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Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 12- 1
Pricing Strategies
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CHAPTER OBJECTIVES
1. What are the roles of price and value in the marketing mix? How do market structures, costs, and demand affect prices?
2. What are the most important market factors influencing pricing decisions?
3. How do marketers use pricing strategy and pricing objectives to achieve their goals?
4. What procedures and strategies do marketers use when making pricing decisions?
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 3Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 12-
Objective 1
What are the roles of price and value in
the marketing mix? How do market
structures, costs, and demand affect
prices?
DEFINED
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A Price is the exchange value of a
product or service in the
marketplace.
EXPLAINED
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Value
Value = Benefits - Costs
Service Benefits
Brand Benefits
Product Benefits
Price &OtherCosts
Value
EXPLAINED
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APPLIED
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Establishing Prices
Price
ProductPlace
Promotion
APPLIED
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Market Structure
Pure Competition
Oligopoly
Monopolistic Competition
Monopoly
APPLIED
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Monopoly: A single firm has the power to set and control price in a market.
Drug and software manufacturers, due to patent protections, are examples.
Market Structure
Monopoly
APPLIED
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Oligopoly: Few sellers, fairly large, requires sizable investment to enter market
Where several firms share price power by being able to control supply.
Airlines, Farm Implement Industries
Competition is more through product differentiation than price
Market Structure
Oligopoly
APPLIED
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Monopolistic: Relatively large number of sellers, each seller tries to differentiate their products from the competition
Clothing, Shoes
Product Differentiation: Developing and promoting differences between one’s products and similar products.
Market Structure
Monopolistic Competition
APPLIED
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Monopolistic competition
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$5.00 $30.00
APPLIED
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Pure Competition: Numerous producers selling undifferentiated products.
Agricultural Products: Corn, Wheat, Milk
Market Structure
Pure Competition
APPLIED
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Perfect (or pure) competition
The market situation in which there are many buyers and sellers of a product, and no single buyer or seller is powerful enough to affect the price of that product Supply: The quantity of a product that producers are willing to
sell at each of various prices
Demand: The quantity of a product that buyers are willing to purchase at each of various prices
Market Price (Equilibrium): The price at which the quantity demanded is exactly equal to the quantity supplied
Types of Competition: Perfect
1 | 14
APPLIED
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Supply Curve and Demand Curve
1 | 15
APPLIED
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Cost-Based Pricing
Profit Revenue Costs
Price x units sold
Fixed Costs + Variable Costs
APPLIED
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Add a fixed amount, called a margin, to the cost of each item sufficient enough to earn a desired profit.
Margin
Price
Cost
Margin
APPLIED
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Contribution Margin = Price – Variable Costs
Contribution Margin
$10
Price
$7
Variable Costs
$3Contribution Margin
APPLIED
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Profit Margin = Price – Total Cost of the Product
Profit Margin
$10
Price
$7
Variable Costs
$2 Profit Margin
$1
APPLIED
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Recognize the need to establish a price that offsets costs and results in a reasonable profit margin.
Cost-Based Pricing
$10
Price
$7Variable Costs
$2 Profit Margin
$1 Fixed Costs
APPLIED
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Margin is the percentage of the final selling price that is profit.
Take the variable cost of a product and adding a fixed percentage to arrive at a selling price.
To calculate the selling price of a $12 product, and a desired margin of 10% the formula would be:
$12 /(1-.10) or $12 / .9 =
Profit = $1.33 or 10% of the selling price.
Cost-Plus Pricing: MARGIN
$13.33.
APPLIED
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To calculate the selling price of a $12 product, and a desired margin of 10% the formula would be:
$12 /(1-.10) or $12 / .9 =
Calculate the selling price of a product that costs $14 to produce and has a margin of 15%
$14 /(1-.15) or $14 / .85 =
Calculate the selling price of a product that costs $25 to produce and has a margin of 18%
$25 /(1-.82) or $25 / .82 =
Group Activity
$16.47.
$13.33.
$30.49
APPLIED
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Markup is the percentage difference between the actual cost and the selling price
The margin is determined by dividing the contribution per unit by the unit cost.
Cost = $12
Contribution per unit = $1.33
Selling price = 13.33
The margin is: $1.33 / $12 =
There difference between the cost and the selling price is 11%.
Cost-Plus Pricing
11%
APPLIED
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The markup is determined by dividing the contribution per unit by the unit cost.
Find the margin for the following:
Cost = $14
Contribution per unit = $2.47
Selling price = $16.47
the margin is: $2.47/ $16.47 =
Problem 2
Cost = $25
Contribution per unit = $5.49
Selling price = $30.49
the margin is: $5.49 / $30.49 =
Cost-Plus Pricing
15%
18%
APPLIED
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Cost-Plus Pricing
Markup % Margin Selling Price
10% 11.0% $13.33
15%
20%
25%
30%
Determine the Margin and Selling Price for a product costing $12.00.
17.6%
25.0%
42.8%
33%
$14.12
$15.00
$16.00
$17.14
APPLIED
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Break-even Point
Fixed cost = $40k; Variable Cost = $5; Selling Price = $10
Break-EvenIn Units
= Fixed Costs
Price - Variable Costs
Break-Even = $40,000
$10 - $5
Break-Even 8,000 units=
Calculate the break even point in number of units
APPLIED
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Break-even PointFixed cost = $40k; Variable Cost = $5; Selling Price = $10
APPLIED
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Elastic vs. Inelastic
Determination of Demand
100K 200K 300K
Quantity
$0.50P
rice
$0.25
$0.10
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Objective 3 & 4
How do marketers use pricing strategy and
pricing objectives to achieve their goals?
What procedures and strategies do
marketers use when making pricing
decisions?
DEFINED
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A Pricing Strategy identifies what a business will
charge for its products or
services.
EXPLAINED
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Pricing Objectives
Profitability$
$
$
$
APPLIED
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New Product Pricing
Skimming
APPLIED
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New Product Pricing
Penetration
APPLIED
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Pricing Strategies
Storefront Pricing
Online Pricing
Tiered Pricing
Dynamic Pricing
Carnival Cruise
Verizon Wireless
Priceline
APPLIED
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Portfolio Pricing
Customer’s willingness to pay
Price ceiling $$$
Price floor $
Product 1
Product 2
Product 3
Pric
e ra
nge
for
bran
d/pr
oduc
t lin
e
APPLIED
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Price Adjustment Strategies
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Visual Summary