CHAPTER 11Pricing The Product

M A R K E T I N GReal People, Real Choices

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Chapter Objectives

• Explain the importance of pricing & understand how prices can take both monetary & non-monetary forms

• Understand the pricing objectives that marketers typically have in planning pricing strategies

• Describe how marketers use costs, demands, & revenue to make pricing decisions

• Understand some of the environmental factors that affect pricing strategies

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Chapter Objectives

• Understand key pricing strategies

• Explain pricing tactics for single & multiple products & for pricing on the Internet

• Understand the opportunities for pricing strategies

• Describe the psychological, legal, & ethical aspects of pricing

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Yes, But What Does It Cost?

• Price is the value that customers give up or exchange to obtain a desired product

• Payment may be in the form of money, goods, services, favors, votes, or anything that has value to the other party

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Opportunity Costs

• The value of something that is given up to obtain something else also affects the “price” of a decision

• Example: the cost of going to college is charged in tuition and fees but also includes the opportunity cost of what a student cannot earn by working instead

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The Importance of Pricing Decisions

• Price is the only component of the marketing mix that represents revenue rather than an expense

• Products are becoming more like commodities, making price especially important

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Steps in Price Planning

• Develop pricing objectives

• Estimate demand

• Determine costs

• Evaluate the pricing environment

• Choose a pricing strategy

• Develop pricing tactics

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Types of Pricing Objectives

• Sales or market share objectives

• Profit objectives

• Competitive effect objectives

• Customer satisfaction objectives

• Image enhancement objectives

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Estimating Demand

• Demand refers to customers’ desire for products

– How much of a product do consumers want? How will this change as the price goes up or down?

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Demand Curves

• Shows the quantity of a product that customers will buy in a market during a period of time at various prices if all other factors remain the same

• Vertical axis: different prices a firm might charge

• Horizontal axis: number of units

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Estimating Demand

• Identify demand for an entire product category in markets the company serves

• Predict what the company’s market share is likely to be

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The Price Elasticity of Demand

• How sensitive are customers to changes in the price of a product?

• Price elasticity of demand is a measure of the sensitivity of customers to changes in price

• Price elasticity of demand = Percentage change in quantity demanded / Percentage change in price

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Price Elasticity of Demand

• Availability of substitute goods or services– If a product has a close substitute, its

demand will be elastic• Time period

– The longer the time period, the greater the likelihood that demand will be more elastic

• Income effect– Changes in income affect demand for a

product even if its price remains the same

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Types of Costs_1

• Variable costs – per-unit costs of production that will fluctuate, depending on how many units or individual products a firm produces

– Direct materials, direct labor, variable selling costs

• Fixed costs – do not vary with the number of units produced. Costs remain the same regardless of amount produced

– Advertising (budgeted ahead of time)

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Types of Costs_2

• Average fixed cost is the fixed cost per unit produced (total fixed costs / number of units produced)

• Total costs = variable costs plus fixed costs

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Break-Even Analysis

• Used to examine the relationship between cost & price

– determine what sales volume must be reached at a given price before the company will cover its total costs & begin making a profit

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Marginal Analysis

• Provides a way for marketers to look at cost and demand at the same time

• Examines the relationship of marginal cost to marginal revenue– marginal cost is the increase in total costs from

producing one additional unit of a product– marginal revenue is the increase in total income or

revenue that results from selling one additional unit of a product

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Evaluating the Pricing Environment

• The Economy

– Trimming the Fat: Pricing in a Recession

– Increasing Prices: Responding to Inflation

• Competition

• Product life cycle

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Cost-Plus Pricing (Mark-up)

• Most common cost-based approach

• Marketer figures all costs for the product & then adds desired profit per unit

• Straight markup pricing is the most frequently used type of cost-plus pricing

– price is calculated by adding a pre-determined percentage to the cost

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Pricing Strategies Based on Cost

• Advantages– Simple to calculate– Relatively risk free

• Disadvantages– Fail to consider

several factors• target market• demand• competition• product life cycle• product’s image

– Difficult to accurately estimate costs

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Steps in Cost-Plus Pricing

• Estimate unit cost

• Calculate markup

– Markup on cost

– Markup on selling price – markup percentage is the seller’s gross margin

• Often determined by history of company an industry

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Pricing Strategies Based on Demand

• Demand-based pricing means that the selling price is based on an estimate of volume or quantity that a firm can sell in different markets at different prices– Target costing

• Use research to identify quality & features at ideal price point prior to production

– Real time pricing• Yield management pricing

• Reverse auction

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New Product Pricing Strategies

• Skimming price –high, premium price with the intention of reducing it in response to market pressures

• Penetration pricing – new product is introduced at a very low price to grab market share

• Trial pricing – product carries a low price for a limited time period

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Discounting for Channel Members

• Trade or functional discounts

• Quantity discounts

• Cash discounts

• Seasonal discounts

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Trade Discounts

• Pricing structure built around list price

– List price, also called suggested retail price, is the price the manufacturer sets as the appropriate price for the end consumer

– Manufacturers offer discounts because channel members perform selling, credit, storage, & transportation

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Psychological Issues in Pricing

• Internal Reference Prices – consumers have a set price or price range in mind – If the actual price is higher, consumers feel

the product is overpriced– If it is too low, consumers assume quality is

inferior• Competition as Reference Price – If the price

is close, the assimilation effect encourages the customer to think the products are similar & choose the lower-priced product

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Price-Quality Inferences

• If consumers are unable to judge the quality of a product through examination or prior experience, they usually assume that the higher-priced product is the higher-quality product

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Psychological Pricing Strategies

• Odd-even pricing

– $3.99

• Price lining

– Price points for different models with different features

• Use of signs as signals

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Legal and Ethical Considerations

• Deceptive pricing practices

• Unfair sales act

• Price discrimination

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Deceptive Pricing Practices

• Retailers must not claim prices are lower than competitors unless it is true

• A going out-of-business sale should be the last sale before going out of business

• Bait-and-switch – consumers are lured into store for a very low price, but then the item is not available– A more expensive product is offered

instead– Trading up is acceptable

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Unfair Sales Acts

• Laws or regulations prohibiting selling products below cost

– loss leader pricing

– many regulations even set a percentage markup below which the distributor may not sell the products

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Price Discrimination

• Means selling the same product to different wholesalers and retailers at different prices if practices lessen competition

• Regulated by Robinson-Patman Act– only applies to resellers– discounts are legal if based on established

policy and offered to any customer who chooses to buy under those conditions• Quantity or different features

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Price Fixing

• Occurs when two or more companies conspire to keep prices at a certain level– Horizontal price fixing occurs when

competitors making the same product jointly determine what price they each will charge

– Vertical price fixing occurs when manufacturers attempt to force the retailer to charge the suggested retail price

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Predatory Pricing

• Means that a company sets a very low price for the purpose of driving competitors out of business