1. CHAPTER 11 Pricing The Product
M A R K E T I N G
Real People, Real Choices
CHAPTER 11 Pricing The Product

2. Chapter Objectives
Explain the importance of pricing & understand how prices can take both monetary & non-monetary forms
Understand the pricing objectives that marketers typically have in planning pricing strategies
Describe how marketers use costs, demands, & revenue to make pricing decisions
Understand some of the environmental factors that affect pricing strategies

3. Chapter Objectives
Understand key pricing strategies
Explain pricing tactics for single & multiple products & for pricing on the Internet
Understand the opportunities for pricing strategies
Describe the psychological, legal, & ethical aspects of pricing

4. 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 that has value to the other party

5. Opportunity Costs
The value of something that is given up to obtain something else also affects the “price” of a decision
Example: the cost of going to college is charged in tuition and fees but also includes the opportunity cost of what a student cannot earn by working instead

6. The Importance of Pricing Decisions
Price is the only component of the marketing mix that represents revenue rather than an expense
Products are becoming more like commodities, making price especially important

7. Steps in Price Planning
Develop pricing objectives
Estimate demand
Determine costs
Evaluate the pricing environment
Choose a pricing strategy
Develop pricing tactics

8. Types of Pricing Objectives
Sales or market share objectives
Profit objectives
Competitive effect objectives
Customer satisfaction objectives
Image enhancement objectives

9. Estimating Demand
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?

10. 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: different prices a firm might charge
Horizontal axis: number of units

11. 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

12. 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

13. 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
Changes in income affect demand for a product even if its price remains the same

14. 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
Direct materials, direct labor, variable selling costs
Fixed costs – do not vary with the number of units produced. Costs remain the same regardless of amount produced
Advertising (budgeted ahead of time)

15. 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

16. Break-Even Analysis
Used to examine the relationship between cost & price
determine what sales volume must be reached at a given price before the company will cover its total costs & begin making a profit

17. Examines the relationship of marginal cost to marginal revenue
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

18. Evaluating the Pricing Environment
The Economy
Trimming the Fat: Pricing in a Recession
Increasing Prices: Responding to Inflation
Competition
Product life cycle

19. Cost-Plus Pricing (Mark-up)
Most common cost-based approach
Marketer figures all costs for the product & then adds desired profit per unit
Straight markup pricing is the most frequently used type of cost-plus pricing
price is calculated by adding a pre-determined percentage to the cost

20. Pricing Strategies Based on Cost
Advantages
Simple to calculate
Relatively risk free
Disadvantages
Fail to consider several factors
target market
demand
competition
product life cycle
product’s image
Difficult to accurately estimate costs

21. Steps in Cost-Plus Pricing
Estimate unit cost
Calculate markup
Markup on cost
Markup on selling price – markup percentage is the seller’s gross margin
Often determined by history of company an industry

22. Pricing Strategies Based on Demand
Demand-based pricing means that the selling price is based on an estimate of volume or quantity that a firm can sell in different markets at different prices
Target costing
Use research to identify quality & features at ideal price point prior to production
Real time pricing
Yield management pricing
Reverse auction

23. New Product Pricing Strategies
Skimming price –high, premium price with the intention of reducing it in response to market pressures
Penetration pricing – new product is introduced at a very low price to grab market share
Trial pricing – product carries a low price for a limited time period

24. Discounting for Channel Members
Trade or functional discounts
Quantity discounts
Cash discounts
Seasonal discounts

25. Trade Discounts
Pricing structure built around list price
List price, also called suggested retail price, is the price the manufacturer sets as the appropriate price for the end consumer
Manufacturers offer discounts because channel members perform selling, credit, storage, & transportation

26. Psychological Issues in Pricing
Internal Reference Prices – consumers have a set price or price range in mind
If the actual price is higher, consumers feel the product is overpriced
If it is too low, consumers assume quality is inferior
Competition as Reference Price – If the price is close, the assimilation effect encourages the customer to think the products are similar & choose the lower-priced product

27. Price-Quality Inferences
If consumers are unable to judge the quality of a product through examination or prior experience, they usually assume that the higher-priced product is the higher-quality product

28. Psychological Pricing Strategies
Odd-even pricing
$3.99
Price lining
Price points for different models with different features
Use of signs as signals

29. Legal and Ethical Considerations
Deceptive pricing practices
Unfair sales act
Price discrimination

30. Deceptive Pricing Practices
Retailers must not claim prices are lower than competitors unless it is true
A going out-of-business sale should be the last sale before going out of business
Bait-and-switch – consumers are lured into store for a very low price, but then the item is not available
A more expensive product is offered instead
Trading up is acceptable

31. Unfair Sales Acts
Laws or regulations prohibiting selling products below cost
loss leader pricing
many regulations even set a percentage markup below which the distributor may not sell the products

32. Regulated by Robinson-Patman Act
Price Discrimination
Means selling the same product to different wholesalers and retailers at different prices if practices lessen competition
Regulated by Robinson-Patman Act
only applies to resellers
discounts are legal if based on established policy and offered to any customer who chooses to buy under those conditions
Quantity or different features

33. Price Fixing
Occurs when two or more companies conspire to keep prices at a certain level
Horizontal price fixing occurs when competitors making the same product jointly determine what price they each will charge
Vertical price fixing occurs when manufacturers attempt to force the retailer to charge the suggested retail price

34. Predatory Pricing
Means that a company sets a very low price for the purpose of driving competitors out of business