Pricing Concepts

Pricing Concepts Price is something of value that is exchanged for something else Barter is an exchange without money or currency

Pricing Concepts Consumers relate to price in terms of a Demand Schedule

Demand Schedule Pizzas Quantity Demanded 1 2 3 4 5 6 Price 20 18 16 14 12 10

____________________________ Demand Curve ____________________________ Price 16 Movement on the curve 10 ______________________________________ 6 Quantity Desired 3

Pricing Concepts Consumers relate to price in terms of a Demand Schedule An increase in price relates to a decreased quantity demanded

Pricing Concepts Organisations relate to price in much the same way as consumers. Orgs are more concerned with labour and component costs.

Pricing Concepts Pricing decisions require consideration of the marketing mix

Pricing Concepts Product Factors: 1. Attributes of the product yielding value e.g, accessories for autos 2. Value of the Brand name 3. The added value of Intangibles

Pricing Concepts Distribution Factors Price determination requires not only what the final buyer will pay but what margin the reseller will require to maintain an acceptable level of profit e.g., Manufacturers suggested retail price

Pricing Concepts Promotion Factors Promotion can reinforce in the buyers minds the value of certain product attributes

Pricing Concepts The Competitive Environment All pricing theory can become irrelevant if competition forces a firm out of the market with lower prices.

Pricing Concepts The Competitive Environment Price Competition used in circumstances where price is the primary variable considered when buying a product e.g, most newspaper ads are based on price competition only

Pricing Concepts The Competitive Environment Most Marketers would prefer to compete on non-price variables

Pricing Concepts The Competitive Environment 1. Price cuts can usually be matched by competitors e.g., Compass Airlines 2. Many firms try to compete on nonprice variables e.g., prestige, convenience and taste

Experience Curve Price A Total Cost/Unit Price B Cost Company A Cost Company B Cumulative Experience

Pricing Concepts 3. Non-price competition shifts the demand curve. The Competitive Environment 3. Non-price competition shifts the demand curve.

___________________________ Demand Curve ___________________________ Price 100 70 Product A _____________________________________ 20 22 10 15 Quantity Desired

Pricing Concepts The Legal Environment Horizontal Price fixing - a group of competing sellers establish a fixed price at which to sell their products

Pricing Concepts The Legal Environment Vertical Price fixing - when a retailer or wholesaler agrees with a manufacturer to resell a product at an agreed-on price

Horizontal vs. Vertical Marketing Producer 1 Producer 2 Producer 3 Transport 1 Transport 2 Transport 3 Horizontal Warehouse1 Warehouse2 Warehouse 3 Retail 1 Retail2 Retail 3 Vertical

Pricing Concepts The Legal Environment Price Discrimination - supplier sells at different prices to two identical firms

Pricing Concepts The Legal Environment Deceptive Pricing - e.g., Bait and Switch Predatory Pricing - different prices in different geographic areas

Pricing Concepts Establishing Pricing Objectives Profit Maximization Profit is Maximized when Marginal Cost = Marginal Revenue

Profit Maximization : Economics ___________________________ Price Marginal Cost Demand Marginal Revenue ___________________________________ Quantity

Pricing Concepts Establishing Pricing Objectives Profit Maximization Market Pricing Target Return Market-Based Objectives Market Share is related to profit through the experience effect, lower costs lead to higher profits

Pricing Concepts Establishing Pricing Policies Price policies are the guiding principles for price setting Price Lining - when a firm has multiple products in a product line and each product is given a different price e.g., Toyota autos

Pricing Concepts Establishing Pricing Policies Geographic Policies - FOB, Uniform delivered pricing and Zone pricing Discount policies - quantity discounts, cumulative quantity discounts, one-off discounts

Pricing Concepts Establishing Pricing Policies Functional Discounts - a price break given to one who performs certain marketing activities for other channel members Seasonal Discounts

Pricing Concepts Price Determination Prices are often based on where a firms wants to position its products with respect to competing products Options: Above MKT., Below MKT. or At Mkt.

Pricing Concepts Price Determination Above Market - product must be positioned above competitor based on tangibles or intangibles e.g., Rolex, Levis, Lancome

Pricing Concepts Price Determination Below Market - volume-based pricing, less profit per unit e.g., McDonalds, Bic, Sharp Calculators

Pricing Concepts Price Determination At Market - price at current market prices e.g., Japanese Department Stores Sogo and Seibu

Pricing Concepts New Product Price Determination Skimming - set a high introductory price and lower the price over the PLC

Skimming Graphic Price 1 Total Cost/Unit Price 2 Initial Profit Company a Profit t2 Cumulative Experience

Pricing Concepts New Product Price Determination Skimming Requirements: 1. Few or any close substitutes 2. Sufficient demand for product at high price

Pricing Concepts New Product Price Determination --Penetration Pricing - set price low at outset and use it as a wedge to enter the market

Penetration Strategy Experience Curve Total Cost/Unit Price Initial Cost Initial Profit Profit t2 Profit t3 Cost t2 Cost t3 Cumulative Experience

Pricing Concepts New Product Price Determination Penetration Pricing Requirements 1. Market Segments are Price elastic -- Price Elasticity - % change in quantity demanded/% change in price

_________________________ ___________________ Product A Demand Curve _________________________ Perfectly Inelastic ___________________ Product A Price __________________________ Perfectly Elastic Product B _______________________________________ Quantity Desired

Pricing Concepts New Product Price Determination Penetration Pricing Requirements 1. Market Segments are price elastic 2. Distribution and production costs decrease rapidly per unit output

Pricing Concepts New Product Price Determination Penetration Pricing Requirements 3. Develop high market share before competitors enter the market

Pricing Concepts New Product Price Determination Psychological Pricing - pertains to customers’ perception of price rather than actual price e.g., Prestige Pricing

Prestige Pricing: Prestige Products

Prestige Product Demand Curve ________________________ 40,000 Price 30,000 10,000 _____________________________________ 100 120 80 Quantity Desired