Transcript Pricing Products and Services

Marketing
8th Canadian Edition
Powerpoints prepared by:
Victor Bilodeau
Grant MacEwan University - School of Business
© 2011 McGraw-Hill Ryerson Ltd. All rights reserved.
Pricing Products and
Services
© 2011 McGraw-Hill Ryerson Ltd. All rights reserved.
Learning Objectives
After reading this chapter, you should be able to:
1.Understand the nature and importance of pricing products and
services.
2.Recognize the constraints on a firm’s pricing latitude and the
objectives a firm has in setting prices.
3.Explain what a demand curve is and what price elasticity of
demand means.
4.Perform a break-even analysis.
5.Understand approaches to pricing as well as factors considered to
establish prices for products and services.
6.Describe basic laws and regulations affecting pricing practices.
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© 2011 McGraw-Hill Ryerson Ltd. All rights reserved.
HERE’S A PRICING PROBLEM FOR YOU!
‣ Confederation Bridge
‣ Joins PEI with New Brunswick
‣ 12.9 km long
‣ Cost $1 Billion
‣ What price do you charge users who might want to
cross it?
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NATURE AND
IMPORTANCE OF PRICE
‣ What is a Price?
‣ Barter
‣ Price as an Indicator of Value
‣ Value-pricing
‣ Price in the Marketing Mix
‣ Profit Equation
‣ Profit = Total revenue - Total cost
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LO 1
FIGURE 13-1 The price of four different purchases
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LO 1
FIGURE 13-2 Steps in setting price
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LO 1
STEP 1: IDENTIFYING PRICING
CONSTRAINTS AND OBJECTIVES
‣ Identifying Pricing Constraints
‣ Demand for the Product Class, Product, and Brand
‣ Newness of the Product: Stage in the Product Life Cycle
‣ Single Product versus a Product Line
‣ Cost of Producing and Marketing the Product
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LO 2
STEP 1: IDENTIFYING PRICING
CONSTRAINTS AND OBJECTIVES
‣ Identifying Pricing Constraints (cont.)
‣ Cost of Changing Prices and Time Period They Apply
‣ Types of Competitive Markets
‣
‣
‣
‣
Pure monopoly
Oligopoly
Monopolistic competition
Pure competition
‣ Competitors’ Prices
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LO 2
FIGURE 13-3 Pricing, product, and advertising strategies
available to firms in four types of competitive markets
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LO 2
STEP 1: IDENTIFYING PRICING
CONSTRAINTS AND OBJECTIVES
‣ Identifying Pricing Objectives
‣ Profit
‣ Sales
‣ Market Share
‣ Unit Volume
‣ Survival
‣ Social Responsibility
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LO 2
FIGURE 13-4
Where each dollar
of your movie
ticket goes
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LO 2
Learning Review
What factors impact the list price to determine the final price?
Answer:
Factors that may limit the latitude of prices a firm may set are
pricing constraints. These pricing constraints are: (1) Demand for
the product class, product, and brand; (2) Newness of the
product: stage of the product life cycle; (3) Single product vs. a
product line, (4) Cost of producing and marketing the product;
(5) Cost of changing prices and time period in which they apply,
(6) Type of competitive markets; and (7) Competitors' prices.
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LO 2
Learning Review
How does the type of competitive market a firm is in affect its
latitude in setting price?
Answer:
The type of competition considerably influences the latitude of
price competition and, in turn, the nature of product
differentiation and extent of advertising. A firm must recognize
the general type of competitive market it is in to understand the
latitude of both its price and non-price strategies.
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LO 2
STEP 2: ESTIMATING
DEMAND AND REVENUE
‣ Fundamentals of Estimating Demand
‣ The Demand Curve
‣ Consumer tastes
‣ Price and availability of other products
‣ Consumer income
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LO 3
STEP 2: ESTIMATING
DEMAND AND REVENUE
‣ Fundamentals of
Estimating Demand
(cont.)
‣ Movement Along versus Shift
of a Demand Curve
‣ Price Elasticity of Demand
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LO 3
FIGURE 13-5 Illustrative demand curves for Newsweek
magazine
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LO 3
STEP 2: ESTIMATING
DEMAND AND REVENUE
‣ Fundamentals of Estimating Revenue
‣ Total revenue
‣ Total Profit = Total Revenue - Total Cost
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LO 3
Learning Review
What is the difference between a movement along and a shift of
a demand curve?
Answer:
A movement along a demand curve means there is a change in
the quantity demanded, with no substantial change in demand
factors. If those factors change, such as in increase in incomes, a
shift in the demand curve can occur.
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LO 3
Learning Review
What does it mean if a product has inelastic demand?
Answer:
Slight increases or decreases in price will not have much impact
on demand.
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LO 3
STEP 3: ESTIMATING COST, VOLUME, AND
PROFIT RELATIONSHIPS
‣ The Importance of Controlling Costs
‣ Total cost
‣ Fixed cost
‣ Variable cost
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LO 3
STEP 3: ESTIMATING COST, VOLUME, AND
PROFIT RELATIONSHIPS
‣ Break-Even Analysis
‣ Break-even point (BEP)
‣ Calculating a Break-Even Point
‣ Break-even chart
‣ Application of Break-Even Analysis
‣ Using Microsoft Excel to answer hypothetical “what-if”
questions.
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LO 4
FIGURE 13-6 Calculating a break-even point
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LO 4
FIGURE 13-7 Break-even analysis chart for a picture frame
shop
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LO 4
Learning Review
What is the difference between fixed cost and variable cost?
Answer:
Fixed cost is the sum of the firm's expenses that are stable and
do not change with the quantity of product that is produced and
sold. Variable cost is the sum of the firm's expenses that vary
directly with the quantity of product that is produced and sold.
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LO 4
Learning Review
What is a break-even point?
Answer:
The break-even point (BEP) is the quantity at which total
revenue and total cost are equal and beyond which profit occurs.
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LO 4
STEP 4: SELECTING AN APPROXIMATE
PRICE LEVEL
‣ Demand-Oriented Approaches
‣ Skimming Pricing
‣ Penetration Pricing
‣ Prestige Pricing
‣ Price Lining
‣ Odd-Even Pricing
‣ Target Pricing
‣ Bundle Pricing
‣ Yield Management Pricing
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LO 5
FIGURE 13-8 Four approaches for selecting an approximate
price level
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LO 5
Energizer and Customer Value
Value lies in the eye of the beholder
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LO 5
Air Canada Vacations
Value lies in the eye of the beholder
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LO 5
Learning Review
What are the circumstances in pricing a new product that might
support skimming or penetration pricing?
Answer: Circumstances that support skimming pricing are: (1)
Enough prospective customers are willing to buy the product
immediately at the high initial price to make sales profitable,
(2) The high initial price will not attract competitors, (3)
Lowering price has only a minor effect on increasing the sales
volume and reducing the unit costs, and (4) Customers interpret
the high price as signifying high quality.
Circumstances that support penetration pricing are the opposite
of skimming, and they are: (1) Many segments of the market are
price sensitive; (2) Low initial price discourages competitors
from entering the market, and (3) Unit production and marketing
costs fall dramatically as production volume increase.
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LO 5
Learning Review
What is odd-even pricing?
Answer:
Odd-even pricing is setting prices a few dollars or cents under an
even number.
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LO 5
STEP 4: SELECTING AN APPROXIMATE
PRICE LEVEL
‣ Cost-Oriented Approaches
‣ Standard Markup Pricing
‣ Cost-Plus Pricing
‣ Experience Curve Pricing
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LO 5
STEP 4: SELECTING AN APPROXIMATE
PRICE LEVEL
‣ Profit-Oriented Approaches
‣ Target Profit Pricing
‣ Target Return-on-Sales Pricing
‣ Target Return-on-Investment Pricing
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LO 5
STEP 4: SELECT AN APPROXIMATE PRICE
LEVEL
‣ Competition-Oriented Approaches
‣ Customary Pricing
‣ Above- At- or Below- Market Pricing
‣ Loss-Leader Pricing
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LO 5
Zellers: Below-market price strategy
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LO 5
Using Marketing Dashboards
Are Cracker Jack Prices Above, At, or Below the Market?
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LO 5
Learning Review
What is standard markup pricing?
Answer:
Standard markup pricing entails adding a fixed percentage to the
cost of all items in a specific product class.
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LO 5
Learning Review
What is the purpose of loss-leader pricing when used by a retail
firm?
Answer:
The purpose of loss-leader pricing is not to increase sales of that
particular produce but to attract customers in hopes they will
buy other products as well, particularly discretionary items
carrying large markups.
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LO 5
STEP 5: SETTING THE
LIST OR QUOTED PRICE
‣ One-Price versus Flexible-Price Policy
‣ Company, Customer, and Competitive Effects
‣ Company Effects
‣ Product-line pricing
‣ Customer Effects
‣ Competitive Effects
‣ Price war
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LO 5
Dollarama: One-Price Policy
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LO 5
Frito-Lay Products
Frito-Lay recognizes that its tortilla chip products are partial substitutes for
one another and its bean and cheese dips and salsa sauces complement
tortilla chips.
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LO 5
STEP 6: MAKING SPECIAL ADJUSTMENTS TO
THE LIST OR QUOTED PRICE
‣ Discounts
‣ Quantity Discounts
‣ Seasonal Discounts
‣ Trade (Functional) Discounts
‣ Cash Discounts
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LO 5
Toro Ad
Toro uses seasonal
discounts to
stimulate consumer
demand and smooth
out seasonal
manufacturing peaks
and troughs.
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LO 5
STEP 6: MAKING SPECIAL ADJUSTMENTS TO
THE LIST OR QUOTED PRICE
‣ Allowances
‣ Trade-In Allowances
‣ Promotional Allowances
‣ Everyday low pricing
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LO 5
STEP 6: MAKING SPECIAL ADJUSTMENTS TO
THE LIST OR QUOTED PRICE
‣ Geographical Adjustments
‣ FOB Origin Pricing
‣ Uniform Delivered Pricing
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LO 5
STEP 6: MAKING SPECIAL ADJUSTMENTS TO
THE LIST OR QUOTED PRICE
‣ Legal and Regulatory Aspects of Pricing
‣ Price Fixing
‣ Vertical price fixing
‣ Horizontal price fixing
‣ Price Discrimination
‣ Deceptive Pricing
‣ Predatory Pricing
‣ Delivered Pricing
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LO 6
FIGURE 13-9 Five most common deceptive pricing
practices
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LO 6
Learning Review
Why would a seller choose a flexible-price policy over a oneprice policy?
Answer:
Most companies use a one-price policy. A flexible-price policy
gives sellers considerable discretion in setting the final price in
light of demand, cost, and competitive factors. Flexible pricing
has grown in popularity because of increasingly sophisticated
information technology.
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LO 6
Learning Review
Which pricing practices are covered by the Competition Act?
Answer:
The Competition Act covers these pricing practices: (1) Price
fixing, (2) Price discrimination, (3) Deceptive pricing, (4)
Predatory pricing, and (5) Delivered pricing.
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LO 6
VIDEO CASE 13
Washburn International, Inc.
Washburn
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VIDEO CASE 13-1
Washburn International, Inc.
What factors are most likely to affect the demand for
the lines of Washburn guitars
a. bought by a first-time guitar buyer and
b. bought by a sophisticated musician who wants a
signature model?
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VIDEO CASE 13-2
Washburn International, Inc.
For Washburn what are examples of
a. shifting the demand curve to the right to get a
higher price for a guitar line (movement of the
demand curve) and
b. pricing decisions involving moving along a demand
curve?
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VIDEO CASE 13-3
Washburn International, Inc.
In Washburn’s current plant what is the break-even
point for the new line of guitars if the retail price is
a. $349,
b. $389,
c. $309?
d. Also, if Washburn achieves the sales target of
2,000 units at the $349 retail price, what will
its profit be?
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VIDEO CASE 13-4
Washburn International, Inc.
Assume that the merger with Parker leads to the cost
reductions projected in the case. Then, what will be
the
a. new break-even point at a $349 retail price for this
line of guitars and
b. the new profit if it sells 2,000 units?
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VIDEO CASE 13-5
Washburn International, Inc.
If for competitive reasons, Washburn eventually has to
move all its production back to Asia,
a. which specific costs might be lowered and
b. what additional costs might it expect to incur?
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Profit Equation
‣ Profit = total revenue – Total cost,
or
‣ Profit = (Unit Price x Quantity Sold) – Total Cost
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Pricing Constraints
‣ Factors that limit the latitude of price a firm may set.
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Pricing Objectives
‣ Expectations that specify the role of price in an
organization’s marketing and strategic plans.
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Demand Curve
‣ The summation of points representing the maximum
number of products consumers will buy at a given
price.
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Total Revenue
‣ The total money received from the sale of a product.
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Price Elasticity of Demand
‣ The percentage change in quantity demanded relative
to a percentage change in price.
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Total Cost
‣ The total expense incurred by a firm in producing and
marketing a product. Total cost is the sum of fixed
cost and variable cost. In physical distribution
decisions, the sum of all applicable costs for logistical
activities.
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Fixed Cost
‣ The sum of expenses of the firm that are stable and
do not change with the quantity of product that is
produced and sold.
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Variable Cost
‣ The sum of the expenses of the firm that vary directly
with the quantity of product that is produced and
sold.
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Break-Even Analysis
‣ A technique that analyses the relationship between
total revenue and total cost to determine profitability
at various levels of output.
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Penetration Pricing
‣ Setting a low initial price on a new product to appeal
immediately to the mass market.
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Price
‣ The money or other considerations (including other
goods and services) exchanged for the ownership or
use of a good or service.
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Skimming Pricing
‣ The highest initial price that customers really desiring
the product are willing to pay.
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Above-, At-, or Below-Market Pricing
‣ Setting prices based on pricing of similar products in
the market.
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Bundle Pricing
‣ The marketing of two or more products in a single
“package” price.
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Cost-Plus Pricing
‣ Summing the total unit cost of providing a product or
service and adding a specific amount to the cost to
arrive at a price.
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Customary Pricing
‣ Setting prices dictated by tradition, standardized
channels of distribution, or other competitive factors.
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Experience Curve Pricing
‣ Pricing method based on production experience, that
is, the unit cost of many products and services
declines by 10 to 30 percent each time a firm’s
experience at producing and selling them doubles.
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Loss-Leader Pricing
‣ Selling products below their customary prices to
attract attention to them in the hope that customers
will buy other products as well.
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Odd–Even Pricing
‣ Setting prices a few dollars or cents under an even
number.
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Prestige Pricing
‣ Setting a high price on a product to attract quality- or
status-conscious consumer.
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Price Lining
‣ Pricing a line of products at a number of different
specific pricing points.
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Standard Markup Pricing
‣ Adding a fixed percentage to the cost of all items in a
specific product class.
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Target Pricing
‣ The practice of deliberately adjusting the composition
and features of a product to achieve the target price
to consumers.
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Target Profit Pricing
‣ Pricing method based on an annual target of a specific
dollar volume of profit.
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Target Return-on-Investment Pricing
‣ Setting prices to achieve return-on-investment (ROI)
targets.
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Target Return-on-Sales Pricing
‣ Setting typical prices that will give a firm a profit that
is a specific percentage.
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Yield Management Pricing
‣ The charging of different prices to maximize revenue
for a set amount of capacity at any given time.
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