11-1

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 else that has value to the other party

11-2

The Importance of Pricing Decisions

• Price is the only P which represents revenue rather than an expense

• Pricing and the Marketing Mix– Price and Place– Price and Product– Price and Promotion

11-3

Types of Pricing Objectives

• Sales or market share objectives

• Profit objectives

• Competitive effect objectives

• Customer satisfaction objectives

• Image enhancement objectives

11-4

Pricing Objectives

Purex’s pricing objectivesfocus on the competition

11-5

Value

People may be willing to pay a premium because they believe it makes a statement about their own worth

11-6

Demand Curves

11-7

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

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

11-8

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

11-9

Break-Even Analysis

• Technique used to examine the relationship between cost and price and to determine what sales volume must be reached at a given price before the company will completely cover its total costs and past which it will begin making a profit

• All costs are covered but there isn’t a penny left over

11-10

Break-Even Analysis

11-11

Evaluating the Pricing Environment

• The Economy

– Trimming the Fat: Pricing in a Recession

– Increasing Prices: Responding to Inflation

• The Competition

• Consumer Trends

• International Environmental Influences

11-12

Daffy’s

When the economy isdown, consumersare more interestedin lower prices

11-13

Consumers like getting luxury goods

11-14

Cost-Plus Pricing

• Most common cost-based approach

• Marketer figures all costs for the product and 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

11-15

Pricing Strategies Based on Cost

Advantages• Simple to calculate• Relatively risk free

Disadvantages• Fails to consider

– target market– demand– competition– product life cycle– product’s image

• Difficult to accurately estimate

11-16

Business purchasers try to get the supplies they need at the lowest price

11-17

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• gross margin is the difference between

the cost to the wholesaler or retailer and the price needed to cover overhead and profit

11-18

Cost Plus Pricing Excerpt

• Fixed costs = $2,000,000

• Number of jeans produced = 400,000

• Fixed costs per unit = $5

• Variable costs per unit = $20

• Markup on cost– Price = total cost + (total cost * markup percentage)– Price = $25 + ($25 * .20) = $25 + $5 = $30

11-19

Markup on Cost vs. Markup on Selling Price

• On Cost– Price paid = $30– Markup = 40%– Price = total cost

+ (total cost * markup percentage)

– Price = $30 + ($30 * .40) = $42

• On Selling Price– Price paid = $30– Markup = 40%– Price = cost/1.00 -

markup percentage

– Price = $30/ 1-.40 = $50

11-20

Pricing Strategies Based on Demand_1

• 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

– Yield management pricing

11-21

Demand Pricing

Dell regularly reviewssales performance and adjusts its prices

11-22

Communicating Competitive Pricing

11-23

Pricing Strategies

• Value pricing (EDLP) - offers a fair value to consumers (e.g., Kmart’s blue light specials)

11-24

New Product Pricing

• Skimming price - firm charges a high, premium price for its new product with the intention of reducing it in future response to market pressures

• Penetration pricing - new product is introduced at a very low price

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

11-25

Captive Pricing

Gillette practices captive pricing. Oncecustomers have bought the razor, they are a “captive” of the company’s blade prices.

11-26

Discounting for Channel Members

• Trade or functional discounts

• Quantity discounts

• Cash discounts

• Seasonal discounts

11-27

Trade Discounts

• Pricing structure built around list price

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

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

11-28

Pricing with Electronic Commerce

• Dynamic pricing strategies

– price can be adjusted to meet changes in the marketplace

– online price changes can occur quickly, easily, and at virtually no cost

• Auctions

– sites offer chance to bid on items

– sites offer reverse-price auctions

11-29

Psychological Issues in Pricing

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

feel the product is overpriced– If it is too low below the internal reference

price, consumers may assume its quality is inferior

• Competition as Reference Price - If the price is close, the assimilation effect will encourage the customer to think the products are similar enough and choose the lower priced product

11-30

Price-Quality Inferences

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