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

2. 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. 3 Factors Affecting Price Decisions ( Fig. 10.1) Internal Factors Marketing Objectives Marketing Mix Strategy Costs Organizational considerations Internal Factors Marketing Objectives Marketing Mix Strategy Costs Organizational considerations External Factors Nature of the market and demand Competition Other environmental factors (economy, resellers, government) External Factors Nature of the market and demand Competition Other environmental factors (economy, resellers, government) Pricing Decisions Pricing Decisions

4. 4 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. 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. Internal Factors Affecting Pricing Decisions: Marketing Objectives

5. 5 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. 6 Price Product Design Distribution Promotion Nonprice Positions Internal Factors Affecting Pricing Decisions: Marketing Mix

7. 7 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 Fixed Costs (Overhead) Costs that don’t vary with sales or production levels. Executive Salaries, Rent

8. 8 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

9. 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. 10 Market and Demand Competitors’ Costs, Prices, and Offers Other External Factors Economic Conditions Reseller Needs Government Actions Social Concerns External Factors Affecting Pricing Decisions

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

12. 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. 13 Price Elasticity of Demand 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.

14. 14 Major Considerations in Setting Price (Fig. 10.5)

15. 15 Cost-Based Pricing Certainty About Costs Pricing is Simplified Price Competition Is Minimized Unexpected Situational Factors 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 Much Fairer to Buyers & Sellers

16. 16 Breakeven Analysis or Target Profit Pricing 2 4 6 8 10 12 2004006008001,000 Total Revenue Total Cost Fixed Cost Target Profit ($2 million) Sales Volume in Units (thousands) Cost in Dollars (millions) Tries to Determine the Price at Which a Firm Will Break Even or Make a Certain Target Profit.

17. 17 Product Cost Price Value Customers Customer Value Price Cost Product Cost-Based Pricing Value-Based Pricing Cost-Based Versus Value- Based Pricing (Fig. 10.7)

18. 18 Discussion Connections A few years ago, Buick pitched its top-of- the-line Park Avenue model as “America’s best car value.” Does this fit with your understanding of value? Pick two competing brands from a familiar product category (watches, perfume, etc) - one low priced and the other high priced. Which, if either, offers the greatest value? Does “value” mean the same thing as “low price”? How do these concepts differ?

19. 19 Setting Prices Sealed-Bid Company Sets Prices Based on What They Think Competitors Will Charge. Going-Rate Company Sets Prices Based on What Competitors Are Charging. ? ? Competition-Based Pricing

20. 20 Review of Concept Connections Identify and define the internal factors affecting a firm's pricing decisions. Identify and define the external factors affecting pricing. Contrast the three general approaches to setting prices.