Presentation on theme: "Pricing Products: Pricing Considerations and Approaches"— Presentation transcript:
1 Pricing Products: Pricing Considerations and Approaches Chapter 10Pricing Products:Pricing Considerations and Approaches
2 PricePrice 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 Stageof the PLCDecisionMakerIndustryConditionsThreat of newentrantsMarket powerSubstitutesCapacityGovernmentSocial ConcernsMarketingObjectivesPsychologicalAspectsSurvivalST Profit MaxMarket ShareQuality LeadershipReference PricePrice/Perceived QualityPrice points
4 Internal Factors Affecting Pricing Decisions: Marketing Objectives SurvivalLow Prices to Cover Variable Costs andSome Fixed Costs to Stay in Business.Current Profit Maximization Choose the Price that Produces the Maximum Current Profit, Etc.MarketingObjectivesMarket Share LeadershipLow as Possible Prices to Becomethe Market Share Leader.Product Quality LeadershipHigh Prices to Cover HigherPerformance 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 BestValue in Terms of Benefits Received for the Price Paid.Product DesignNonpricePositionsPriceDistributionPromotion
7 Types of Cost Factors that Affect Pricing Decisions Fixed Costs(Overhead)Costs that don’tvary with sales orproduction levels.Executive Salaries, RentVariable CostsCosts that do varydirectly with thelevel of production.Raw materialsTotal CostsSum of the Fixed and Variable Costs for a GivenLevel of Production
8 Costs ConsiderationsCost Per Unit at Different Levels of Production Per Period12Cost per unit3SRAC4LRAC1,0002,0003,0004,000Quantity 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.
11 Market and Demand Factors Affecting Pricing Decisions Pricing in Different Types of MarketsPure MonopolySingle SellerPure CompetitionMany Buyers and SellersWho Have LittleEffect on the PriceOligopolisticCompetitionFew Sellers Who AreSensitive to Each Other’sPricing/ MarketingStrategiesMonopolisticCompetitionMany Buyers and SellersWho Trade Over aRange 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 Witha Small Change in Price.PriceP2P1Q2Q1Quantity Demanded per PeriodB. Elastic Demand -Demand Changes Greatly Witha Small Change in Price.PriceP’2P’1Q2Q1Quantity Demanded per Period
14 Cost-Based PricingCertainty About CostsFactorsSituationalUnexpectedAttitudesofOthersEthicalIgnores Current Demand & CompetitionCost-Plus Pricing is an Approach That Adds a Standard Markup to the Cost of the Product.Simplest Pricing MethodPricing is SimplifiedPrice Competition Is MinimizedMuch Fairer to Buyers & Sellers
15 Break-even Chart for Determining Target Price Total revenueTarget profit$2 million12Total cost108Dollars (millions)Fixed cost6422004006008001,000Sales volume in units (thousands)4
16 Cost-Based Versus Value-Based Pricing (Fig. 10.7) ProductCostPriceValueCustomersCustomerCost-Based PricingValue-Based Pricing
17 Competition-Based Pricing Setting PricesCompetition-Based PricingGoing-RateCompany Sets Prices Based on WhatCompetitors Are Charging.Sealed-BidCompany Sets Prices Based onWhat They Think CompetitorsWill Charge.??
18 Pricing Products: Pricing Considerations and Strategies Chapter 11Pricing Products:Pricing Considerations and Strategies
19 Steps in Price Planning 1. Develop Pricing Objectives2. Estimate Demand3. Determine Costs4. Evaluate the Pricing Environment5. Choose a Pricing Strategy6. Develop Pricing Tactics
20 New Product Pricing Strategies This CTR relates to the material on ppNew Product Pricing StrategiesMarket SkimmingMarket PenetrationPricing Innovative ProductsMarket 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 SkimmingSetting 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 PenetrationSetting 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 ppProduct Line PricingSetting Price Steps Between Product Line Itemsi.e. $299, $399Optional-Product PricingPricing Optional or Accessory ProductsSold With The Main Producti.e. Car OptionsCaptive-Product PricingPricing Products That Must Be UsedWith The Main Producti.e. Razor Blades, Film, SoftwareBy-Product PricingPricing Low-Value By-Products To Get Ridof Themi.e. Lumber Mills, ZoosProduct-Bundle PricingPricing Bundles Of Products Sold Togetheri.e. Season Tickets, Computer MakersProductMixPricingStrategiesProduct-Mix Pricing StrategiesProduct 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 IThis CTR corresponds to Table 11-2 on p. 334 and relates to the material on ppPrice-Adjustment StrategiesDiscount & AllowanceReducing Prices to RewardCustomer Responses such asPaying Early or Promotingthe Product.SegmentedAdjusting Prices to Allowfor Differences in Customers,Products, or Locations.Price Adjustment StrategiesCompanies typically adjust their prices to account for various customer differences and changing situations:Cash DiscountCustomerDiscount 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 DiscountProduct FormFunctional DiscountLocationSeasonal DiscountTimeTrade-In Allowance
25 Price-Adjustment Strategies Adjustment Strategies - IIThis CTR corresponds to Table 11-2 on p. 334 and relates to the discussion on ppPsychological PricingPromotional PricingAdjusting Prices for PsychologicalEffect.Price Used as a Quality Indicator.Geographical PricingTemporarily Reducing Prices toIncrease Short-Run Sales.i.e. Loss Leaders, Special-EventsPsychological 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 PricingAdjusting Prices to Account for theGeographic Location of Customers.i.e. FOB-Origin, Uniform-Delivered,Zone Pricing, Basing-Point, &Freight-Absorption.Adjusting Prices for InternationalMarkets.Price Depends on Costs, Consumers,Economic Conditions & Other Factors.
26 Reactions to Price Changes Being Replaced by Newer ModelsPrice Cuts Are Seen by Buyers As:Number of Firms is SmallProduct is UniformBuyers are Well InformedCompetitors Reactions When:Current Models Are Not Selling WellCompany is in Financial TroubleQuality Has Been ReducedPrice Comes Down Further
27 Price-Adjustment Strategies Has Competitor CutPrice?Price-Adjustment StrategiesHold Current Price;Continue to MonitorCompetitor’s Price.NoWill Lower PriceNegatively Affect OurMarket Share & Profits?Reduce PriceNoCan/ Should EffectiveAction be Taken?Raise PerceivedQualityImprove Quality& Increase PriceNoLaunch Low-Price“Fighting Brand”Yes
28 Public Policy Issues in Pricing Pricing Within Channel LevelsPriceFixingPredatoryPricingBoth Are Prohibited by Law
29 Pricing Across Channel Levels PriceDiscriminationEnsure SellersOffers theSame PriceTerms to aGiven LevelOf TradeResale PriceMaintenanceManufacturerCan’t RequireDealers toCharge aSpecified RetailPrice for ItsProductDeceptivePricingOccurs When aSeller StatesPrices or PricesSavings thatAvailableTo Consumers
30 Pricing and the Internet The Web enables you to compare prices quickly.Some Web sites do bidding and price comparison for you.