4.4 Price Chapter 27

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-In Pieces 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 Costs of production Competitive conditions in the market Competitors’ prices Marketing objectives Price elasticity of demand What? (Measures the responsiveness of demand following a change in price.) 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 Pricing Adding 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 = $20 Selling 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. 5000 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 (Cost-Based Continued…) Marginal-Cost Pricing Basing the price on the extra cost of making one additional unit. This pricing scheme could gain market share and increase sales. Assume that the total cost of producing 10,000 units is $50,000. If you produce a total of 10,001 units the total cost is $50,002. That would mean the marginal cost—the cost of producing the next unit—was $2. HL

Pricing Strategies (Cost-Based Continued…) Contribution-Cost Pricing Basing the price on the variable cost of the product plus extra to contribute towards covering fixed costs and profit. If enough units are sold, fixed costs are covered and a profit will be made. Assume that the variable costs per unit is $2. The sales price is set at $3. $1 can be contributed to cover fixed costs. If fixed costs are $1000, 1000 units will need to be sold before a profit is made. HL

Pricing Strategies Competition-based pricing The company will base its price upon the price set by its competitors. Price Leadership One 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 Pricing The 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 (Competition-Based Continued) Predatory pricing Deliberately charging less than competitors in order to force them out of the market. This practice is illegal in the European Union. It is difficult to prove. HL

Pricing Strategies Market-Based Pricing Pricing set based upon the marketing objectives of the company. Penetration Pricing Setting a low price supported by strong 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 Skimming A 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

Pricing Strategies (Market-Based Continued) Price Discrimination Charging different groups of consumers different prices for the same goods or services. Examples: Airline tickets, bus fare, train tickets, movie theatre tickets, restaurant meals, grocery discounts. Senior citizen discounts, children’s prices vs adult prices HL

Pricing Strategies (Market-Based Continued) Loss Leader Product sold at a very low price to encourage consumers to buy other products. Commonly done in the grocery industry. Example: Milk, bread, soda, or chips are sold at a very low price – perhaps at a loss – to entice buyers into the store. Selling computer printers below cost or giving them away for free so expensive ink cartridges can be sold. HL

Pricing Strategies (Market-Based Continued) Psychological Pricing Setting prices to advantage of a customer’s perception of value of the product. Common for prices to be set below the key price to make the product appear cheaper than it is: $999 instead of $1001; $1.99 instead of $2.01 Prices are set to coincide with market perception of the product even if the product has a low production cost. Setting the price too low would create a perception of a cheap product. Setting the price too high could alienate buyers. HL

Pricing Strategies (Market-Based Continued) Promotional Pricing Special low prices used to gain market share or sell off excess stock – includes “buy one get one free” offers. Widely used pricing strategy to stimulate sales for limited periods of time usually during low product demand periods or to promote the opening of a new store. HL

Elasticity The quantity demanded for products as the price for them rises or falls. Goods that are “needs” (milk, bread, gas) are considered “inelastic”. The demand is steady regardless of price. Goods that are “wants” (steak, expensive cars, jewelry) are considered “elastic”. The demand for them decreases as their price increases. HL

Price Elasticity of Demand (PED) The quantity demanded for most products increases as the price of the product falls. Lower demand as price increases High demand for inexpensive products Demand Price Demand Price HL

Income Elasticity of Demand (YED) The quantity demanded for products as income rises or falls. Low demand for expensive products when income is low High demand for inexpensive products when income is low Demand Price Demand Price HL

Income Elasticity of Demand (YED) - Reverse when income is HIGH The quantity demanded for products as income rises or falls. High demand for expensive products when income is high Low demand for inexpensive products when income is high Demand Price Demand Price HL

Cross Elasticity of Demand (XED) The quantity demanded for a product following the price of change of ANOTHER product. Your competitor lowers the price of his product is likely to cause a reduction in price in your product – positive elasticity HL

Advertising Elasticity (AED) The quantity demanded for a product following advertising spending. Typically elasticity is high when advertising consumer goods….the more advertising $$ spent, the more products sold…..the fewer advertising $$ spent, the fewer products sold. Not true when: Competitors are spending more advert $$ than you. The campaign is expensive but poorly received by customers. Other elements of the marketing mix are in conflict. Industrial products are less responsive to advert $$. HL