4.4 Price Chapter 27

Price Price is the amount paid by consumers for a product.

What else does PRICE say? Determines the degree of value added to bought-in components. Bought-InPieces purchased from other manufacturers to create a whole product. Influences the revenue and profit of a business due to impacting demand for a product. Reflects the marketing objectives of the business. Establishes the psychological image and identify of a product.

Factors in determining price 1. Costs of production 2. Competitive conditions in the market 3. Competitors prices 4. Marketing objectives 5. Price elasticity of demand What? (Measures the responsiveness of demand following a change in price.) 6. Whether it is a new or existing product

Pricing Strategies Cost-Based Pricing Firms determine the costs of producing and supplying a product and then ADD money on top of this calculated costs to determine the selling price. Cost-Plus PricingAdding a fixed mark-up for profit to the cost of the item. This method is popular with retailers. They take the cost of the item and add a mark up percentage to determine selling price. Cost of bought-in materials: $40 50% markup on cost = $20Selling price= $60

Pricing Strategies (Cost-Based Continued…) Full-Cost Pricing (or absorption-cost pricing) This pricing strategy is similar to cost-plus pricing. Used in manufacturing companies. The fixed and variable costs are allocated to manufactured products to determine cost, then a markup is added to determine selling price Training videos are produced $10,000 fixed costs $5 variable costs per video $10,000 + (5000 X $5) = $35,000 total cost of videos Average unit cost = $35,000 / 5000 = $7 cost per video A markup is added to the average video cost to determine selling price.

Pricing Strategies Competition-based pricing The company will base its price upon the price set by its competitors. Price LeadershipOne dominant firm in a market sets a price and the other firms simply charge a price based upon the price set by the market leader. This occurs in markets dominated by a few firms. Examples: Airlines, Gas stations, cell phone service

Pricing Strategies (Competition-Based Continued) Going-Rate PricingThe price charged is based upon a study of the conditions that prevail in a market and the prices charged by major competitors. This occurs in markets where pricing information is easily determined by customers and can be easily compared. Examples: Internet

Pricing Strategies Market-Based Pricing Pricing set based upon the marketing objectives of the company. Penetration PricingSetting a low price supported bystrong promotion in order to achieve high volume in sales. This occurs when firms are trying to obtain market share. If successful, the price can increase later. Examples: Snack foods

Pricing Strategies (Market-Based Continued) Market SkimmingA high price is charged for a new product that has little or no competition. This strategy is used to maximize short-term profits until competitors enter the market and to project an exclusive image. Examples: Pharmaceuticals, Technology products