12 Total cost 10 8 Dollars (millions) Fixed cost 6 4 2 200 400 600 800 1,000 Sales volume in units (thousands) 4

16 Cost-Based Versus Value-Based Pricing (Fig. 10.7)
Product Cost Price Value Customers Customer Cost-Based Pricing Value-Based Pricing

17 Competition-Based Pricing
Setting Prices Competition-Based Pricing Going-Rate Company Sets Prices Based on What Competitors Are Charging. Sealed-Bid Company Sets Prices Based on What They Think Competitors Will Charge. ? ?

18 Pricing Products: Pricing Considerations and Strategies
Chapter 11 Pricing Products: Pricing Considerations and Strategies

19 Steps in Price Planning
1. Develop Pricing Objectives 2. Estimate Demand 3. Determine Costs 4. Evaluate the Pricing Environment 5. Choose a Pricing Strategy 6. Develop Pricing Tactics

20 New Product Pricing Strategies
This CTR relates to the material on pp New Product Pricing Strategies Market Skimming Market Penetration Pricing Innovative Products Market Skimming Pricing. Market skimming pricing is the strategy of setting high initial prices to skim maximum profits from each successive layer of the target market. Setting a High Price for a New Product to Maximize Revenues from the Target Market. Results in Fewer, More Profitable Sales. Setting a Low Price for a New Product in Order to Attract a Large Number of Buyers. Results in a Larger Market Share. Skimming strategies typically set a price as high as some segments will bear. Once all customers within this segment have purchased, prices are lowered only so far as the next segment needs to be persuaded to buy. Skimming usually works well only when: Product Distinctiveness. Product quality, image, and innovation are sufficiently distinct to support a high price. Costs of Small Production Runs. The costs of producing small volume are not prohibitive. Barriers to Entry. Competitors should not be able to enter the market easily and undercut the high price. Market Penetration Pricing. Some innovations are priced low upon introduction in order to capture large market share quickly thus penetrating the market. High volume results in lower costs, which helps keep prices low. Several conditions favor penetration pricing: Price Sensitive Markets. Highly price-sensitive markets with very large volume potential so that low price produces more market growth are needed. Falling Costs. Production and distribution costs must fall as sales volume increases. Barriers to Entry. Here the low costs must generate a sustainable advantage that cannot easily be duplicated by competitors. Discussion Note: Penetration pricing may also accelerate overall market adoption rates thus supporting low price continuance that may discourage competitors from entering the market.

21 New Product Pricing Strategies
Market Skimming Setting a High Price for a New Product to “Skim” Maximum Revenues from the Target Market. Results in Fewer, But More Profitable Sales. Use Under These Conditions: Product’s Quality and Image Must Support Its Higher Price. Costs Can’t be so High that They Cancel the Advantage of Charging More. Competitors Shouldn’t be Able to Enter Market Easily and Undercut the High Price.

22 New Product Pricing Strategies
Use Under These Conditions: Market Must be Highly Price-Sensitive so a Low Price Produces More Market Growth. Production/ Distribution Costs Must Fall as Sales Volume Increases. Must Keep Out Competition & Maintain Its Low Price Position or Benefits May Only be Temporary. Market Penetration Setting a Low Price for a New Product in Order to “Penetrate” the Market Quickly and Deeply. Attract a Large Number of Buyers and Win a Larger Market Share.

23 Product Mix Pricing Strategies
This CTR corresponds to Table 11-1 on p. 331 and the relates to the material on pp Product Line Pricing Setting Price Steps Between Product Line Items i.e. $299, $399 Optional-Product Pricing Pricing Optional or Accessory Products Sold With The Main Product i.e. Car Options Captive-Product Pricing Pricing Products That Must Be Used With The Main Product i.e. Razor Blades, Film, Software By-Product Pricing Pricing Low-Value By-Products To Get Rid of Them i.e. Lumber Mills, Zoos Product-Bundle Pricing Pricing Bundles Of Products Sold Together i.e. Season Tickets, Computer Makers Product Mix Pricing Strategies Product-Mix Pricing Strategies Product Line Pricing. Companies usually develop product lines rather than single products. In product line pricing, management must decide on the price steps to set between each product in the line. Companies often use price points to target distinctive combinations of product features and value represented by a particular price. Optional-Product Pricing. Under this strategy, the company offers a base product and prices differently for each combination of additional features or options added to the base product as desired by the customer. Automobile pricing is famous -- or infamous -- for this practice. But many manufacturers use optional-product pricing, such as personal computer makers. Captive-Product Pricing. Under this strategy, producers price products that must be used with a main product. The text describes razor blades as an example. The razor is priced low while high markups are attached to the price of the blades. Discussion Note: Students should distinguish captive pricing from optional pricing on the basis of need versus convenience. When Apple Computer prices its keyboards separately from its computers, it is practicing captive-product pricing. When it offers additional RAM beyond the included board memory, it is practicing optional-product pricing. By-Product Pricing. Waste from production and distribution may be marketable as by-products. Selling by-products allows producers to lower prices and costs on their main products. Otherwise, the prices of main products must cover the disposable or storage of by- products. Product-Bundle Pricing. This strategy combines several products and offers them at a reduced price from the cost of each product purchased separately. Season tickets and group rates are examples.

24 Price-Adjustment Strategies
Price Adjustment Strategies I This CTR corresponds to Table 11-2 on p. 334 and relates to the material on pp Price-Adjustment Strategies Discount & Allowance Reducing Prices to Reward Customer Responses such as Paying Early or Promoting the Product. Segmented Adjusting Prices to Allow for Differences in Customers, Products, or Locations. Price Adjustment Strategies Companies typically adjust their prices to account for various customer differences and changing situations: Cash Discount Customer Discount and Allowance Pricing. Several forms of discount and allowance pricing are used by marketers: Cash Discounts. These are price reductions to buyers who pay bills promptly. Quantity Discounts. These refer to price reductions per unit on large volumes. Functional Discounts. These are granted to channel members who perform various marketing functions. Seasonal Discounts. These are granted to buyers who purchase merchandise out of season. Allowances. These are discounts such as trade-ins for turning in old items on new purchases or promotional allowances for participating in seller sponsored advertising can also lower buyer prices. Segmented Pricing. Segmented pricing refers to pricing differences not based on costs and takes several forms: Customer-segment pricing. These target a specific segment, as in senior citizen discounts. Product-form pricing. This varies costs on versions of a product by features but not production costs. Location pricing. This stems from preferences where different locations have different perceived values, such as seating in a theater. Time pricing. This refers to price breaks given at times of lower demand. Quantity Discount Product Form Functional Discount Location Seasonal Discount Time Trade-In Allowance

25 Price-Adjustment Strategies
Adjustment Strategies - II This CTR corresponds to Table 11-2 on p. 334 and relates to the discussion on pp Psychological Pricing Promotional Pricing Adjusting Prices for Psychological Effect. Price Used as a Quality Indicator. Geographical Pricing Temporarily Reducing Prices to Increase Short-Run Sales. i.e. Loss Leaders, Special-Events Psychological Pricing. A key component in psychological pricing is the reference price consumers carry in their mind when considering sellers prices. Promotional Pricing. Promotional prices are temporary reductions below list and sometimes below costs, used to attract customers: Loss leaders. These may be offered below costs to attract attention to an entire line. Special event. This type of pricing may be used during slow seasons. Cash rebates or low financing. These “extras” may bring in customers “on the brink” and help them to decide to finally purchase. Geographical Pricing. Several forms of geographical pricing are common: FOB-Origin. Free On Board has customer pay freight. Uniform Delivered. Here the company charges the same price to all. Zone. Zone uses different areas pay different prices on freight but all customers within the same area pay the same freight charges. Basing-Point. Under this system, all customers charged freight from a specified billing location. Freight-Absorption. Here the seller pays all or part of the shipping costs to get the desired business. International Pricing. Firms may charge the same price throughout the world, especially for high-ticket, high-tech products like jetliners. Or it may offer different prices based upon differing taxes, tariffs, distribution, and promotion costs. International Pricing Adjusting Prices to Account for the Geographic Location of Customers. i.e. FOB-Origin, Uniform-Delivered, Zone Pricing, Basing-Point, & Freight-Absorption. Adjusting Prices for International Markets. Price Depends on Costs, Consumers, Economic Conditions & Other Factors.

26 Reactions to Price Changes
Being Replaced by Newer Models Price Cuts Are Seen by Buyers As: Number of Firms is Small Product is Uniform Buyers are Well Informed Competitors Reactions When: Current Models Are Not Selling Well Company is in Financial Trouble Quality Has Been Reduced Price Comes Down Further

27 Price-Adjustment Strategies
Has Competitor Cut Price? Price-Adjustment Strategies Hold Current Price; Continue to Monitor Competitor’s Price. No Will Lower Price Negatively Affect Our Market Share & Profits? Reduce Price No Can/ Should Effective Action be Taken? Raise Perceived Quality Improve Quality & Increase Price No Launch Low-Price “Fighting Brand” Yes

28 Public Policy Issues in Pricing
Pricing Within Channel Levels Price Fixing Predatory Pricing Both Are Prohibited by Law

29 Pricing Across Channel Levels
Price Discrimination Ensure Sellers Offers the Same Price Terms to a Given Level Of Trade Resale Price Maintenance Manufacturer Can’t Require Dealers to Charge a Specified Retail Price for Its Product Deceptive Pricing Occurs When a Seller States Prices or Prices Savings that Available To Consumers

30 Pricing and the Internet
The Web enables you to compare prices quickly. Some Web sites do bidding and price comparison for you.

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