pricing concepts setting the right price. the importance of price to the consumer... price is the...
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Pricing ConceptsPricing ConceptsSetting the Right PriceSetting the Right Price
The Importance of PriceThe Importance of Price
To the consumer...To the consumer...Price is the cost Price is the cost
of somethingof something
To the consumer...To the consumer...Price is the cost Price is the cost
of somethingof something
In the broadest sense, price allocates resources in a In the broadest sense, price allocates resources in a free-market economyfree-market economy
What is Price?What is Price?What is Price?What is Price?To the seller...To the seller...
Price is revenuePrice is revenueand profit sourceand profit source
To the seller...To the seller...Price is revenuePrice is revenueand profit sourceand profit source
The Importance of PriceThe Importance of Price
Revenue = Unit Price * Number of units sold
Revenue pays for every activity. What’s left over is Profit.
Marketers must select a price Marketers must select a price that is not too highthat is not too high
or not too low, or not too low, a price that equals a price that equals
the perceived value to target consumersthe perceived value to target consumers
Demand and SupplyDemand and Supply
DemandDemand The quantity of a product that
will be sold in the market at various prices for a specified period.
The quantity of a product that will be sold in the market at various
prices for a specified period.
SupplySupply
The quantity of a productthat will be offered to the marketby a supplier at various prices
for a specific period.
The quantity of a productthat will be offered to the marketby a supplier at various prices
for a specific period.
The Demand CurveThe Demand Curve
D
DPri
ce
.50
1.00
1.50
2.00
2.50
0 20 40 60 80 100 120Quantity demanded
The Supply CurveThe Supply Curve
Quantity supplied
S
S
Pri
ce
.50
1.00
1.50
2.00
2.50
0 20 40 60 80 100 120
Equilibrium PriceEquilibrium Price
Quantity demanded
S
S
Pri
ce
.50
1.00
1.50
2.00
2.50
0 20 40 60 80 100 120
D
D
SurplusSurplus
ShortageShortage
PricePriceEquilibriumEquilibrium
Elasticity of DemandElasticity of Demand
Elastic Elastic Demand Demand Elastic Elastic
Demand Demand
Consumers buy more or lessof a product when the price changes
InelasticInelasticDemandDemandInelasticInelasticDemandDemand
An increase or decrease in price will not significantly affect demand
UnitaryUnitaryElasticityElasticityUnitaryUnitary
ElasticityElasticity
An increase in sales exactly offsets a decrease in prices, and revenue is unchanged
Elasticity of DemandElasticity of Demand
Price Goes...Price Goes...Price Goes...Price Goes... Revenue Goes...Revenue Goes...Revenue Goes...Revenue Goes... Demand is...Demand is...
Down Up Elastic
Down Down Inelastic
Up Up Inelastic
Up Down Elastic
Up or Down Stays the Same Unitary Elasticity
Elasticity of DemandElasticity of Demand
Elastic DemandElastic DemandD
D
Quantity
Pri
ce
D
D
Quantity
Pri
ce
Completely Completely Inelastic DemandInelastic Demand
Factors that Affect ElasticityFactors that Affect Elasticity
FactorsFactorsThat Affect That Affect Elasticity Elasticity
ofofDemandDemand
FactorsFactorsThat Affect That Affect Elasticity Elasticity
ofofDemandDemand
Availability of SubstitutesAvailability of Substitutes
Price relative toPurchasing Power
Price relative toPurchasing Power
Product DurabilityProduct Durability
Product’s Other UsesProduct’s Other Uses
The Cost Determinant of PriceThe Cost Determinant of Price
Deviate with changes in level of output
Deviate with changes in level of output
Types of CostsTypes of CostsTypes of CostsTypes of Costs
VariableVariableCostsCosts
VariableVariableCostsCosts Fixed CostsFixed CostsFixed CostsFixed Costs
Do not deviate as level of output changes
Do not deviate as level of output changes
The Cost Determinant of PriceThe Cost Determinant of Price
Target-ReturnPricing
Target-ReturnPricing
Break-EvenPricing
Break-EvenPricing
Profit Maximization Pricing
Profit Maximization Pricing
KeystoningKeystoning
Markup pricingMarkup pricing
MethodsMethodsUsed toUsed to
Set PricesSet Prices
MethodsMethodsUsed toUsed to
Set PricesSet Prices
Markup PricingMarkup 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.
Profit MaximizationProfit 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.
Break-Even PricingBreak-Even Pricing
QuantityQuantity
Pri
ceP
rice
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 point
Break-Even PricingBreak-Even Pricing
Break-EvenQuantity = Total Fixed Costs
Fixed cost Contribution
Fixed costContribution = Price -- Avg. Variable Cost
Other Determinants of PriceOther Determinants of Price
Perceived QualityPerceived Quality
Promotion StrategyPromotion Strategy
Distribution StrategyDistribution Strategy
CompetitionCompetition
Stages of theProduct Life Cycle
Stages of theProduct Life Cycle
Other Factors Other Factors ThatThat
InfluenceInfluencePricePrice
Other Factors Other Factors ThatThat
InfluenceInfluencePricePrice
Stages in the Product Life CycleStages in the Product Life Cycle
IntroductoryIntroductoryStageStage
GrowthGrowthStageStage
DeclineDeclineStageStage
$$
HighHigh$$
StableStable$$
DecreaseDecrease
MaturityMaturityStageStage
$$DecreaseDecrease
StableStable
HighHigh
Distribution StrategyDistribution Strategy
Offer a larger profit margin
Offer a larger profit margin
Convincing DistributorsConvincing Distributorsto Carry Productto Carry Product
Convincing DistributorsConvincing Distributorsto Carry Productto Carry Product
Give dealers a largetrade allowance
Give dealers a largetrade allowance
Regaining Price ControlRegaining Price Control
DEVELOP BRAND LOYALTY
DEVELOP BRAND LOYALTY
Package marked with selling price
Package marked with selling price
Avoid business withprice-cutting discounters
Avoid business withprice-cutting discounters
FranchisingFranchising
Exclusive distribution system
Exclusive distribution system
MethodsMethodsUsed toUsed toRegainRegain
Price ControlPrice Control
MethodsMethodsUsed toUsed toRegainRegain
Price ControlPrice Control
The Impact of the InternetThe Impact of the Internet
• Allows price and product comparisons
• Prices are coming down
• Data collection allows sellers to tailor products and prices
ExtranetExtranet
A private electronic network that links a
company with its suppliers and customers.
Indicators of QualityIndicators of Quality
Brand NameBrand Name
PricePrice
AppearanceAppearance
Retailer Retailer ReputationReputation
Steps in Setting the Right PriceSteps 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
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
Price StrategyPrice 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.
Choosing a Price StrategyChoosing 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
Price SkimmingPrice Skimming
SituationsSituationswhenwhenPrice Price
SkimmingSkimmingis is
SuccessfulSuccessful
SituationsSituationswhenwhenPrice Price
SkimmingSkimmingis is
SuccessfulSuccessful
Superior Product
Legal Protection of Product
Limited Production
Technological Breakthrough
Inelastic Demand
Penetration PricingPenetration Pricing
AdvantagesAdvantagesAdvantagesAdvantages
Discourages or blocks competition from market entry
DisadvantagesDisadvantagesDisadvantagesDisadvantages
Requires gear up for mass production
Selling large volumes at low prices
Strategy to gain market share may fail
Status Quo PricingStatus Quo Pricing
AdvantagesAdvantagesAdvantagesAdvantages
Simplicity
Safest route to long-term survival for small firms
DisadvantagesDisadvantagesDisadvantagesDisadvantages
Strategy may ignore demand or cost
Tactics for Fine-Tuning the Base PriceTactics for Fine-Tuning the Base Price
Fine-TuningFine-TuningPricingPricingTacticsTactics
Fine-TuningFine-TuningPricingPricingTacticsTactics
Special Pricing Tactics
Special Pricing Tactics
DiscountsDiscounts
Geographic PricingGeographic Pricing
Tactics for Fine-Tuning the Base PriceTactics for Fine-Tuning the Base Price
CommonCommonTacticsTactics
for for Fine-TuningFine-Tuning
the Base Pricethe Base Price
CommonCommonTacticsTactics
for for Fine-TuningFine-Tuning
the Base Pricethe Base Price
Quantity DiscountsQuantity Discounts
Cash DiscountsCash Discounts
Functional DiscountsFunctional Discounts
Seasonal DiscountsSeasonal Discounts
Promotional AllowancesPromotional Allowances
RebatesRebates
Value-Based PricingValue-Based Pricing
Value-Based PricingValue-Based Pricing
The price is set at a level that seems to the The price is set at a level that seems to the
customer to be a good price compared to the customer to be a good price compared to the
prices of other options.prices of other options.
Trade LoadingTrade Loading
The practice of temporarily lowering the price to The practice of temporarily lowering the price to
induce wholesalers and retailers to buy more induce wholesalers and retailers to buy more
goods than can be sold in a reasonable time.goods than can be sold in a reasonable time.
Geographic PricingGeographic Pricing
Basing-Point Pricing
Basing-Point Pricing
Freight AbsorptionPricing
Freight AbsorptionPricing
Zone PricingZone Pricing
Uniform Delivered Pricing
Uniform Delivered Pricing
FOB PricingFOB Pricing
Common Common Methods ofMethods ofGeographicGeographic
PricingPricing
Common Common Methods ofMethods ofGeographicGeographic
PricingPricing
Geographic PricingGeographic 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.
Zone PricingZone PricingThe 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.
FreightAbsorption
Pricing
FreightAbsorption
Pricing
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.
Basing-PointPricing
Basing-PointPricing
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.
Special Pricing TacticsSpecial 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
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