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

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.

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

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.

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.

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

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

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

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.

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

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

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

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

Major Considerations in Setting Price (Fig. 10.5)

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

Breakeven Analysis or Target Profit Pricing Tries to Determine the Price at Which a Firm Will Break Even or Make a Certain Target Profit. 2 4 6 8 10 12 200 400 600 800 1,000 Total Revenue Target Profit ($2 million) Cost in Dollars (millions) Total Cost Fixed Cost Sales Volume in Units (thousands)

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

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?

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. ? ?

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.