Download presentation
Presentation is loading. Please wait.
Published byMarjorie Powell Modified over 8 years ago
1
PRICING
2
The Meaning of Price Price = 1.Value 2.Cost 3.Sacrifices 4.Utility 2
3
Some important pricing definitions Utility: The attribute that makes it capable of want satisfaction Value: The worth in terms of other products Price: The monetary medium of exchange. Value Example: Caterpillar Tractor is $100,000 vs. Market $90,000 $90,000 if equal 7,000 extra durable 6,000 reliability 5,000 service 2,000 warranty $110,000 in benefits - $10,000 discount!
4
The Customer Wants Value price is not always an important factor in influencing a sale; the customer wants more than a low price, may be willing to pay more the customer considers what he or she gets for the price paid; the seller must offer value price of a product or service communicates a message to the consumer about quality what causes them to conclude that they “paid too much” or “got a great deal”? 4
5
The Consumer’s View of Price some consumers are very interested in getting a low price and pay close attention to price; they are price sensitive. But, this is variable and personal many are interested in other elements of the purchase, including brand, quality, etc. there is a tendency to link quality with price consumers are often prepared to pay more if they expect to get added value adding value doesn’t mean dropping price 5
6
Factors Affecting Price 6 Price cost elasticit y Product characteri stic Marketing mix Competiti on Goal/ objective s
7
Setting Pricing Policy 1.Selecting the pricing objective 2. Determining demand 3. Estimating costs 4.Analyzing competitors’ costs, prices, and offers 5.Selecting a pricing method 6. Selecting final price
8
Setting Pricing Policy 1.Selecting the pricing objective Survival Maximum current profit Maximum market share Maximum market skimming Product-quality leadership
9
2. Determining demand
10
the cost of producing or offering the product or service must be considered in setting price while easy to calculate, cost-plus pricing is not usually practical and is not often used occasionally, a firm will sell below cost occasionally also, a firm will price so as to recover marginal (variable) costs only when would such approaches be used? 3. Estimating costs
11
Costs and Break-Even Analysis cost is viewed as a floor under a firm’s price many firms do not have particularly good cost data and may not know what it costs to produce a product or service the break-even point is where total revenue equals total costs; will be different for each price -- lets a firm see what it will need to sell break-even analysis is not a pricing strategy, but can offer useful information 11
12
Estimating Costs: Fixed costs - are those costs that do not vary with production or sales revenue. Variable costs - are those costs that vary directly with production. Total costs = Fixed Cost + Variable Cost (for a given level of production.) 12
13
Break-Even Analysis Assumptions: total fixed costs are constant variable costs remain constant per unit of output. B/E = Total Fixed Costs Price - Average Variable Costs 13
14
Figure 15-2 Break-Even Chart for Futon Factory 14
17
Pricing Strategy how does a company decide what price to charge for its products and services? what is “the price” anyway? doesn’t price vary across situations and over time? some firms have to decide what to charge different customers and in different situations they must decide whether discounts are to be offered, to whom, when, and for what reason 17
18
Penetration Pricing
19
Price set to ‘penetrate the market’ ‘Low’ price to secure high volumes Typical in mass market products – chocolate bars, food stuffs, household goods, etc. Suitable for products with long anticipated life cycles May be useful if launching into a new market
20
Market Skimming
21
High price, Low volumes Skim the profit from the market Suitable for products that have short life cycles or which will face competition at some point in the future (e.g. after a patent runs out) Examples include: Playstation, jewellery, digital technology, new DVDs, etc. Many are predicting a firesale in laptops as supply exceeds demand. Copyright: iStock.com
22
Value Pricing
23
Price set in accordance with customer perceptions about the value of the product/service Examples include status products/exclusive products Companies may be able to set prices according to perceived value. Copyright: iStock.com
24
Loss Leader
25
Goods/services deliberately sold below cost to encourage sales elsewhere Typical in supermarkets, e.g. at Christmas, selling bottles of gin at £3 in the hope that people will be attracted to the store and buy other things Purchases of other items more than covers ‘loss’ on item sold e.g. ‘Free’ mobile phone when taking on contract package
26
Psychological Pricing
27
Used to play on consumer perceptions Classic example - £9.99 instead of £10.99! Links with value pricing – high value goods priced according to what consumers THINK should be the price
28
Going Rate (Price Leadership)
29
In case of price leader, rivals have difficulty in competing on price – too high and they lose market share, too low and the price leader would match price and force smaller rival out of market May follow pricing leads of rivals especially where those rivals have a clear dominance of market share Where competition is limited, ‘going rate’ pricing may be applicable – banks, petrol, supermarkets, electrical goods – find very similar prices in all outlets
30
Tender Pricing
31
Many contracts awarded on a tender basis Firm (or firms) submit their price for carrying out the work Purchaser then chooses which represents best value Mostly done in secret
32
Price Discrimination
33
Charging a different price for the same good/service in different markets Requires each market to be impenetrable Requires different price elasticity of demand in each market Prices for rail travel differ for the same journey at different times of the day Copyright: iStock.com
34
Destroyer Pricing/Predatory Pricing
35
Destroyer/Predatory Pricing Deliberate price cutting or offer of ‘free gifts/products’ to force rivals (normally smaller and weaker) out of business or prevent new entrants Anti-competitive and illegal if it can be proved
36
Absorption/Full Cost Pricing
37
Full Cost Pricing – attempting to set price to cover both fixed and variable costs Absorption Cost Pricing – Price set to ‘absorb’ some of the fixed costs of production
38
Marginal Cost Pricing
39
Marginal cost – the cost of producing ONE extra or ONE fewer item of production MC pricing – allows flexibility Particularly relevant in transport where fixed costs may be relatively high Allows variable pricing structure – e.g. on a flight from London to New York – providing the cost of the extra passenger is covered, the price could be varied a good deal to attract customers and fill the aircraft
40
Marginal Cost Pricing Example: Aircraft flying from Bristol to Edinburgh – Total Cost (including normal profit) = £15,000 of which £13,000 is fixed cost* Number of seats = 160, average price = £93.75 MC of each passenger = 2000/160 = £12.50 If flight not full, better to offer passengers chance of flying at £12.50 and fill the seat than not fill it at all! *All figures are estimates only
41
Contribution Pricing
42
Contribution = Selling Price – Variable (direct costs) Prices set to ensure coverage of variable costs and a ‘contribution’ to the fixed costs Similar in principle to marginal cost pricing Break-even analysis might be useful in such circumstances
43
Target Pricing
44
Setting price to ‘target’ a specified profit level Estimates of the cost and potential revenue at different prices, and thus the break-even have to be made, to determine the mark-up Mark-up = Profit/Cost x 100
45
Cost-Plus Pricing
46
Calculation of the average cost (AC) plus a mark up AC = Total Cost/Output
47
Influence of Elasticity
48
Any pricing decision must be mindful of the impact of price elasticity The degree of price elasticity impacts on the level of sales and hence revenue Elasticity focuses on proportionate (percentage) changes PED = % Change in Quantity demanded/% Change in Price
49
Influence of Elasticity Price Inelastic: % change in Q < % change in P e.g. a 5% increase in price would be met by a fall in sales of something less than 5% Revenue would rise A 7% reduction in price would lead to a rise in sales of something less than 7% Revenue would fall
50
Influence of Elasticity Price Elastic: % change in quantity demanded > % change in price e.g. A 4% rise in price would lead to sales falling by something more than 4% Revenue would fall A 9% fall in price would lead to a rise in sales of something more than 9% Revenue would rise
Similar presentations
© 2024 SlidePlayer.com Inc.
All rights reserved.