McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved The Meaning of Price n Price >What’s charged for something--the cost. >The cost may be monetary or non-monetary. »e.g., opportunity cost, inconvenience, discomfort n Other names for price: >Tuition, interest, rent, fare, fee, toll, retainer, salary, wage, commission, dues, payment, barter, contribution, donation, tithe, blackmail, ransom, and bribery. n Meaningful prices >A price is meaningful only when enough customers pay it. n Value >Value is the ratio of perceived benefits of the product to its price and other incurred costs.

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved The Price/Value Relationship n Consumers and businesses evaluate monetary and non-monetary attributes of competing products looking for value. n Monetary attributes >Discounts and allowances >Payment terms n Non-monetary attributes >Brand image, quality, and style >Guarantees and service >Associated stuff (gifts, contests, upgrades, clubs)

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved SELECT PRICING OBJECTIVE Profit, Sales/Market Share, Status Quo SELECT METHOD OF DETERMINING THE BASE PRICE: Cost-plus pricing Balancing supply and demand Price set in relation to competition DESIGN APPROPRIATE STRATEGIES: Price vs. nonprice competition Skimming vs. penetration Discounts and allowances Geographic terms/ freight payments One price vs. flexible price Psychological pricing Leader pricing Everyday low vs. high-low pricing Resale price maintenance

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved Factors Influencing Price n Other Marketing Mix components >Product advantages and disadvantages >Distribution channels (Where it’s sold.) >Promotion (How much advertising, publicity, sales promotions, etc.) n Competition: >directly similar products >available substitutes >unrelated products seeking the same consumer dollar n Expected demand: >The Expected Price Range is the range of prices customers would be willing to pay for a product in a particular product class. >Estimates sales potential/volume at different prices. >Inverse demand: A price increase causes increased sales. Or a price decrease causes decreased sales.

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved Price Normal deman d curve Inverse curve Fig Inverse Demand Quantity Sold

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved Price versus Nonprice Competition Strategies n In price competition... >sellers regularly offer products priced as low as possible, accompanied by a minimum of service. >sellers attempts to move up or down their individual demand curves by changing prices. n In nonprice competition... >a seller maintains stable/status quo prices, and attempts to improve their market positions by emphasizing other competitive advantages. >sellers attempt to shift their demand curves to the right using other marketing techniques and strategies.

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved $ Price per pair Thousands of pairs of skis DD’ Y X Z D Fig Shift in Demand Curve for Skis

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved Market-Entry Pricing Strategies n Market-Skimming >Start with high price. Then gradually reduce. >Product has desirable distinctive features >Demand is fairly inelastic >Product is protected from competition n Market-Penetration >Start with lowest price to capture total market. >A large mass market exists for the product >Demand is highly elastic >Economies of scale are possible >Fierce competition exists or can be expected soon

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved Price Setting Techniques n Pricing in relation to competition n Balancing supply and demand n Cost-plus

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved Pricing in Relation to Competition n Prices below competition -- the low end of the expected price range. >Discount Retailers -- Wal-Mart, Target >Risks »Product or store may be viewed as an undifferentiated commodity »Can prices never be raised again? n Prices above competition -- the high end of the expected price range. >Upscale retailers >Product must be distinctive >Seller has prestige >Location may also allow this strategy n Adjusting to competition >Being proactive versus reactive

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved $ Price per pair Thousands of pairs of skis DD’ Y X Z D Balancing Supply and Demand S

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved Cost-Plus Pricing n Cost-plus pricing is setting the price of a product equal to the cost/unit plus a mark-up. n Mark-up is an amount to cover fixed costs/overhead plus profit. >It is also called “per unit contribution to overhead” and “gross margin.” >It may be expressed in dollars ($5/unit) or as a percent (34%). Price $15 Cost 10 Mark-up $ 5

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved Pricing by Middlemen n Example Fast Food Restaurant Profit Structure >Price$2.70 (100%) >Cost.90 (33.3%) >Mark-up$1.80 (66.7%) n Different types of retailers require different percentage markups because of the nature of the products handled and the services offered: >Low-turnover products (jewelry) need much larger markups than high-turnover products (groceries). >Retailers that offer many services require larger markups than those that offer few.

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved Fig Examples of Markup Pricing Cost and profit = 100% = $72 MANUFACTURER Manu- facturer’s selling price = 100% = $72 Cost = 80% = $72 WHOLESALER Whole- saler’s selling price = 100% = $90 Markup = 20% = $18 RETAILER Re- tailer’s selling price = 100% = $150 Cost = 60% = $90 Cost to consumer = $150 CONSUMER Markup = 40% = $60

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved Break-Even Analysis n Break-even point: That quantity of output at which total revenue equals total cost, assuming a certain selling price. n Mark-up = Unit contribution to fixed costs/overhead = Selling price - Variable cost n Definitions: >Variable costs vary with the level of production. >Fixed costs/overhead remain constant regardless of the level of production. n Breakeven Formulas: >B.E. in units = Total fixed costs/overhead Selling price - Variable cost >B.E. in $=B.E. in units x Selling price

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved Assume a store sells bubble gum machines for $100 that cost $75 to make. Monthly overhead is $1000.

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved Pricing in Disinflationary Times Disinflation means very low levels of inflation. Thus, you can’t raise prices. Dealing with disinflation Reverse Pricing First, determine a target price for the product. Then decide the desired profit margin. Lastly, figure out how to reduce costs. Better manufacturing techniques, fewer/more empowered workers, just-in-time inventory, new supply channels, pressuring suppliers. Value Pricing Increase price but increase benefits even more, or Reduce price, but less than any reduction in benefits.