1 pricing concepts & setting the right price. 2 the importance of price to marketing managers...
TRANSCRIPT
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Pricing Concepts & Setting the Right
Price
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The Importance of Priceto Marketing Managers
RevenueRevenue
ProfitProfit
The price charged to customers multiplied by the
number of units sold.
The price charged to customers multiplied by the
number of units sold.
Revenue minus expensesRevenue minus expenses
Price – Cost = Profit
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The Importance of Price
To earn a profit, To earn a profit, marketers must select a price marketers must select a price
that is not too highthat is not too high or too low, or too low,
a price that equals a price that equals the perceived value to target consumersthe perceived value to target consumers
Revenue = Unit Price X Number of Units Sold
Revenue pays for every activity. What’s left over is Profit.
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Trends Influencing Price Setting
Flood of new product introductions
Flood of new product introductions
Increased availability ofbargain-priced private and
generic brands
Increased availability ofbargain-priced private and
generic brands
Price cutting as a strategy tomaintain or regain
market share
Price cutting as a strategy tomaintain or regain
market share
A general decline in consumer confidence after terrorist attacksA general decline in consumer
confidence after terrorist attacks
Trends Trends in thein the
MarketMarket
Trends Trends in thein the
MarketMarket
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Pricing Objectives
Profit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing Objectives
Sales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing Objectives
Status Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing Objectives
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Profit-Oriented Pricing Objectives
Profit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing Objectives
ProfitMaximization
ProfitMaximization
SatisfactoryProfits
SatisfactoryProfits
Target Return on
Investment
Target Return on
Investment
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Sales-Oriented Pricing Objectives
MarketShare
MarketShare
SalesMaximization
SalesMaximization
Sales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing Objectives
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Status Quo Pricing Objectives
Maintainexistingprices
Maintainexistingprices
Meetcompetition’s
prices
Meetcompetition’s
prices
Status Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing Objectives
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The Cost Determinant of Price
Change with changes in level of output
Change with changes in level of output
Types of CostsTypes of CostsTypes of CostsTypes of Costs
VariableVariableCostsCosts
VariableVariableCostsCosts Fixed CostsFixed CostsFixed CostsFixed Costs
Do not change as level of output changes
Do not change as level of output changes
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The Cost Determinant of Price
Methods Used to Set
Prices
• Markup pricing
• Key Stoning
• Profit Maximization Pricing
• Break-Even Pricing
• Introductory Price Point
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Markup Pricing
Markup Pricing
Markup Pricing
The cost of buying the product from the producer plus amounts for
profit and for expenses not otherwise accounted for.
The cost of buying the product from the producer plus amounts for
profit and for expenses not otherwise accounted for.
KeystoningKeystoning The practice of marking up pricesby 100%, or doubling the cost.The practice of marking up pricesby 100%, or doubling the cost.
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Profit Maximization
ProfitMaximization
ProfitMaximization
A method of setting prices that occurs when marginal revenue
equals marginal cost.
A method of setting prices that occurs when marginal revenue
equals marginal cost.
MarginalRevenueMarginalRevenue
The extra revenue associated with selling an extra unit of output, or the change in total revenue with a
one-unit change in output.
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
QuantityQuantity
$$
2,0002,000
00 1,0001,000 2,0002,000 3,0003,000 4,0004,000 5,0005,000 6,0006,000
4,0004,000
Fixed costsFixed costs
LossLoss
ProfitProfitTotal RevenueTotal Revenue
Total CostsTotal CostsBreak-even pointBreak-even pointVariable CostsVariable Costs
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Fixed and Variable Costs
Fixed costs do not change as production or sales quantity changes.
Variable costs change as production changes
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Average Variable Cost (AVC)
Assuming $2.00 AVC per unit (raw materials, labor, packaging, distribution, etc.)
50,000 units produced = $100,000 variable costs
250,000 units produced = $500,000 variable costs
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Steps to Find Break Even Price
1. Total Fixed Costs + (AVC x # of Units Sold)
= Total Costs
2. Total Costs / # of Units Sold = Break Even Price
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Other Determinants of Price
Perceived QualityPerceived Quality
Promotion StrategyPromotion Strategy
Distribution StrategyDistribution Strategy
CompetitionCompetition
Stages of theProduct Life Cycle
Stages of theProduct Life Cycle
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Stages in the Product Life Cycle
IntroductoryIntroductoryStageStage
GrowthGrowthStageStage
DeclineDeclineStageStage
MaturityMaturityStageStage
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Steps in Setting the Right Price
Results lead to the right price
Fine tune with pricing tacticsFine tune with pricing tactics
Choose a price strategyChoose a price strategy
Estimate demand, costs, and profitsEstimate demand, costs, and profits
Establish pricing goalsEstablish pricing goals
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Choosing a Price Strategy
Basic StrategiesBasic Strategiesforfor
Setting PricesSetting Prices
Basic StrategiesBasic Strategiesforfor
Setting PricesSetting Prices
Status Quo Pricing Status Quo Pricing
Price SkimmingPrice Skimming
Penetration PricingPenetration Pricing
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Price Skimming
SituationsSituationswhenwhenPrice Price
SkimmingSkimmingIs Is
SuccessfulSuccessful
SituationsSituationswhenwhenPrice Price
SkimmingSkimmingIs Is
SuccessfulSuccessful
Unique Advantages/Superior
Legal Protection of Product
Blocked Entry to Competitors
Technological Breakthrough
Inelastic Demand
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Penetration Pricing
AdvantagesAdvantagesAdvantagesAdvantages
Discourages or blocks competition from market entry
Boosts sales and provides large profit increases.
DisadvantagesDisadvantagesDisadvantagesDisadvantages
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
AdvantagesAdvantagesAdvantagesAdvantages
Simplicity
Safest route to long-term survival for small firms
DisadvantagesDisadvantagesDisadvantagesDisadvantages
Strategy may ignore demand and/or cost
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The Legality and Ethics ofPrice Strategy
Issues Issues That LimitThat LimitPricing Pricing DecisionsDecisions
Issues Issues That LimitThat LimitPricing Pricing DecisionsDecisions
Unfair Trade PracticesUnfair Trade Practices
Price FixingPrice Fixing
Price DiscriminationPrice Discrimination
Predatory PricingPredatory Pricing
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Price Fixing
An agreement between two
or more firms on the
price they will charge
for a product.
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Price Discrimination
The Robinson-Patman Act of 1936:
Prohibits any firm from selling to two or more different buyers at different prices if the result would lessen competition
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Robinson-Patman Act Defenses
Seller Defenses Seller Defenses Seller Defenses Seller Defenses
CostCost MarketConditions
MarketConditions CompetitionCompetition
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Predatory Pricing
The practice of charging a
very low price for a product
with the intent of driving
competitors out of business
or out of a market.
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Tactics for Fine-Tuning the Base Price
Special Pricing Tactics Special Pricing Tactics
DiscountsDiscounts
Geographic PricingGeographic Pricing
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Tactics for Fine-Tuning the Base Price
Quantity DiscountsQuantity Discounts
Cash DiscountsCash Discounts
Functional DiscountsFunctional Discounts
Seasonal DiscountsSeasonal Discounts
Promotional AllowancesPromotional Allowances
RebatesRebates
Value-Based PricingValue-Based Pricing
Zero Percent FinancingZero Percent Financing
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Geographic Pricing
FOB OriginPricing
FOB OriginPricing
The buyer absorbs the freight costs from the shipping point
(“free on board”).
The buyer absorbs the freight costs from the shipping point
(“free on board”).
UniformDelivered
Pricing
UniformDelivered
Pricing
The seller pays the freight charges and bills the purchaser an
identical, flat freight charge.
The seller pays the freight charges and bills the purchaser an
identical, flat freight charge.
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Geographic Pricing
Zone PricingZone Pricing
FreightAbsorption
Pricing
FreightAbsorption
Pricing
Basing-PointPricing
Basing-PointPricing
The U.S. is divided into zones and a flat freight rate is charged to
customers in a given zone.
The U.S. is divided into zones and a flat freight rate is charged to
customers in a given zone.
The seller pays for all or part of the freight charges and does not
pass them on to the buyer.
The seller pays for all or part of the freight charges and does not
pass them on to the buyer.
The seller designates a location as a basing point and charges all
buyers the freight costs from that 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 Single-Price Tactic
Flexible PricingFlexible Pricing
Professional Services PricingProfessional Services Pricing
Price LiningPrice Lining
Leader PricingLeader Pricing
Bait PricingBait Pricing
Odd-Even PricingOdd-Even Pricing
Price Bundling Price Bundling
Two-Part PricingTwo-Part Pricing
All goods offered at the same price All goods offered at the same price
Different customers pay different priceDifferent customers pay different price
Used by professionals with experience,training or certificationUsed by professionals with experience,training or certification
Several line items at specific price pointsSeveral line items at specific price points
Sell product at near or below costSell product at near or below cost
Lure customers through false or misleading price advertisingLure customers through false or misleading price advertisingOdd-number prices imply bargainEven-number prices imply qualityOdd-number prices imply bargainEven-number prices imply qualityCombining two or more products in a single package Combining two or more products in a single package
Two separate charges to consume a single goodTwo separate charges to consume a single good