Transcript Slide 1

Price the Product
Chapter Eleven
© 2012 Pearson Education, Inc. publishing as Prentice-Hall.
Chapter Objectives
 Explain the importance of pricing and how
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prices marketers set objectives for pricing
strategies
Describe how marketers use costs, demands,
revenue and the pricing environment to make
pricing decisions
Understand key pricing strategies and tactics
Understand the opportunities for Internet pricing
strategies
Describe the psychological, legal, and ethical
aspects of pricing
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Real People, Real Choices:
Decision Time at Taco Bell
 Which pricing option should Taco Bell
implement?
• Option 1: Price the entire menu at $1.29
• Option 2: Use mixed price menu #4, and
price items at $.99 and $1.29
• Option 3: Use mixed price menu #1, and
price menu items at $.99, $1.19, and
$1.29
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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
• Includes money, goods, services,
favors, votes, or anything else that has
value to the other party
• Opportunity costs must also be
considered
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Steps in Price Planning
Step 1: Set Pricing Objectives
 Pricing objectives take many of the
following forms:
• Profit
• Sales
• Market share
• Competitive effect
• Customer satisfaction
• Image enhancement
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Steps in Price Planning
Step 2: Estimate Demand
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Demand:
Customers’ desire 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 illustrate the effect of price
on quantity demanded
Law of demand:
• As price goes up, quantity demanded declines
• For prestige products, a price increase may
actually increase the quantity demanded
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Shifts in Demand
 Typical demand curves assume that
only price changes, but in reality, other
factors can shift demand upward or
downward:
• Changes in marketing strategy
(improved product, new advertising)
• Non-marketing activities (product
recalls, development of new
technologies, etc.)
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Estimating Demand
 Total demand:
• Number of buyers * average amount of
each buyer’s purchase
 Firm’s demand:
• Total demand * the firm’s estimated
share of the market
• Demand estimates should be adjusted if
competition, the economy, or other
factors change
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Price Elasticity of Demand
 Elasticity of demand:
The percentage change in unit sales
that results from a percentage change
in price
• When changes in price have large
effects on the amount demanded,
demand is elastic
• When changes in price have little or no
effect on the amount demanded,
demand is inelastic
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Elastic vs. Inelastic Demand
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Elastic Demand:
 Inelastic Demand:
• Revenues decrease • As price
as price increases
increases,
and vice versa
revenues
increase
• Non-necessities
(pizza) generate
• The demand for
elastic demand
necessities such
as food and
• Availability of close
electricity is
substitute products
generally
facilitates elastic
inelastic
demand
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Cross-elasticity of Demand
 Changes in the prices of other products
affect a product’s demand:
• If products are substitutes, an increase
in the price of one will increase demand
for the other
• If one product is essential for use of
second, an increase in the price of one
decreases demand for another
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Steps in Price Planning
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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Steps in Price Planning
Step 3: Determine Costs
 Fixed costs:
Costs of production that don’t change
with the number of units produced
• Average fixed cost per unit will
decrease as the number of units
produced increases
 Total costs:
Total of fixed costs and variable costs
for a set number of units produced
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Break-Even Analysis
 Break-even analysis:
• Determines the number of units a firm
must produce/sell at a given price to
cover costs
 Break-even point:
• Point at which total revenue and total
cost are equal
• Break-even point (in units)
Contribution
per unit
• Break-even point (in dollars)
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Marginal Analysis
 Analysis that uses cost and demand to
find the price that will maximize profits:
• 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 (decreases with each
additional unit sold)
• Profit is maximized where marginal cost
is exactly equal to marginal revenue
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Markups and Margins:
Pricing Through the Channel
 Markup
An amount added to the cost of the
product to create a price at which the
channel member will sell the product
• Gross margin
• Retailer margin
• Wholesaler margin
• List price
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Steps in Price Planning
Step 4: Evaluate the Pricing Environment
 The economy
• Broad economic trends
• Recession
• Inflation
 Competition
 Government regulation
 Consumer trends
 The international environment
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Steps in Price Planning
Step 5: Choose a Price Strategy
 Pricing strategies based on cost:
• Simple to calculate and relatively risk
free
• Drawbacks: demand, competition, and
the nature of the target market are not
considered
• Cost-plus pricing:
Total all product costs and add markup
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Steps in Price Planning
Step 5: Choose a Price Strategy
 Pricing strategies based on demand:
• Based on estimates of the quantity a
firm can sell at different prices
• Target costing:
Identify quality and functionality
customers need and price they’re
willing to pay before designing product
• Yield management pricing:
Manages capacity by charging different
prices to different customers
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Steps in Price Planning
Step 5: Choose a Price Strategy
 Pricing strategies based on the
competition can include:
• Pricing near, at, above, or below the
competition
• Price leadership strategy:
Industry giant announces price, and
competitors get in line or drop out
Typical
in oligopolistic industries
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Steps in Price Planning
Step 5: Choose a Price Strategy
 Pricing strategies based on customers’
needs
• Value pricing or everyday low pricing
(EDLP): Pricing strategy in which a firm
sets prices that provide ultimate value
to customers
• Some firms use hybrid EDLP to
compete with low-price retailers
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Steps in Price Planning
Step 5: Choose a Price Strategy
 New-product pricing
• Skimming pricing:
A very high premium price is charged
• Penetration pricing:
A very low price is set to encourage
more customers to purchase
• Trial pricing:
Low price for a limited period of time
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Steps in Price Planning
Step 6: Develop Pricing Tactics
 Pricing for individual products include:
• Two-part pricing
• Payment pricing
 Pricing for multiple products include:
• Price bundling
• Captive pricing
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Steps in Price Planning
Step 6: Develop Pricing Tactics
 Distribution-based pricing include:
• F.O.B. (free on board) origin pricing
• F.O.B delivered pricing
• Basing-point pricing
• Uniform delivered pricing
• Freight absorption pricing
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Steps in Price Planning
Step 6: Develop Pricing Tactics
 Discounting for channel members
include:
• Trade or functional discounts
Price
given to channel members
• Quantity discounts
• Cash discounts
Encourages
prompt payment
• Seasonal discounts
Available
only at certain times
of the year
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Pricing and Electronic Commerce
 Strategy 1 - Dynamic pricing:
• Cost of changing prices on the Internet
is practically zero
• Firms can respond quickly and
frequently to changes in costs, supply,
and/or demand
 Strategy 2 - Online auctions (eBay.com)
• E-commerce allows shoppers to
purchase products through online
bidding
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Pricing and Electronic Commerce
 Strategy 3 - Freenomics
A business model that encourages
giving products away for free because
of the increase in profits that can be
achieved by getting more people to
participate in a market
 Pricing advantages for online shoppers
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Psychological Issues in
Setting Prices
 Issues in setting price include:
• Buyer’s pricing expectation
• Internal reference price
• Price/quality inferences
 Psychological pricing strategies
include:
• Odd-even pricing
• Price lining
• Prestige pricing
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Legal and Ethical Considerations
in Pricing
 Deceptive pricing practices include:
• Going-out-of-business sale
• Bait-and-switch
 Unfair sales acts include:
• Loss-leader pricing
• Unfair sales acts
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Legal and Ethical Considerations
in Pricing
 Legal issues in business-to-business
pricing include:
• Price discrimination
• Price fixing:
Two or more companies conspire to
keep prices at a certain level
Horizontal
vs. vertical price fixing
• Predatory pricing
Firm sets a very low price for purpose
of driving competitors out of business
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Real People, Real Choices:
Decision Made at Taco Bell
 Danielle chose option 3
• Why do you think Danielle chose to
implement the mixed price menu?
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Keeping It Real: Fast-Forward to
Next Class Decision Time at Campfire
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Meet Mike Monello, the partner/executive
creative director at Campfire, a
communication agency in New York
Campfire’s campaigns cross all media
channels and center around storytelling and
experience
The decision to be made:
Whether to become a full-service digital
agency for a new client as their agent of
record (AOR)
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photocopying, recording, or otherwise, without the prior
written permission of the publisher. Printed in the United
States of America
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