NATURE AND IMPORTANCE OF PRICE
• The Many Names of Price - ???• Hotel• Doctor• Insurance• apartment
• 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
To the consumer...To the consumer...Price is what you give Price is what you give
up to get what you wantup to get what you want
To the consumer...To the consumer...Price is what you give Price is what you give
up to get what you wantup to get what you want
THE PROFIT EQUATION FOR SELLERS
Profit = Total revenue - Total cost or
Profit = (Unit price × Quantity sold) −Total cost
WAYS TO SELECT BASE PRICE LEVELS
Demand oriented – focus on consumer preference
Cost oriented – focus on business’s expenses
Profit oriented – focus on profit
Competition oriented – focus on the marketplace players
DEMAND ORIENTED APPROACHES
Skimming Pricing – high initial price
Penetration Pricing – low initial price
Prestige Pricing – high price = quality and status
Target Pricing-make product fit price market will pay
Bundle Pricing- 2 products priced as one. helps poorer seller
Yield Management Pricing – peak and non peak prices
PROFIT ORIENTED APPROACHES
Target Profit Pricing-set annual dollar volume or profit
If I need to make $5000, & I can make 5 units, selling price is $1000.
Target Return-on-Sales Pricing-
Want to receive 1% of sales as my profit – actors & directors
Target Return-on-Investment Pricing –
I can make 5 % on my money in the bank. Set price so I make 6% on my investment if I invest it in my business.
COST ORIENTED APPROACHES
• Cost-Oriented Approaches
Standard Markup Pricing add the standard industry fixed % to my costs. Easy to implement.
Cost-Plus Pricing add a standard dollar amount to my costs- like $5.00 for shipping and handling
COMPETITION ORIENTED APPROACHES
Customary Pricing
Adjust product to fit costs & maintain price 75¢ candy bar in a vending machine
Above-, At-, or Below-Market Pricing Use largest competitor as a benchmark to set your price. Rolex watches (above) or Value City Furniture (below)
Loss-Leader Pricing- Price below cost to lure buyers in Want buyer purchasing other things you sell at high mark ups
Lots of choices, but when to use which one?
Profit-Oriented Pricing Objectives-Profit-Oriented Pricing Objectives-Sales revenue Sales revenue
Profit-Oriented Pricing Objectives-Profit-Oriented Pricing Objectives-Sales revenue Sales revenue
Sales-Oriented Pricing Objectives-Sales-Oriented Pricing Objectives-
Sales-Oriented Pricing Objectives-Sales-Oriented Pricing Objectives-
Status Quo Pricing Objectives-Status Quo Pricing Objectives-Survival, social responsibilitySurvival, social responsibility
Status Quo Pricing Objectives-Status Quo Pricing Objectives-Survival, social responsibilitySurvival, social responsibility
Market share, unit volume
PRICING OBJECTIVES
PRICING CONSTRAINTS
Demand for the Product Class, Product, & Brand
Newness of the Product: Stage in the Product Life Cycle
Cost of Producing and Marketing the Product
Competitors’ Prices
ESTIMATING DEMANDAND REVENUE
• Consumer Tastes
• Price and Availability of Similar Products
• Consumer Income levels
• Changes in external environment
Always use price first, but must adjust for:
HOW MUCH MORE WILL THEY BUY WHEN I LOWER PRICE?
Price Elasticity of Demand
InelasticInelasticDemandDemandInelasticInelasticDemandDemand
An increase or decrease in price will not significantly affect demand
Elastic Elastic Demand Demand Elastic Elastic
Demand Demand
Consumers buy more or lessof a product when the price changes
But price set depends on costs, so how to value them?
Total revenue is the total money received from the sale of a product
Total Revenue = Price X Quantity
FUNDAMENTAL REVENUE CONCEPT
Deviate with changes in level of output
Deviate with changes in level of output
Total CostsTotal CostsTotal CostsTotal Costs
VariableVariableCostsCosts
VariableVariableCostsCosts Fixed CostsFixed CostsFixed CostsFixed Costs
Do not deviate as level of output changes
Do not deviate as level of output changes
FUNDAMENTAL COST CONCEPT
How do you know when you’re making money?
Issues Issues That That LimitLimitPricing Pricing DecisionsDecisions
Issues Issues That That LimitLimitPricing Pricing DecisionsDecisions
Deceptive pricing- can’t bait and switchDeceptive pricing- can’t bait and switch
Price Fixing-Manufacturer can’t agree with competitors or resellers to
set price
Price Fixing-Manufacturer can’t agree with competitors or resellers to
set price
Price Discrimination-can’t set a different price for the same item for two
different customers
Price Discrimination-can’t set a different price for the same item for two
different customers
Predatory Pricing-can’t sell an item at a loss to bankrupt
the competition
Predatory Pricing-can’t sell an item at a loss to bankrupt
the competition
LEGAL AND ETHICAL CONSIDERATIONS
SETTING A FINAL PRICE
• Step 1: Set an Approximate Price Level pick a starting range using demand and break even analysis
One-Price Policy – Dollar Store or no haggling
• Step 2: Set the Specific List or Quoted Price
Flexible-Price Policy- different prices for different buyers and buying situations
SETTING A FINAL PRICE
• Step 3: Make Special Adjustments to the List or Quoted Price
Discounts
• Quantity Discounts
• Seasonal Discounts
• Trade Discounts to resellers
• Cash Discounts
SETTING A FINAL PRICE
Promotional Allowances – if you sell 12, 13th is free
Trade-In Allowances - like for cars
Allowances
• Everyday Low Pricing-reduce promotional allowances but also reduce price of item so reseller sells more
Uniform Delivered Pricing – seller pays shipping and charges it to all buyers equally, but holds title during transit
FOB Origin Pricing – buyer pays shipping owns goods in transit
Geographical Adjustments
SETTING A FINAL PRICE
Price (P)
Price (P) is the money or other considerations (including other goods and services) exchanged for the ownership or use of a good or service.
Price (P) is the money or other considerations (including other goods and services) exchanged for the ownership or use of a good or service.
Demand Curve
A demand curve is a graph relating the quantity sold and price, which shows the maximum number of units that will be sold at a given price.
A demand curve is a graph relating the quantity sold and price, which shows the maximum number of units that will be sold at a given price.
Total Cost (TC)
Total cost (TC) is the total expense incurred by a firm in producing and marketing a product. Total cost (TC) equals the sum of fixed cost (FC) and variable cost (VC) or TC = FC + VC.
Total cost (TC) is the total expense incurred by a firm in producing and marketing a product. Total cost (TC) equals the sum of fixed cost (FC) and variable cost (VC) or TC = FC + VC.
Fixed Cost (FC)
Fixed cost (FC) is the sum of the expenses of the firm that are stable and do not change with the quantity of a product that is produced and sold.
Fixed cost (FC) is the sum of the expenses of the firm that are stable and do not change with the quantity of a product that is produced and sold.
Variable Cost (VC)
Variable cost (VC) is the sum of the expenses of the firm that vary directly with the quantity of a product that is produced and sold.
Variable cost (VC) is the sum of the expenses of the firm that vary directly with the quantity of a product that is produced and sold.
Break-Even Analysis
Break-even analysis is a technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output.
Break-even analysis is a technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output.
Pricing Objectives
Pricing objectives involve specifying the role of price in an organization’s marketing and strategic plans.
Pricing objectives involve specifying the role of price in an organization’s marketing and strategic plans.