CHAPTER 11 Pricing The Product M A R K E T I N G Real People, Real Choices CHAPTER 11 Pricing The Product

Chapter Objectives Explain the importance of pricing & understand how prices can take both monetary & non-monetary forms Understand the pricing objectives that marketers typically have in planning pricing strategies Describe how marketers use costs, demands, & revenue to make pricing decisions Understand some of the environmental factors that affect pricing strategies

Chapter Objectives Understand key pricing strategies Explain pricing tactics for single & multiple products & for pricing on the Internet Understand the opportunities for pricing strategies Describe the psychological, legal, & ethical aspects of pricing

Yes, But What Does It Cost? Price is the value that customers give up or exchange to obtain a desired product Payment may be in the form of money, goods, services, favors, votes, or anything that has value to the other party

Opportunity Costs The value of something that is given up to obtain something else also affects the “price” of a decision Example: the cost of going to college is charged in tuition and fees but also includes the opportunity cost of what a student cannot earn by working instead

The Importance of Pricing Decisions Price is the only component of the marketing mix that represents revenue rather than an expense Products are becoming more like commodities, making price especially important

Steps in Price Planning Develop pricing objectives Estimate demand Determine costs Evaluate the pricing environment Choose a pricing strategy Develop pricing tactics

Types of Pricing Objectives Sales or market share objectives Profit objectives Competitive effect objectives Customer satisfaction objectives Image enhancement objectives

Estimating Demand Demand refers to customers’ desire for products How much of a product do consumers want? How will this change as the price goes up or down?

Demand Curves Shows the quantity of a product that customers will buy in a market during a period of time at various prices if all other factors remain the same Vertical axis: different prices a firm might charge Horizontal axis: number of units

Estimating Demand Identify demand for an entire product category in markets the company serves Predict what the company’s market share is likely to be

The Price Elasticity of Demand How sensitive are customers to changes in the price of a product? Price elasticity of demand is a measure of the sensitivity of customers to changes in price Price elasticity of demand = Percentage change in quantity demanded / Percentage change in price

Price Elasticity of Demand Availability of substitute goods or services If a product has a close substitute, its demand will be elastic Time period The longer the time period, the greater the likelihood that demand will be more elastic Income effect Changes in income affect demand for a product even if its price remains the same

Types of Costs_1 Variable costs – per-unit costs of production that will fluctuate, depending on how many units or individual products a firm produces Direct materials, direct labor, variable selling costs Fixed costs – do not vary with the number of units produced. Costs remain the same regardless of amount produced Advertising (budgeted ahead of time)

Types of Costs_2 Average fixed cost is the fixed cost per unit produced (total fixed costs / number of units produced) Total costs = variable costs plus fixed costs

Break-Even Analysis Used to examine the relationship between cost & price determine what sales volume must be reached at a given price before the company will cover its total costs & begin making a profit

Examines the relationship of marginal cost to marginal revenue Marginal Analysis Provides a way for marketers to look at cost and demand at the same time Examines the relationship of marginal cost to marginal revenue marginal cost is the increase in total costs from producing one additional unit of a product marginal revenue is the increase in total income or revenue that results from selling one additional unit of a product

Evaluating the Pricing Environment The Economy Trimming the Fat: Pricing in a Recession Increasing Prices: Responding to Inflation Competition Product life cycle

Cost-Plus Pricing (Mark-up) Most common cost-based approach Marketer figures all costs for the product & then adds desired profit per unit Straight markup pricing is the most frequently used type of cost-plus pricing price is calculated by adding a pre-determined percentage to the cost

Pricing Strategies Based on Cost Advantages Simple to calculate Relatively risk free Disadvantages Fail to consider several factors target market demand competition product life cycle product’s image Difficult to accurately estimate costs

Steps in Cost-Plus Pricing Estimate unit cost Calculate markup Markup on cost Markup on selling price – markup percentage is the seller’s gross margin Often determined by history of company an industry

Pricing Strategies Based on Demand Demand-based pricing means that the selling price is based on an estimate of volume or quantity that a firm can sell in different markets at different prices Target costing Use research to identify quality & features at ideal price point prior to production Real time pricing Yield management pricing Reverse auction

New Product Pricing Strategies Skimming price –high, premium price with the intention of reducing it in response to market pressures Penetration pricing – new product is introduced at a very low price to grab market share Trial pricing – product carries a low price for a limited time period

Discounting for Channel Members Trade or functional discounts Quantity discounts Cash discounts Seasonal discounts

Trade Discounts Pricing structure built around list price List price, also called suggested retail price, is the price the manufacturer sets as the appropriate price for the end consumer Manufacturers offer discounts because channel members perform selling, credit, storage, & transportation

Psychological Issues in Pricing Internal Reference Prices – consumers have a set price or price range in mind If the actual price is higher, consumers feel the product is overpriced If it is too low, consumers assume quality is inferior Competition as Reference Price – If the price is close, the assimilation effect encourages the customer to think the products are similar & choose the lower-priced product

Price-Quality Inferences If consumers are unable to judge the quality of a product through examination or prior experience, they usually assume that the higher-priced product is the higher-quality product

Psychological Pricing Strategies Odd-even pricing $3.99 Price lining Price points for different models with different features Use of signs as signals

Legal and Ethical Considerations Deceptive pricing practices Unfair sales act Price discrimination

Deceptive Pricing Practices Retailers must not claim prices are lower than competitors unless it is true A going out-of-business sale should be the last sale before going out of business Bait-and-switch – consumers are lured into store for a very low price, but then the item is not available A more expensive product is offered instead Trading up is acceptable

Unfair Sales Acts Laws or regulations prohibiting selling products below cost loss leader pricing many regulations even set a percentage markup below which the distributor may not sell the products

Regulated by Robinson-Patman Act Price Discrimination Means selling the same product to different wholesalers and retailers at different prices if practices lessen competition Regulated by Robinson-Patman Act only applies to resellers discounts are legal if based on established policy and offered to any customer who chooses to buy under those conditions Quantity or different features

Price Fixing Occurs when two or more companies conspire to keep prices at a certain level Horizontal price fixing occurs when competitors making the same product jointly determine what price they each will charge Vertical price fixing occurs when manufacturers attempt to force the retailer to charge the suggested retail price

Predatory Pricing Means that a company sets a very low price for the purpose of driving competitors out of business