pricing the product

Pricing the Product

2

Chapter Objectives

• importance of pricing• monetary & non-monetary

forms of pricing

• pricing objectives for planning pricing strategies

3

Chapter Objectives

• using costs, demands, and revenue to make pricing decisions

• environmental factors affecting pricing strategies

4

Chapter Objectives

• key pricing strategies• pricing tactics

for single products multiple products, pricing on the Internet

5

Chapter Objectives

• Internet pricing strategies

• Psychological aspects of pricing • Legal aspects of pricing• ethical aspects of pricing

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“Yes, but what does it cost?”

• Price: the assignment of value, or the amount the consumer must exchange

• to receive the offering

• Offerings:Money, goods, services, favors, votes,

anything else that has value to the other party

7

Figure 11.1:Steps in

Price Planning

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Step 1: Develop Pricing Objectives

• Sales or market share objectives• Profit objectives • Competitive effect objectives • Customer satisfaction objectives• Image enhancement objectives

ROLLS-ROYCE

http://www.rolls-royce.com/

Step 2

Estimate demand

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Step 2: Estimate Demand

• Demand: • customers’ desires for a

product

• How much of a product are customers willing to buy as its price goes up or down?

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Demand Curves

• Law of demand: as price goes up, quantity demanded goes down.

• For prestige products, a price increase may actually result in an increase in

quantity demanded.

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Shifts in Demand Curve

1. Changes in marketing strategy (improved product, new advertising) or

2. non-marketing activities can cause upward or downward

shifts in demand.

At a given price, demand is greater or less than before the shift.

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Estimating Demand

• Marketers predict total demand by estimating potential buyers for a product, then multiplying number of buyers times

• average amount of each buyer’s purchase.

• Then they predict what the company’s share of the total market will be.

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Elastic Demand • A change in price results • in a substantial change in quantity

demanded.

If price is increased, revenues decrease, and vice-versa.

Non-necessities (pizza) generate elastic demand.

Availability of close substitute products facilitates elastic demand.

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Inelastic Demand

• A change in price • has little or no effect on quantity

demanded. If price is increased, revenues increase.

The demand for necessities • (food and electricity) • is generally inelastic.

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Cross-elasticity of Demand

• Changes in prices of other products affect a product’s demand.Products are substitutes:

• increase in price of one will increase demand for other (bananas vs. strawberries).

One product is essential for use of second: • increase in price of one decreases demand for

other (increasing price of gas lowers demand for tires).

Step 3

Determine costs

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Step 3: Determine Costs

• Variable costs: • costs of production that are tied to and

vary depending on the number of units produced. Average variable costs may change

• as the number of products produced changes.

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• Fixed costs: • costs of production that don’t change

with number of units producedRent, cost of owning/maintaining factory, utilities, equipment, fixed salaries of firm’s executives

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• Fixed costs:

Average fixed cost: fixed cost per unit (total fixed costs divided by number of units produced) will decrease as number of units produced increases.

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Step 3: Determine Costs (cont’d)

• Total costs: • total of fixed costs & • variable costs

for a set number of units produced.

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Break-Even Analysis

• the number of units a firm must produce and sell at a given price to cover all its costs.

• Break-even point: point at which a firm doesn’t lose any money

and doesn’t make any profit.

Song AirlinesVideo

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Break-Even Analysis (cont’d)

• Break-even point (in units) • = (total fixed costs) • divided by (contribution per unit)

Contribution per unit: • the difference between the price the firm

charges for a product & the variable costs

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Break-Even Analysis (cont’d)

• Break-even point (in dollars) • = (total fixed costs) • divided by [1 - (variable cost per unit

divided by price)]

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Marginal Analysis• A method that uses • cost and demand• to identify the price • that will maximize profits.

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Marginal Analysis• Marginal cost:

increase in total costs from producing one additional unit of a product

• Marginal revenue: increase in total income or revenue from selling one

additional unit of a product (decreases with each additional unit sold)

• Profit is maximized where marginal cost is exactly equal to marginal

revenue.

Step 4:

Evaluate the Pricing Environment

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Step 4: Evaluate the Pricing Environment

• The economyBroad economic

trends Recessions, Inflation

• The competition• Consumer trends

Step 5:

Choose a Price Strategy

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Step 5: Choose a Price Strategy

• Pricing strategies based on costSimple to calculate and

relatively risk free

Cost-plus pricing: total all product costs and

add markup

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Step 5: Choose a Price Strategy (cont’d)

• Pricing strategies based on demandBased on estimate of quantity a firm can sell at different prices

PRICELINE.COM

http://www.priceline.com/

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• Pricing strategies based on demandTarget costing:

• identify quality and functionality –customers need and

• price they’re willing to pay –before designing product.

PRICELINE.COM


33


• Pricing strategies based on demandYield management pricing:

• charge different prices • to different customers • to manage capacity

PRICELINE.COM


34


• Pricing strategies based on the competitionPricing near, at, above, or below the

competitionPrice leadership strategy:

• industry giant announces price, and • competitors get in line • or drop out

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• Pricing strategies based on customers’ needsValue pricing or everyday low pricing (EDLP):

• pricing strategy in which a firm sets prices • that provide ultimate value to customers.

36


• New-product pricingSkimming price:

a very high premium price

HP FINANCIAL CALCULATORS

http://www.hp.com/calculators/financial/index.html

37


• New-product pricingPenetration pricing:

a very low price to encourage more customers to purchase



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• New-product pricingTrial pricing: low price for a limited

period of time



Step 6:

Develop Pricing Tactics

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Step 6: Develop Pricing Tactics

• Pricing for individual products

Two-part pricing: offering two separate

types of payments to purchase the product

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Step 6: Develop Pricing Tactics

• Pricing for individual products

Payment pricing: breaking total price into smaller amounts payable over time

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Step 6: Develop Pricing Tactics (cont’d)

• Pricing for multiple productsPrice bundling: selling two or more goods or services as a single package for one price

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• Pricing for multiple products

Captive pricing:

pricing two products that work only when used together

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• Distribution-based pricingF.O.B. (free on board) origin pricingF.O.B delivered pricingBasing-point pricingUniform delivered pricingFreight absorption pricing

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• Discounting for channel membersList price (suggested retail price):

• price that manufacturer sets • as appropriate • for end consumer to pay

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• Discounting for channel membersTrade or functional discounts: set percentage discounts

• off list price for each channel level

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• Discounting for channel membersQuantity discounts: reduced prices for purchases of larger quantities

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• Discounting for channel membersCash discounts:

enticements to customers to pay bills quickly

(2% 10 days, net 30 days)(2/10 net 30)

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• Discounting for channel members

Seasonal discounts: price reductions offered during certain times of year

Other pricing issues

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Pricing and Electronic Commerce

• Dynamic pricing strategies: • seller easily adjusts price • to meet changes in marketplace.

CHEAPTICKETS.COM

http://www.cheaptickets.com/

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• Dynamic pricing strategies:.Cost of changing prices on Internet

is practically zero.Firms can respond quickly and frequently

to changes in costs, supply, and/or demand.

CHEAPTICKETS.COM

http://www.cheaptickets.com/

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• Online auctions (eBay.com)E-commerce allows shoppers to purchase products through online bidding.

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Pricing and Electronic Commerce (cont’d)

• Pricing advantages for online shoppersConsumers gain control. Search engines and “shopbots”

• make customers more price-sensitive.Consumers have more negotiating

power.

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Psychological Issues in Pricing

• Buyer’s pricing expectationInternal reference price: consumers use a price/price range to evaluate product’s cost.

• Assimilation effect • Contrast effect

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Psychological Issues in Pricing

• Buyer’s pricing expectationPrice/quality inferences:

• consumers assume higher-priced product

• has higher quality.

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Psychological Pricing Strategies

• Odd-even pricing: prices ending in 99 rather

than 00 lead to increased sales.

• Price lining: items in a product line sell at

different price points.

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Legal and Ethical Considerations

• Deceptive pricing practicesGoing-out-of-business sale Bait-and-switch

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Legal and Ethical Considerations

• Unfair sales actsLoss-leader pricing Unfair sales acts

• Illegal business-to-business (B2B) price discrimination

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Legal and Ethical Considerations in Pricing (cont’d)

• Price fixing: two or more companies conspire to keep prices at a certain level

Horizontal price fixing

Vertical price fixing

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Legal and Ethical Considerations in Pricing (cont’d)

• Predatory pricing: • company sets a very low

price • for purpose of driving

competitors out of business

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The end

63

Real People, Real Choices

• Taco Bell (Danielle Blugrind)• In order to differentiate itself

from the competition, Taco Bell needed to update its value pricing menu.Option 1: price entire menu at $1.29Option 2: price items at 99 cents and $1.29Option 3: price items at 99 cents, $1.19, and $1.29 TACO BELL

http://www.tacobell.com/

64

Real People, Real Choices

• Taco Bell (Danielle Blugrind)• Danielle chose option 3:

price items at 99 cents, $1.19, and $1.29By carefully tuning its pricing strategy,

Taco Bell is reclaiming its position as purveyor of fast-food value for the money.

65

Marketing Plan Exercise

• A new seaside resort offers luxury rentals for a few days, a week, or longer. Consider possible pricing strategies -- cost-plus, yield management, everyday low pricing, skimming, and penetration and trial pricing. --What pricing strategy do you recommend for the resort ? --What pricing tactics do

you suggest?

66

Marketing in Action Case:You Make the Call

• What is the decision facing True Religion?• What factors are important in

understanding this decision situation?• What are the alternatives?• What decision(s) do you recommend?• What are some ways to implement your

recommendation?

67

Keeping It Real: Fast-Forward to Next Class, Decision Time at General Motors R*Works

• Meet Vince O’Brien, VP-Regional Managing Director for General Motors R*Works

• R*Works: regional promotional agency for GM; manages partnerships with sports organizations

• The decision: How to get dealers to support R*Works ski mountain promotional partnerships?

68

Group Activity

• Your group are marketers for a candy bar manufacturer. You feel it’s time to increase price, but you’re concerned the increase might not be profitable.--How would you investigate elasticity of demand?--What findings would lead you to increase price?--What findings would lead you not to increase it?

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Marketing Math Activity

• You and your friend have decided to go into business together manufacturing handbags. --You know fixed costs will be $120,000 a year, and

you expect variable costs to be $28 per bag. --If you plan to sell the bags to retail stores for $35,

how many must you sell to break even?

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Discussion

• In what ways is a price leadership strategy good or bad for consumers?

• Should governments allow price leadership?

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Discussion

• In pricing new products, marketers may choose a skimming or a penetration pricing strategy. --What is the advantage or disadvantage of this

practice for consumers? --For the industry as a whole?

72

Discussion

• Consumers often make price-quality inferences about products.--What are some products for

which you make price-quality inferences?

--Do your inferences make sense?

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Discussion

• In loss-leader pricing, retailers advertise and sell an item below cost to get customers into the store. --Do you consider this an unethical practice? --Who benefits and who is hurt by it? --Should the practice be made illegal (some states

have done so)? --How is loss-leader pricing different from bait-and-

switch pricing?

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Figure 11.3: Shift in Demand Curve

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Figure 11.2: Demand Curves for Normal and Prestige Products

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Price Elasticity of Demand• The percentage change in unit sales that

results from a percentage change in price.

Figure 11.5: Price Elastic and Inelastic Demand Curves

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Figure 11.7: Break-Even Analysis

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Figure 11.8: Marginal Analysis

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Figure 11.6: Variable Costs at Different Levels of Production

pricing the product

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