©2003 Prentice Hall, IncMarketing: Real People, Real Choices 3rd edition 12-0 Chapter 12 Pricing the Product

©2003 Prentice Hall, IncMarketing: Real People, Real Choices 3rd edition 12-1 Chapter Objectives  Explain the importance of pricing and understand how prices can take both monetary and non-monetary forms  Understand the pricing objectives that marketers typically have in planning pricing strategies  Explain how customer demand influences pricing decisions

©2003 Prentice Hall, IncMarketing: Real People, Real Choices 3rd edition 12-2 Chapter Objectives_2  Describe how marketers use costs, demands, and revenue to make pricing decisions  Understand some of the environmental factors that affect pricing strategies

©2003 Prentice Hall, IncMarketing: Real People, Real Choices 3rd edition 12-3 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 else that has value to the other party

©2003 Prentice Hall, IncMarketing: Real People, Real Choices 3rd edition 12-4 The Importance of Pricing Decisions  Price is the only P which represents revenue rather than an expense  Pricing and the Marketing Mix –Price and Place –Price and Product –Price and Promotion

©2003 Prentice Hall, IncMarketing: Real People, Real Choices 3rd edition 12-5 Pricing Objectives  Sales or market share objectives  Profit objectives  Competitive effect objectives  Customer satisfaction objectives  Image enhancement objectives

©2003 Prentice Hall, IncMarketing: Real People, Real Choices 3rd edition 12-6 Flexibility of Price Objectives  Pricing objectives and strategies may be tailored for –different areas –time periods –competitive conditions –market conditions

©2003 Prentice Hall, IncMarketing: Real People, Real Choices 3rd edition 12-7 Estimating Demand: How Demand Influences Pricing  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?

©2003 Prentice Hall, IncMarketing: Real People, Real Choices 3rd edition 12-8 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 represents the different prices a firm might charge  Horizontal axis shows the number of units

©2003 Prentice Hall, IncMarketing: Real People, Real Choices 3rd edition 12-9 Shifts in Demand  An upward shift in the demand curve means that at any given price, demand is greater than before the shift occurs

©2003 Prentice Hall, IncMarketing: Real People, Real Choices 3rd edition 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

©2003 Prentice Hall, IncMarketing: Real People, Real Choices 3rd edition 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

©2003 Prentice Hall, IncMarketing: Real People, Real Choices 3rd edition Influences on 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 –Change in income affects demand for a product even if its price remains the same normal goods, luxury goods, inferior goods

©2003 Prentice Hall, IncMarketing: Real People, Real Choices 3rd edition 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  Fixed costs - do not vary with the number of units produced. Costs remain the same regardless of amount produced

©2003 Prentice Hall, IncMarketing: Real People, Real Choices 3rd edition 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

©2003 Prentice Hall, IncMarketing: Real People, Real Choices 3rd edition Break-Even Analysis  Technique used to examine the relationship between cost and price and to determine what sales volume must be reached at a given price before the company will completely cover its total costs and past which it will begin making a profit  All costs are covered but there isn’t a penny left over

©2003 Prentice Hall, IncMarketing: Real People, Real Choices 3rd edition 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

©2003 Prentice Hall, IncMarketing: Real People, Real Choices 3rd edition Evaluating the Pricing Environment  The Economy –Trimming the Fat: Pricing in a Recession –Increasing Prices: Responding to Inflation  The Competition  Consumer Trends  International Environmental Influences