PRICING PRODUCTS AND SERVICES CHAPTER PRICING PRODUCTS AND SERVICES

NATURE AND IMPORTANCE OF PRICE The Many Names of Price - ??? Hotel Doctor Insurance apartment What Is Price? To the seller... Price is revenue and profit source To the consumer... Price is what you give up to get what you want

THE PRICING EQUATION FOR CONSUMERS PRICE = LIST PRICE - INCENTIVES & ALLOWANCES + EXTRA FEES

Profit = Total revenue - Total cost or THE PROFIT EQUATION FOR SELLERS Profit = Total revenue - Total cost or Profit = (Unit price × Quantity sold) −Total cost

WAYS TO SELECT BASE PRICE LEVELS Demand oriented – focus on consumer preference Cost oriented – focus on business’s expenses Profit oriented – focus on profit Competition oriented – focus on the marketplace players

DEMAND ORIENTED APPROACHES Skimming Pricing – high initial price Penetration Pricing – low initial price Prestige Pricing – high price = quality and status Target Pricing-make product fit price market will pay Bundle Pricing- 2 products priced as one. helps poorer seller Yield Management Pricing – peak and non peak prices

PROFIT ORIENTED APPROACHES Target Profit Pricing-set annual dollar volume or profit If I need to make $5000, & I can make 5 units, selling price is $1000. Target Return-on-Sales Pricing- Want to receive 1% of sales as my profit – actors & directors Target Return-on-Investment Pricing – I can make 5 % on my money in the bank. Set price so I make 6% on my investment if I invest it in my business.

COST ORIENTED APPROACHES Standard Markup Pricing add the standard industry fixed % to my costs. Easy to implement. Cost-Plus Pricing add a standard dollar amount to my costs- like $5.00 for shipping and handling

COMPETITION ORIENTED APPROACHES Customary Pricing Adjust product to fit costs & maintain price 75¢ candy bar in a vending machine Above-, At-, or Below-Market Pricing Use largest competitor as a benchmark to set your price. Rolex watches (above) or Value City Furniture (below) Loss-Leader Pricing- Price below cost to lure buyers in Want buyer purchasing other things you sell at high mark ups Lots of choices, but when to use which one?

PRICING OBJECTIVES Profit-Oriented Pricing Objectives- Sales revenue Sales-Oriented Pricing Objectives- Status Quo Pricing Objectives- Survival, social responsibility Market share, unit volume

PRICING CONSTRAINTS Demand for the Product Class, Product, & Brand Newness of the Product: Stage in the Product Life Cycle Cost of Producing and Marketing the Product Competitors’ Prices

ESTIMATING DEMAND AND REVENUE Always use price first, but must adjust for: Consumer Tastes Price and Availability of Similar Products Consumer Income levels Changes in external environment

demand curve for Newsweek (initial conditions)

demand curve for Newsweek (shift in demand)

HOW MUCH MORE WILL THEY BUY WHEN I LOWER PRICE? Price Elasticity of Demand Inelastic Demand An increase or decrease in price will not significantly affect demand Elastic Demand Consumers buy more or less of a product when the price changes

FUNDAMENTAL REVENUE CONCEPT Total revenue is the total money received from the sale of a product Total Revenue = Price X Quantity But price set depends on costs, so how to value them?

FUNDAMENTAL COST CONCEPT Deviate with changes in level of output Total Costs Variable Costs Fixed Costs Do not deviate as level of output changes How do you know when you’re making money?

CALCULATING A BREAK EVEN POINT Copyright © 2007 by The McGraw - Hill Companies, Inc. All Rights Reserved. Slide 12 - 32

LEGAL AND ETHICAL CONSIDERATIONS Deceptive pricing- can’t bait and switch Issues That Limit Pricing Decisions Price Fixing-Manufacturer can’t agree with competitors or resellers to set price Price Discrimination-can’t set a different price for the same item for two different customers Predatory Pricing-can’t sell an item at a loss to bankrupt the competition

Step 1: Set an Approximate Price Level SETTING A FINAL PRICE Step 1: Set an Approximate Price Level pick a starting range using demand and break even analysis Step 2: Set the Specific List or Quoted Price One-Price Policy – Dollar Store or no haggling Flexible-Price Policy- different prices for different buyers and buying situations

Step 3: Make Special Adjustments to the List or Quoted Price SETTING A FINAL PRICE Step 3: Make Special Adjustments to the List or Quoted Price Discounts Quantity Discounts Seasonal Discounts Cash Discounts Trade Discounts to resellers

SETTING A FINAL PRICE Allowances Trade-In Allowances - like for cars Promotional Allowances – if you sell 12, 13th is free Everyday Low Pricing-reduce promotional allowances but also reduce price of item so reseller sells more

Geographical Adjustments SETTING A FINAL PRICE Geographical Adjustments FOB Origin Pricing – buyer pays shipping owns goods in transit Uniform Delivered Pricing – seller pays shipping and charges it to all buyers equally, but holds title during transit

Price (P) Price (P) is the money or other considerations (including other goods and services) exchanged for the ownership or use of a good or service.

Demand Curve A demand curve is a graph relating the quantity sold and price, which shows the maximum number of units that will be sold at a given price.

Total Cost (TC) Total cost (TC) is the total expense incurred by a firm in producing and marketing a product. Total cost (TC) equals the sum of fixed cost (FC) and variable cost (VC) or TC = FC + VC.

Fixed Cost (FC) Fixed cost (FC) is the sum of the expenses of the firm that are stable and do not change with the quantity of a product that is produced and sold.

Variable Cost (VC) Variable cost (VC) is the sum of the expenses of the firm that vary directly with the quantity of a product that is produced and sold.

Break-Even Analysis Break-even analysis is a technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output.

Pricing Objectives Pricing objectives involve specifying the role of price in an organization’s marketing and strategic plans.

Pricing Constraints Pricing constraints involve factors that limit the range of prices a firm may set.