contemporary marketing wired, 9th edition© 1998 the dryden press chapter 13 price determination

Contemporary Marketing Wired, 9th Edition © 1998 The Dryden Press

Chapter 13

Price Determination


PRICE IN THE MARKETING MIX

• Price:Price: exchange value of a exchange value of a good or servicegood or service

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Figure 14.11

Alternative Pricing

Objectives

Figure 14.11

Alternative Pricing

Objectives


Profitability Objectives• Perhaps the most commonly Perhaps the most commonly

used objective in firms’ used objective in firms’ pricing strategiespricing strategies

• Some firms try to maximize Some firms try to maximize profits by reducing costs profits by reducing costs rather than through price rather than through price changeschanges

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Volume Objectives• Bases pricing decisions on Bases pricing decisions on

market sharemarket share• Market share: Market share: the the

percentage of a market percentage of a market controlled by a certain controlled by a certain company or productcompany or product

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Pricing to Meet Competition• Third set of pricing Third set of pricing

objectivesobjectives

• Seeks to meet Seeks to meet competitors’ pricescompetitors’ prices

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Prestige Objectives• Prestige pricing Prestige pricing encompasses encompasses

the effect of price on prestigethe effect of price on prestige

• Prestige pricing establishes a Prestige pricing establishes a relatively high price to relatively high price to develop and maintain an develop and maintain an image of quality and image of quality and exclusivenessexclusiveness

Interesting WWW Site Interesting WWW Site


Figure 14.12 Product Priced to Achieve Prestige

Objectives

Copyright © 2001 by Harcourt, Inc. All rights reserved.


HOW PRICES ARE DETERMINED

• Determined in two basic ways:Determined in two basic ways:– By applying the theoretical concepts of By applying the theoretical concepts of

supply and demandsupply and demand– By completing cost analysesBy completing cost analyses

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Price Determination in Practice• Cost-based pricing formulas:Cost-based pricing formulas:

formulas calculate base-cost figures formulas calculate base-cost figures per unit and then add markups to per unit and then add markups to cover overhead costs and generate cover overhead costs and generate profitsprofits

• Simpler and easier to use than Simpler and easier to use than economic theory-based pricingeconomic theory-based pricing

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Figure 14.13 The Markup Chain for a Hardcover Book

Figure 14.13 The Markup Chain for a Hardcover Book


Breakeven Analysis• Breakeven analysis:Breakeven analysis: pricing pricing

technique that determines the sales technique that determines the sales volume that a firm must achieve at a volume that a firm must achieve at a specified price in order to generate specified price in order to generate enough revenue to cover its total costenough revenue to cover its total cost


Break Even Analysis

Break-even point is the unit or dollar sales at which an

organization neither makes a profit nor a loss.

At the organization’s break-even sales volume:

Total Revenue = Total Cost


Finding the Breakeven PointBreakeven point Breakeven point Total Fixed Cost Total Fixed Cost

(in units) (in units) Contribution to Fixed Costs Per Unit Contribution to Fixed Costs Per Unit

Breakeven point Breakeven point Total Fixed Cost Total Fixed Cost(in dollars)(in dollars) 1 – Variable Cost Per Unit/Price 1 – Variable Cost Per Unit/Price

Calculate the breakeven point in units and dollars for the following:Calculate the breakeven point in units and dollars for the following:

Manufacturer selling price = $5.00Manufacturer selling price = $5.00Unit variable costs = $2.00Unit variable costs = $2.00Total fixed costs = $ 30,000Total fixed costs = $ 30,000

=

=


Finding the Breakeven Point 10,000 10,000 30,000 30,000

(in units) (in units) 3.00 3.00

$50,000$50,000 30,000 30,000(in dollars)(in dollars) 1 – 2.00/5.00 1 – 2.00/5.00

What if you had a profit goal of $9,000?What if you had a profit goal of $9,000?Calculate the breakeven point in units for the following:Calculate the breakeven point in units for the following:Manufacturer selling price = $5.00Manufacturer selling price = $5.00Unit variable costs = $2.00Unit variable costs = $2.00Total fixed costs = $ 30,000Total fixed costs = $ 30,000

=

=


Target Returns 13,000 13,000 30,000 + 9,000 30,000 + 9,000

(in units) (in units) 3.00 3.00

$65,000$65,000 30,000 + 9,000 30,000 + 9,000(in dollars)(in dollars) 1 – 2.00/5.00 1 – 2.00/5.00=

=


• Skimming pricing strategy: sets an intentionally high price relative to the prices of competing products

• Often works for introduction of a distinctive good or service with little or no real competition

SkimmingSkimming

Alternative Pricing Strategies

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• Penetration pricing strategy: sets a low price as a major marketing weapon

• Assumes that a below-market price will attract buyers and move a brand from an unknown newcomer to at least a brand recognition or even a brand preference stage

Skimming

PenetrationPenetration


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CompetitiveCompetitive

• Competitive pricing strategy: product priced at the general level of competing offerings

• Attempts to reduce the emphasis on price and concentrates marketing efforts on product, distribution, and promotion

Skimming

Penetration


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CONSUMER PERCEPTIONS OF PRICES

• Price-Quality RelationshipsPrice-Quality Relationships– Consumers’ perceptions of Consumers’ perceptions of

product quality is closely product quality is closely related to pricerelated to price

– Most marketers believe that this Most marketers believe that this perceived price-quality perceived price-quality relationship holds over a relationship holds over a relatively wide range of pricesrelatively wide range of prices

– In other situations, marketers In other situations, marketers establish price-quality establish price-quality relationships with comparisons relationships with comparisons that demonstrate a product’s that demonstrate a product’s value at the established pricevalue at the established price © PhotoDisc


Figure 14.15 Establishing Price-Quality Relationships for

Printers

Copyright © 2001 by Harcourt, Inc. All rights reserved.


CONSUMER PERCEPTIONS OF PRICES

• Psychological PricingPsychological Pricing– Odd pricing Odd pricing (charging (charging

$39.95 or $19.98 instead of $39.95 or $19.98 instead of $40 or 20) $40 or 20)

– Commonly-used retail Commonly-used retail practice, as many retailers practice, as many retailers believe that consumer favor believe that consumer favor uneven amountsuneven amounts

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The exchange value of a good or service.

Price


• Profitability Objectives•Profit Maximization•Target Return

• Volume Objectives•Sales Maximization•Market Share

• Meeting Competition Objectives

• Prestige Objectives

Pricing Objectives


The point at which the additional revenue gained by increasing the price of a product equals the increase in total costs.

Profit Maximization

Profitability


A short-run or long-run pricing practice intended to achieve a specified return on either sales or investment.

Target Return Objective


A research program that discovered a strong positive relationship between a firm’s market share and its return on investment.

Profit Impact or Market Strategies (PIMS) Project

Volume


A pricing strategy that emphasizes benefits a product provides in comparison to the price and quality levels of competing offerings.

Value Pricing

Meeting Competition Objectives


Prestige

A pricing strategy that establishes a relatively high price to develop and maintain an image of quality and exclusiveness. This typically appeals to the status-conscious consumer


A schedule of the amounts of a firm’s product that consumers will purchase at different prices during a specified time period.

Demand


A schedule of the amounts of a good or service that a firm will offer for sale at different prices during a specified time period.

Supply


A market structure in which relatively few sellers compete, while high start-up costs form barriers to keep out new competitors.

Oligopoly


A market structure in which only one seller dominates trade in a good or service for which buyers can find no close substitutes.

Monopoly

contemporary marketing wired, 9th edition© 1998 the dryden press chapter 13 price determination

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