1. Pricing Decisions

2. Learning Objectives
After studying this chapter, you should be able to:
Identify and define the internal factors affecting a firm’s pricing decisions
Identify and define the external factors affecting pricing decisions, including the impact of consumer perceptions of price and value
Contrast the two general approaches to setting prices
Discuss how companies use pricing strategies for different customers and situations

3. What is a Price?
Price: the amount of money charged for a product or service, or the sum of values exchanged for the benefits of having or using the product or service
Fixed pricing
Dynamic pricing
Only marketing mix element that produces revenue

4. Factors Affecting Pricing Decisions
Marketing objectives:
Survival
Current profit maximization
Market share leadership
Product quality leadership
Marketing mix strategy:
Price should be consistent with other mix elements
Target costing
Non-price positions

5. External Factors Affecting Pricing Decisions
Types of markets:
Pure competition
Monopolistic competition
Oligopolistic competition
Pure monopoly
Competition:
Consumers will compare
High margins attract competition
Benchmarking costs

6. Types of Costs Fixed costs: costs that do not vary with production
Variable costs: costs that vary directly with the level of production
Total costs: sum of fixed and variable costs

7. Cost Per Unit/Accumulated Production
Experience (learning) curve: the drop in the average per-unit production cost that comes with accumulated production experience

8. How to set price?

9. General Pricing Approaches
Cost-based pricing:
Adding a standard markup to the cost of the product; using formula:
Average unit cost = variable cost + (fixed cost / unit sales)
Markup price = Unit cost / (1 - desired return on sales)
Example:
$10 + ($300,000/50,000) = $16
Selling price based on 20%: $16/( ) = $20
Double-check: $4 profit/selling price = 20% profit margin

10. Break-even Pricing
Break-even (target profit) pricing: setting price to break even (or make a target profit) on the costs of making and marketing a product
Break-even = fixed cost / (price - variable cost)
Example (a):
B/E = $300,000/($20 - $10)
B/E = 30,000 units
Example (b):
B/E = ($300,000 + $75,000 profit)/($20 - $10)
B/E = 37,500 units

11. Cost Versus Value Pricing
Value-based pricing: setting price based on buyers’ perceptions of value rather than on the seller’s cost
Everyday low pricing (EDLP): charging a constant low price with few discounts or promotional sales; used successfully by Wal-Mart, suits busy consumers, encourages impulse buying due to trust

12. Pricing Strategies New product pricing strategies
Product Mix pricing strategies
Price adjustment strategies

13. New-Product Pricing Strategies
Market skimming pricing: setting a high price to skim maximum revenues layer by layer from the segments willing to pay the high price
Market penetration pricing: setting a low price for a new product to attract a large number of buyers and achieve a large market share
Figure 7.7

14. Product mix Pricing Strategies
Product line pricing
Optional- product pricing
Captive- product pricing
By-product pricing
Product bundle pricing

15. Product Mix Pricing Strategies
Product line pricing takes into account the cost differences between products in the line, customer evaluation of their features, and competitors’ prices Optional product pricing takes into account optional or accessory products along with the main product

16. Product Mix Pricing Strategies
Captive-product pricing involves products that must be used along with the main product
Two-part pricing involves breaking the price into:
Fixed fee
Variable usage fee

17. Product mix Pricing Strategies
By-product pricing refers to products with little or no value produced as a result of the main product. Producers will seek little or no profit other than the cost to cover storage and delivery.
Product bundle pricing combines several products at a reduced price

18. Price Adjustment Strategies
Discount and
Allowance pricing
Reducing prices to reward customer
responses such as paying early
Segmented
pricing
Adjusting prices to allow for differences
in customers, products, or locations
Psychological
pricing
Adjusting prices for
psychological effect
Promotional
pricing
Temporarily reducing prices
to increase short-run sales
Geographical
pricing
Adjusting prices to account for
geographic location of customers
International
pricing
Adjusting prices for
international markets
Table 12.2

19. Price-Adjustment Strategies
Promotional pricing is when prices are temporarily priced below list price or cost to increase demand
Examples:
Special event pricing
Cash rebates
Low-interest financing
Longer warrantees
Free maintenance

20. Price-Adjustment Strategies
Geographic Strategies
FOB (free on board) pricing means that the goods are delivered to the carrier and the title and responsibility passes to the customer
Uniformed delivery pricing means the company charges the same price plus freight to all customers, regardless of location
Zone pricing means that the company sets up two or more zones where customers within a given zone pay a single total price

21. Price-Adjustment Strategies
Geographic Strategies
Basing point pricing means that a seller selects a given city as a “basing point” and charges all customers the freight cost associated from that city to the customer location, regardless of the city from which the goods are actually shipped
Freight absorption pricing means the seller absorbs all or part of the actual freight charge as an incentive to attract business in competitive markets

22. Price-Adjustment Strategies
International pricing is when prices are set in a specific country based on country-specific factors
Economic conditions
Competitive conditions
Laws and regulations
Infrastructure
Company marketing objective