Consumers Rule

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Transcript Consumers Rule

Pricing the Product
Chapter Objectives
• Explain the importance of pricing and how prices
can take both monetary and nonmonetary forms
• Understand the pricing objectives marketers
typically have in planning pricing strategies
• Describe how marketers use costs, demands,
and revenue to make pricing decisions
• Understand some of the environmental factors
that affect pricing strategies
Chapter Objectives (cont’d)
• Understand key pricing strategies
• Explain pricing tactics for single and
multiple products, and for pricing on the
• Understand the opportunities for Internet
pricing strategies
• Describe the psychological, legal, and
ethical aspects of pricing
“Yes, but what does it cost?”
• Price: the assignment of
value, or the amount the
consumer must exchange
to receive the offering
Money, goods, services, favors,
votes, or anything else that has
value to the other party
Figure 11.1:
Steps in Price Planning
Step 1: Develop Pricing Objectives
• Sales or market share objectives
 Pricing strategy change to support a 5% increase in sales
• Profit objectives
 Prices should increase profit 8%..etc. important for Fad products.
• Competitive effect objectives
 Alter pricing to increase sales during competitors entering the
market / maintain low-price to stop new entrants.
• Customer satisfaction objectives
 Match expectations/ simplify price structure to simplify decision
• Image enhancement objectives
 Reflect the increased emphasis on product’s quality image.
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?
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.
Figure 11.2: Demand Curves for
Normal and Prestige Products
Shifts in Demand Curve
Changes in marketing strategy
(improved product, new
advertising) or non-marketing
activities can cause upward or
downward shifts in demand.
At a given price, demand is greater
or less than before the shift.
Figure 11.3: Shift in Demand Curve
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.
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
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.
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.
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.
 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
• 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.
Figure 11.6: Variable Costs at Different
Levels of Production
Step 3: Determine Costs (cont’d)
• Fixed costs: costs of production that don’t
change with number of units produced
Rent, cost of owning/maintaining factory, utilities,
equipment, fixed salaries of firm’s executives
Average fixed cost: fixed cost per unit (total fixed costs
divided by number of units produced) will decrease as
number of units produced increases.
Step 3: Determine Costs (cont’d)
• Total costs: total of fixed costs and
variable costs for a set number of units
Break-Even Analysis
• A method for determining 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.
Figure 11.7: Break-Even Analysis
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 and the variable costs
• Break-even point (in dollars) = (total fixed
costs) divided by [1 - (variable cost per
unit divided by price)]
Marginal Analysis
• A method that uses cost and demand to
identify 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 of a product
(decreases with each additional unit sold)
 Profit is maximized where marginal cost is exactly
equal to marginal revenue.
Marginal cost
Marginal revenue
Figure 11.8: Marginal Analysis
Marketing Math Activity
• You and your friend have decided to go
into business together manufacturing
 --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?
Step 4: Evaluate the Pricing
• The economy
Broad economic trends
• The competition
• Consumer trends
Step 5: Choose a Price Strategy
• Pricing strategies based on cost
Simple to calculate and relatively risk free
Cost-plus pricing: total all product costs and add
Step 5: Choose a Price Strategy
• Pricing strategies based on demand
 Based on estimate of 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: charge different prices to
different customers to manage capacity
Step 5: Choose a Price Strategy
• Pricing strategies based on the
 Pricing near, at, above, or below the competition
 Price leadership strategy: industry giant announces
price, and competitors get in line or drop out
Step 5: Choose a Price Strategy
• Pricing strategies based on customers’
 Value pricing or everyday low pricing (EDLP): pricing
strategy in which a firm sets prices that provide
ultimate value to customers.
Step 5: Choose a Price Strategy
• New-product pricing
Skimming price: a very high premium
Penetration pricing: a very low price
to encourage more customers to
Trial pricing: low price for a limited
period of time
• 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?
Step 6: Develop Pricing Tactics
• Pricing for individual
Two-part pricing: offering two
separate types of payments to
purchase the product
Payment pricing: breaking total
price into smaller amounts
payable over time
Step 6: Develop Pricing Tactics (cont’d)
• Pricing for multiple products
Price bundling: selling two or more goods or services as
a single package for one price
Captive pricing: pricing two products that work only
when used together
Step 6: Develop Pricing Tactics (cont’d)
• Distribution-based pricing
 F.O.B. (free on board) origin pricing
 F.O.B delivered pricing
 CIF (Cost, insurance, freight)
 CFR (Cost & freight)
 CIP (Carriage and insurance paid to) CPT (carriage
paid to)
 Basing-point pricing
 Uniform delivered pricing
 Freight absorption pricing
Step 6: Develop Pricing Tactics (cont’d)
• Discounting for channel members
 List price (suggested retail price): price that
manufacturer sets as appropriate for end consumer to
 Trade or functional discounts: set percentage
discounts off list price for each channel level
 Quantity discounts: reduced prices for purchases of
larger quantities
Step 6: Develop Pricing Tactics (cont’d)
• Discounting for channel members
Cash discounts: enticements to customers to pay bills
quickly (2% 10 days, net 30 days)
Seasonal discounts: price reductions offered during
certain times of year
Pricing and Electronic Commerce
• Dynamic pricing
strategies: seller easily
adjusts price to meet
changes in marketplace.
Cost of changing prices on Internet
is practically zero.
Firms can respond quickly and
frequently to changes in costs,
supply, and/or demand.
Pricing and Electronic Commerce
• Online auctions (
 E-commerce allows shoppers to purchase products
through online bidding.
• Pricing advantages for online shoppers
 Consumers gain control.
 Search engines and “shopbots” make customers
more price-sensitive.
 Consumers have more negotiating power.
Psychological Issues in Pricing
• Buyer’s pricing expectation
 Internal reference price: consumers use a price/price
range to evaluate product’s cost.
• Assimilation effect
• Contrast effect
 Price/quality inferences: consumers assume higherpriced product has higher quality.
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.
Legal and Ethical Considerations in
• Deceptive pricing practices
 Going-out-of-business sale
 Bait-and-switch
• Unfair sales acts
 Loss-leader pricing
 Unfair sales acts
• Illegal business-to-business price
• 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-andswitch pricing?
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
• Predatory pricing: company sets a very low price
for purpose of driving competitors out of
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 ? And why?!
 --What pricing tactics do
you suggest?