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Marketing Management
Unit II Section 5
Price setting - objectives, factors andmethods, Price adapting policies, Initiating
and responding to price changes
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Section Outline
The Nature of Price
Price and Nonprice Competition
Analysis of Demand Demand, Cost, and Profit Relationships
Factors Affecting Pricing Decisions
Pricing for Business Markets
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The Nature of Price
Price
The value exchanged for products in a marketingexchange
Barter
The trading of products; the oldest form ofexchange
Terms Used to Describe Price Tuition, premium, fine, fee, fare, toll, rent,
commission, dues, deposit, tips, interest, taxes
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The Nature of Price (contd)
The Importance of Price to Marketers It is the most readily changeable characteristic (under
favorable circumstances) of a product.
It is a key element in the marketing mix because itrelates directly to generation of revenues and
quantities sold. It is a key component of the profit equation, having
strong effect on the firms profitability.
It has symbolic value to customersprestige pricing.
CostsTotal-RevenuesTotalProfit !
CostsTotal-Sold)Quantityx(PriceProfits !
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Price and Nonprice Competition
Price Competition
Emphasizing price and matching or beatingcompetitors prices
An effective strategy in markets with standardizedproducts
Lowest-cost competitor (seller) will be mostprofitable.
Allows marketers to respond quickly tocompetitors
Price wars can weaken competing organizations.
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Price and Nonprice Competition
(contd)
Nonprice Competition Emphasizing factors other than price to distinguish a
product from competing brands Distinctive product features Service
Product quality Promotion Packaging
Advantage is in increasing brands unit sales withoutchanging price.
Is effective when a product or services features are
difficult to imitate by competitors and customersperceive their value
Builds customer loyalty by focusing on nonpricefeatures
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Analysis of Demand
The Demand Curve
A graph of the quantity of products expected to
be sold at various prices
Decreases in price create increases in quantities
demanded.
Increased demand means larger quantities sold at
the same price. Prestige items sell best in higher price ranges.
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Demand Curve
Illustrating the
Price / QuantityRelationship and
Increase in
Demand
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Demand Curve
Illustrating the
RelationshipBetween Price
and Quantity for
Prestige Products
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Elasticity of Demand
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Analysis of Demand (contd)
Demand Fluctuations Changes in buyers needs
Variations in the effectiveness of the marketing mix
The presence of substitutes
Dynamic environmental/market factors
Assessing Price Elasticity of Demand
Price elasticity
A measure of the sensitivity of demand to changes in price
the greater the change in demand for a specific change inprice, the more elastic demand is
PriceinChange%
DemandedQuantityinChange%DemandofElasticityPrice !
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Demand, Cost, and Profit Relationships
Marginal Analysis
Examines what happens to a firms costs and
revenues when product changes by one unit
Marginal Revenue
The change in total revenue resulting from the
sale of an additional unit of product
Profit is maximized where marginal costs (MC) areequal to marginal revenue (MR).
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Types of CostsCost
Fixed costs Costs that do not vary with changes in theunits produced or sold
Average fixed cost The fixed cost per unit produced
Variable costs Costs that vary directly with changes in thenumber of units produced or sold
Average variable cost The variable cost per unit produced
Total cost The sum of average fixed and averagevariable costs times the quantity produced
Average total cost The sum of the average fixed cost and theaverage variable cost
Marginal cost (MC) The extra cost a firm incurs by producingone more unit of a product
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Typical Marginal Cost and
Average Total Cost Relationship
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Typical Marginal Revenue and
Average Revenue Relationship
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Combining the Marginal Cost and Marginal Revenue
Concepts for Optimal Profit
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Breakeven Analysis
Breakeven Point The point at which the costs of producing a product
equal the revenue made from selling the product
The point after which profitability begins
CostsFixedtoContributionUnit-Per
CostsFixedBreakeven
Point!
CostsUnit VariablePriceUnitCostsFixedTotalBreakeven
Point=
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Determining the Breakeven Point
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Factors Affecting Pricing Decisions
Organizational and Marketing Objectives Prices should be set that are consistent with the
organizations goals and mission.
Prices must be compatible with marketing objectives(e.g., setting premium prices to enhance a productsquality image).
Types of Pricing Objectives Setting prices low to increase market share
Using temporary price reductions to gain market share Lowering prices to raise cash quickly
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Factors Affecting Pricing Decisions
(contd) Costs
Set a floor priceproducts must be sold above theircosts if the firm is to remain in business.
Reducing costs increases productivity and profitability. Using labor-saving technologies
Focusing on quality
Establishing efficient manufacturing processes
Other Marketing Mix Variables
Price/quality image of the product or brand
Selective or intensive product distribution
Product pricing used as a promotional tool
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Factors Affecting Pricing Decisions
(contd)
Channel Member Expectations
To make a profit at least equivalent to thepotential profit from handling a competitors
brand To earn a profit commiserate with the effort and
resources the channel member expends on theproduct
To receive discounts for volume purchases andprompt payment
To be supported by the producer with training,advertising, sales promotion, and return policies
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Factors Affecting Pricing Decisions
(contd)
Customers Interpretation and Response
What meaning does the products price have tothe customer?
Does the customer respond to the price bymoving closer to or farther away from making apurchase?
Internal reference price
A price developed in the buyers mind throughexperience with the product
External reference price
A comparison price provided by others
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Factors Affecting Pricing Decisions
(contd)
Buyers responses to price
Value consciousness
Concern about price and quality
Price consciousness
Striving to pay low prices
Prestige sensitivity
Being drawn to products that signify prominence andstatus
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Factors Affecting Pricing Decisions
(contd)
Competition
Pricing to match competitors prices
Judging competitors responses to adjusting prices
Changes in an industrys market structure cause andcreate pricing opportunities.
Legal and Regulatory Issues
Price controls intended to curb inflation
Controls that set/regulate prices for specific products
Regulations and laws to prohibit price fixing, anddeceptive and discriminatory pricing
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Price Discounting
Trade (Functional) Discounts A reduction off the list price given by a producer to an
intermediary for performing for performing certainfunctions
Quantity Discounts Deductions from list price for purchasing large
quantities
Cumulative Discounts Quantity discounts aggregated over a stated period
Noncumulative Discounts One-time reductions in price based on specific factors
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Price Discounting (contd)
Cash Discount
A price reduction given to buyers for prompt
payment or cash payment
Seasonal Discount
A price reduction given to buyers for purchasing
goods or services out of season
Allowance
A concession in price to achieve a desired goal
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Pricing for Business Markets Geographic Pricing
Reductions for transportation costs and other costs related tothe physical distance between buyer and seller
Type Pricing method
F.O.B. factory The price of the merchandise at the factory, beforeshipment
F.O.B. destination A price indicating that the producer is absorbing
shipping costs
Uniform geo-
graphic pricing
Charging all customers the same price, regardless of
geographic location
Zone pricing Pricing based on transportation costs within majorgeographic zones
Base-point pricing Geographic pricing combining factory price andfreight charges from the base point nearest the buyer
Freight absorptionpricing
Absorption of all or part of actual freight costs by theseller
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Pricing for Business Markets (contd)
Transfer Pricing The price of products that one organizational unit
charges when selling to another unit in the sameorganization
Actual full cost All fixed and variable costs divided by the number of units
produced
Standard full cost Pricing based on what it would cost to produce the goods at
full plant capacity.
Cost plus investment Full cost plus internal cost of assets used in production
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Pricing for Business Markets (contd)
Transfer Pricing (contd)
Market-based pricing
Market price less marketing and selling costs