chapter 13 pricing concepts. learning objectives 1discuss the importance of pricing decisions to the...
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Chapter 13Pricing concepts
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Learning objectives
1 Discuss the importance of pricing decisions to the economy and to the individual organisation
2 List and explain a variety of pricing objectives
3 Explain the role of demand in price determination
4 Describe cost-oriented pricing strategies
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Learning objectives (cont.)
5 Demonstrate how the product life cycle, competition, distribution and promotion strategies, customer demands, the Internet and extranets, and perceptions of quality can affect price
6 Describe the procedure for setting the right price
7 Identify the legal and ethical constraints on pricing decisions
8 Explain how discounts, geographic pricing and other special pricing tactics can be used to fine-tune the base price
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Learning objective 1
Define the term marketingDiscuss the importance of
pricing decisions to the
economy and to the
individual organisation
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What is price?
Price is that which is given
up in an exchange to
acquire a good or service.
1
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The importance of price
In the broadest sense, price allocates resources in a free-market economy
1
To the seller…Price is revenue and profit source
To the consumer…Price is the cost of something
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The importance of priceto marketing managers
Revenue The price charged to customers
multiplied by the number of units sold.
Profit Revenue minus expenses.
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The importance of price
• Revenue pays for every activity. • What’s left over is profit.
Marketers must select a price that• is not too high• is not too low • equals the perceived value to
target consumers
1
Revenue = Unit price number of units sold
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Learning objective 2
Describe four marketing management philosophies.List and explain a variety
of pricing objectives
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Trends influencing price setting
2
• High rate of new product introduction
• Increased availability of bargain-priced dealer and generic brands
• Price-cutting as a strategy to maintain or regain market share
• More efficient and better-informed buyers
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Pricing objectives2
• Profit-oriented pricing objectives
• Sales-oriented pricing objectives
• Status quo pricing objectives
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Profit-oriented pricing objectives
2
• Profit maximisation
• Satisfactory profits
• Target return on investment
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Profit maximisation
Setting prices so that total revenue is as large as possible relative to total costs.
2
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Return on investment (ROI)
Net profit after taxes divided by total assets.
ROI = net profit after taxtotal assets
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Sales-oriented pricing objectives
2
• Market share
• Sales maximisation
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Market share
A company’s product sales
as a percentage of total
sales for that industry.
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Sales maximisation2
• Short-term objective to maximise sales
• Ignores profits, competition and the marketing environment
• May be used to sell off excess inventory
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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
2
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Learning objective 3
Explain the role of
demand in price
determination
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Demand and supply
Demand The quantity of a product that
will be sold in the market at various prices for a specified period.
Supply
The quantity of a productthat will be offered to the marketby a supplier at various prices
for a specific period.
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Elasticity of demand
Consumers’
responsiveness or
sensitivity to
changes in price.
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Elasticity of demand (cont.)
Elastic 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
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Elasticity of demand (cont.)
Price goes… Revenue goes… Demand is…
down up elastic
down down inelastic
up up inelastic
up down elastic
3
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Factors that affect elasticity3
• Availability of substitutes
• Price relative to purchasing power
• Product durability
• Product’s other uses
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Learning objective 4
Describe cost-oriented pricing strategies
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The cost determinant of price
Types of costs
4
Variable costsDeviate with changes in level of output
Fixed costsDo not deviate as level of output changes
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The cost determinant of price (cont.)
4
Methods used to set price
• Markup pricing
• Break-even pricing
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Markup pricing
Markup pricingThe cost of buying the product from the producer plus amounts for profit and for expenses not otherwise accounted for.
Example: If a pen costs $1.80 and sells for is $2.20, the markup is $0.40 or 22% of cost.
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Break-even pricing4
Quantity
Pri
ce
2 000
0 1 000 2 000 3 000 4 000 5 000 6 000
4 000
Fixed costs
Loss
ProfitTotal revenueTotal costs
Break-even point
6 000
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Learning objective 5
Demonstrate how the product life
cycle, competition, distribution
and promotion strategies,
customer demands, the Internet
and extranets, and perceptions of
quality can affect price
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Other determinants of price5
• Stages of the product life cycle
• Competition
• Distribution strategy
• Promotion strategy
• Perceived quality
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Stages in the product life cycle
Introductorystage
Growthstage
Declinestage
$ High
$Stable
$Decrease
Maturitystage
$Decrease
Stable
High
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Distribution strategy5
• Offer a larger profit margin
• Give dealers a large trade
allowance
Convincing distributors to carry product
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The impact of the Internet5
• Allows price and product comparisons.
• Prices are coming down.
• Data collection allows sellers to tailor products and prices.
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Extranet
A private electronic
network that links a
company with its
suppliers and
customers.
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Prestige pricing
Charging a high price to
help promote a high-
quality image.
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Indicators of quality5
• Retailer reputation
• Appearance
• Price
• Brand name
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Learning objective 6
Describe the
procedure for setting
the right price
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Steps in setting the right price6
Results lead to the right price
Establish pricing goals
Estimate demand, costs and profits
Choose a price strategy
Fine-tune base price with pricing tactics
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Pricing objectives6
• Profit-oriented pricing objectives
• Sales-oriented pricing objectives
• Status quo pricing objectives
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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.
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Choosing a price strategy6
Basic strategies for setting prices• Price skimming• Status quo• Penetration pricing
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Price skimming6
Situations when price skimming is successful
• Inelastic demand
• Superior product
• Legal protection of product
• Technological breakthrough
• Limited production
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Penetration pricing
A pricing policy whereby
a firm charges a relatively
low price for a product
initially as a way to reach
the mass market.
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Penetration pricing (cont.)
Advantages
• 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
6
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Learning objective 7
Identify the legal and ethical constraints on pricing decisions
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The legality and ethics of price strategy
7
Issues that limit pricing decisions
• Unfair trade
• Price fixing
• Price discrimination
• Predatory pricing
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Explain how discounts,
geographic pricing and
other special pricing
tactics can be used to
fine-tune the base price
Learning objective 8
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Tactics for fine-tuning the base price
8
• Discounts
• Geographic pricing
• Special pricing tactics
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Tactics for fine-tuning the base price (cont.)
8
• Quantity discounts• Cash discounts• Functional discounts• Seasonal discounts• Promotional allowances• Rebates• Value-based pricing
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Value-based pricing
The price is set at a level that seems to the customer to be a good price compared to the prices of other options.
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Geographic pricing8
• FOB pricing
• Uniform delivered pricing
• Zone pricing
• Freight absorption pricing
• Basing-point pricing
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Special pricing tacticsSingle-price tactic
Flexible pricing
Professional services pricing
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.
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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