0. Pricing Considerations and Approaches

1. Definition
Price
The amount of money charged for a product or service, or the sum of the values that consumers exchange for the benefits of having or using the product or service.
Goal 1: Identify and define internal factors affecting pricing decisions

2. What is Price? Price Has Many Names Rent Fee Rate Commission
Assessment
Tuition
Fare
Toll
Premium
Retainer
Bribe
Salary
Wage
Interest
Tax
Goal 1: Identify and define internal factors affecting pricing decisions

3. What is Price? Dynamic Pricing on the Web allows SELLERS to:
Monitor customer behavior and tailor offers.
Change prices on the fly to adjust for changes in demand or costs.
Aid consumers with price comparisons.
Negotiate prices in online auctions and exchanges.
Goal 1: Identify and define internal factors affecting pricing decisions

4. What is Price? Price and the Marketing Mix: Common Pricing Mistakes
Only element to produce revenues
Most flexible element
Can be changed quickly
Common Pricing Mistakes
Reducing prices too quickly to get sales
Pricing based on costs, not customer value
Goal 1: Identify and define internal factors affecting pricing decisions

5. Factors to Consider When Setting Price
Market positioning influences pricing strategy
Other pricing objectives:
Survival
Current profit maximization
Market share leadership
Product quality leadership
Internal Factors
Marketing objectives
Marketing mix strategies
Costs
Organizational considerations
Goal 1: Identify and define internal factors affecting pricing decisions

6. Factors to Consider When Setting Price
Internal Factors
Pricing must be carefully coordinated with the other marketing mix elements
Target costing is often used to support product positioning strategies based on price
Nonprice positioning can also be used
Marketing objectives
Marketing mix strategies
Costs
Organizational considerations
Goal 1: Identify and define internal factors affecting pricing decisions

7. Factors to Consider When Setting Price
Internal Factors
Types of costs:
Variable
Fixed
Total costs
How costs vary at different production levels will influence price setting
Experience (learning) curve affects price
Marketing objectives
Marketing mix strategies
Costs
Organizational considerations
Goal 1: Identify and define internal factors affecting pricing decisions

8. Factors to Consider When Setting Price
Internal Factors
Who sets the price?
Small companies: CEO or top management
Large companies: Divisional or product line managers
Price negotiation is common in industrial settings where pricing departments may be created
Marketing objectives
Marketing mix strategies
Costs
Organizational considerations
Goal 1: Identify and define internal factors affecting pricing decisions

9. Factors to Consider When Setting Price
Types of markets
Pure competition
Monopolistic competition
Oligopolistic competition
Pure monopoly
Consumer perceptions of price and value
Price-demand relationship
Demand curve
Price elasticity of demand
External Factors
Nature of market and demand
Competitors’ costs, prices, and offers
Other environmental elements
Goal 2: Identify and define external factors affecting pricing decisions

10. The Market and Demand Factors that Affect Pricing Decisions
Pure Competition
Many Buyers and Sellers Who
Have Little Affect on the Price.
Monopolistic Competition
Many Buyers and Sellers Trading
Over a Range of Prices.
The Market and Demand Factors that Affect Pricing Decisions
Different Types of Markets
The Market and Demand
This CTR relates to the discussion on pp
The Market and Demand
Types of Markets. Each presents distinct pricing challenges:
Pure Competition - is characterized by many buyers and sellers to that no one agent affects pricing. Going rate pricing is the rule.
Monopolistic Competition - consists of many buyers and sellers trading over a range of prices. Products can be differentiated in quality, features, or styles.
Oligopolistic Competition - consists of few sellers each sensitive to the other's pricing and marketing strategies. Barriers to entry prohibit new sellers from entering the market.
Pure Monopoly. This market consists of a single seller. The seller may by a government, private regulated monopoly, or unregulated monopoly. Pricing may be linked to other than cost or profit factors, including fear of competition entering or regulation.
Consumer Perceptions of Price and Value. Buyers ultimately decide prices. Marketers must combine technical expertise with creative judgment and an awareness of buyers’ motivations.
Oligopolistic Competition
Few Sellers Each Sensitive to Other’s
Pricing/ Marketing Strategies
Pure Monopoly
Single Seller

11. Demand Curves Demand Curves Price Quantity Demanded per Period
This CTR corresponds to Figure 10-4 on p. 311 and relates to the discussion on pp
Price
Quantity Demanded per Period
A. Inelastic Demand -
Demand Hardly Changes With
a Small Change in Price. P2 P1 Q1 Q2
P’2
P’1
B. Elastic Demand -
Demand Changes Greatly With
Price Demand Relationship
A demand curve show the number of units the market will buy in a given time period at various prices. The price elasticity of demand illustrates how responsive demand will be to a change in price. Two concepts are important here:
Inelastic Demand. If demand hardly changes with a small change in price, demand is inelastic.
Elastic Demand. If a small change in prices changes demand greatly, demand is elastic.
Discussion Note: The ethical issues involved in pricing products characterized by inelastic demand are often complicated and controversial. For example, many new drugs are extremely expensive to develop and market but may be the only treatment available for an illness. In other cases, relatively cheap drugs are sold for high prices under the same “must have” conditions.
Also, the concept of induced demand, which characterizes both the medical and legal professions is a controversial issue. Induced demand refers to the fact that in these industries, the provider also determines the level of demand or product to be used. In both cases, those providers also set the price of their services. To make matters worse, consumers do not have price comparison information. For example, the WSJ reported heart by-pass operations for two hospitals within four miles of each other varying on price by over $20,000. And even if consumers have knowledge, in critical care situations they may not have time to exercise choice.

12. Factors to Consider When Setting Price
Consider competitors’ costs, prices, and possible reactions
Pricing strategy influences the nature of competition
Low-price low-margin strategies inhibit competition
High-price high-margin strategies attract competition
Benchmarking costs against the competition is recommended
External Factors
Nature of market and demand
Competitors’ costs, prices, and offers
Other environmental elements
Goal 2: Identify and define external factors affecting pricing decisions

13. Factors to Consider When Setting Price
Economic conditions
Affect production costs
Affect buyer perceptions of price and value
Reseller reactions to prices must be considered
Government may restrict or limit pricing options
Social considerations may be taken into account
External Factors
Nature of market and demand
Competitors’ costs, prices, and offers
Other environmental elements
Goal 2: Identify and define external factors affecting pricing decisions

14. General Pricing Approaches
Cost-Based Pricing: Cost-Plus Pricing
Adding a standard markup to cost
Ignores demand and competition
Popular pricing technique because:
It simplifies the pricing process
Price competition may be minimized
It is perceived as more fair to both buyers and sellers
Goal 3: Contrast the three general approaches to setting prices

15. General Pricing Approaches
Cost-Based Pricing Example
- Variable costs: $ Fixed costs: $ 500,000
- Expected sales: 100,000 units - Desired Sales Markup: 20%
Variable Cost + Fixed Costs/Unit Sales = Unit Cost
$20 + $500,000/100,000 = $25 per unit
Unit Cost/(1 – Desired Return on Sales) = Markup Price
$25 / ( ) = $31.25
Goal 3: Contrast the three general approaches to setting prices

16. General Pricing Approaches
Cost-Based Pricing: Break-Even Analysis and Target Profit Pricing
Break-even charts show total cost and total revenues at different levels of unit volume.
The intersection of the total revenue and total cost curves is the break-even point.
Companies wishing to make a profit must exceed the break-even unit volume.
Goal 3: Contrast the three general approaches to setting prices

17. General Pricing Approaches
Value-Based Pricing:
Uses buyers’ perceptions of value rather than seller’s costs to set price.
Measuring perceived value can be difficult.
Consumer attitudes toward price and quality have shifted during the last decade.
Value pricing at the retail level
Everyday low pricing (EDLP) vs. high-low pricing
Goal 3: Contrast the three general approaches to setting prices

18. General Pricing Approaches
Competition-Based Pricing:
Also called going-rate pricing
May price at the same level, above, or below the competition
Bidding for jobs is another variation of competition-based pricing
Sealed bid pricing
Goal 3: Contrast the three general approaches to setting prices