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Pricing Concepts Setting the Right Price
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The Importance of Price
To the seller... Price is revenue and profit source What is Price? To the consumer... Price is the cost of something In the broadest sense, price allocates resources in a free-market economy
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The Importance of Price
Revenue = Unit Price * Number of units sold Revenue pays for every activity. What’s left over is Profit. Marketers must select a price that is not too high or not too low, a price that equals the perceived value to target consumers
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Demand and Supply Demand Supply
The quantity of a product that will be sold in the market at various prices for a specified period. Supply The quantity of a product that will be offered to the market by a supplier at various prices for a specific period.
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The Demand Curve D Price .50 1.00 1.50 2.00 2.50 20 40 60 80 100 120
20 40 60 80 100 120 Quantity demanded
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The Supply Curve Quantity supplied S Price .50 1.00 1.50 2.00 2.50 20
20 40 60 80 100 120
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Equilibrium Price Quantity demanded S Price .50 1.00 1.50 2.00 2.50 20
20 40 60 80 100 120 D Surplus Shortage Price Equilibrium
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Elasticity of Demand Elastic Demand Inelastic Demand
Consumers buy more or less of a product when the price changes Inelastic Demand An increase or decrease in price will not significantly affect demand Unitary Elasticity An increase in sales exactly offsets a decrease in prices, and revenue is unchanged
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Elasticity of Demand Price Goes... Revenue Goes... Demand is... Down
Up Elastic Inelastic Up or Down Stays the Same Unitary Elasticity
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Elasticity of Demand Completely Elastic Demand Inelastic Demand D D
Quantity Price D Quantity Price Completely Inelastic Demand
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Factors that Affect Elasticity
of Demand Availability of Substitutes Price relative to Purchasing Power Product Durability Product’s Other Uses
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The Cost Determinant of Price
Deviate with changes in level of output Types of Costs Variable Costs Fixed Costs Do not deviate as level of output changes
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The Cost Determinant of Price
Target-Return Pricing Break-Even Profit Maximization Pricing Keystoning Markup pricing Methods Used to Set Prices
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Markup Pricing Profit Maximization
The cost of buying the product from the producer plus amounts for profit and for expenses not otherwise accounted for. Keystoning The practice of marking up prices by 100%, or doubling the cost. Profit Maximization Profit Maximization A method of setting prices that occurs when marginal revenue equals marginal cost. Marginal Revenue The extra revenue associated with selling an extra unit of output, or the change in total revenue with a one-unit change in output.
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Break-Even Pricing Total Revenue Profit Total Costs Break-even point
Quantity Price 2,000 1,000 3,000 4,000 5,000 6,000 Fixed costs Loss Profit Total Revenue Total Costs Break-even point
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Fixed cost Contribution Price -- Avg. Variable Cost
Break-Even Pricing Break-Even Quantity = Total Fixed Costs Fixed cost Contribution Fixed cost Contribution = Price -- Avg. Variable Cost
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Other Determinants of Price
Perceived Quality Promotion Strategy Distribution Strategy Competition Stages of the Product Life Cycle Other Factors That Influence Price
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Stages in the Product Life Cycle
Introductory Stage Growth Decline $ High Stable Decrease Maturity Decrease Stable High
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Distribution Strategy
Offer a larger profit margin Convincing Distributors to Carry Product Give dealers a large trade allowance
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Regaining Price Control
DEVELOP BRAND LOYALTY Package marked with selling price Avoid business with price-cutting discounters Franchising Exclusive distribution system Methods Used to Regain Price Control
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The Impact of the Internet
Allows price and product comparisons Prices are coming down Data collection allows sellers to tailor products and prices Extranet A private electronic network that links a company with its suppliers and customers.
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Indicators of Quality Brand Name Price Appearance Retailer Reputation
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Steps in Setting the Right Price
Results lead to the right price Fine tune with pricing tactics Choose a price strategy Estimate demand, costs, and profits Establish pricing goals
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Pricing Objectives Profit-Oriented Pricing Objectives
Sales-Oriented Pricing Objectives Status Quo Pricing Objectives
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Choosing a Price Strategy
A basic, long-term pricing framework, which establishes the initial price for a product and the intended direction for price movements over the product life cycle. Choosing a Price Strategy Basic Strategies for Setting Prices Status Quo Pricing Price Skimming Penetration Pricing
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Legal Protection of Product Technological Breakthrough
Price Skimming Situations when Price Skimming is Successful Superior Product Legal Protection of Product Limited Production Technological Breakthrough Inelastic Demand
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Penetration Pricing Advantages Disadvantages
Discourages or blocks competition from market entry Disadvantages Requires gear up for mass production Selling large volumes at low prices Strategy to gain market share may fail
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Status Quo Pricing Advantages Simplicity
Safest route to long- term survival for small firms Disadvantages Strategy may ignore demand or cost
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Tactics for Fine-Tuning the Base Price
Pricing Tactics Special Pricing Tactics Discounts Geographic Pricing
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Tactics for Fine-Tuning the Base Price
Common Tactics for Fine-Tuning the Base Price Quantity Discounts Cash Discounts Functional Discounts Seasonal Discounts Promotional Allowances Rebates Value-Based Pricing
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Value-Based Pricing Trade Loading
The price is set at a level that seems to the customer to be a good price compared to the prices of other options. Trade Loading The practice of temporarily lowering the price to induce wholesalers and retailers to buy more goods than can be sold in a reasonable time.
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Geographic Pricing FOB Pricing Uniform Delivered Common Methods of
Basing-Point Pricing Freight Absorption Zone Pricing Uniform Delivered FOB Pricing Common Methods of Geographic
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Geographic Pricing FOB Origin Pricing Uniform Delivered Zone Pricing
The buyer absorbs the freight costs from the shipping point (“free on board”). Uniform Delivered The seller pays the freight charges and bills the purchaser an identical flat freight charge. Zone Pricing The U.S. is divided into zones and a flat freight rate is charged to customers in a given zone. Freight Absorption Pricing The seller pays for all or part of the freight charges and does not pass them on to the buyer. Basing-Point The seller designates a location as a basing point and charges all buyers the freight costs from that point.
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Special Pricing Tactics
Single-Price Tactic Flexible Pricing Professional Services Pricing Price Lining Leader Pricing Bait Pricing Odd-Even Pricing Price Bundling Two-Part Pricing All goods offered at the same price Different customers pay different price Used by professionals with experience, training or certification Several line items at specific price points Sell product at near or below cost Lure customers through false or misleading price advertising Odd-number prices imply bargain Even-number prices imply quality Combining two or more products in a single package Two separate charges to consume a single good
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