Marketing: Real People, Real Choices 3rd edition 12-1©2003 Prentice Hall, Inc

Chapter 12

Pricing the Product

Marketing: Real People, Real Choices 3rd edition 12-2©2003 Prentice Hall, Inc

Chapter Objectives

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

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

Explain how customer demand influences pricing decisions

Marketing: Real People, Real Choices 3rd edition 12-3©2003 Prentice Hall, Inc

Chapter Objectives_2

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

Understand some of the environmental factors that affect pricing strategies

Marketing: Real People, Real Choices 3rd edition 12-4©2003 Prentice Hall, Inc

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

Marketing: Real People, Real Choices 3rd edition 12-5©2003 Prentice Hall, Inc

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

Marketing: Real People, Real Choices 3rd edition 12-6©2003 Prentice Hall, Inc

Pricing Objectives

Sales or market share objectives

Profit objectives

Competitive effect objectives

Customer satisfaction objectives

Image enhancement objectives

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Flexibility of Price Objectives

Pricing objectives and strategies may be tailored for

– different areas

– time periods

– competitive conditions

– market conditions

Marketing: Real People, Real Choices 3rd edition 12-8©2003 Prentice Hall, Inc

Estimating Demand: How Demand Influences

Pricing

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?

Marketing: Real People, Real Choices 3rd edition 12-9©2003 Prentice Hall, Inc

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 represents the different prices a firm might charge

Horizontal axis shows the number of units

Marketing: Real People, Real Choices 3rd edition 12-10©2003 Prentice Hall, Inc

Shifts in Demand

An upward shift in the demand curve means that at any given price, demand is greater than before the shift occurs

Marketing: Real People, Real Choices 3rd edition 12-11©2003 Prentice Hall, Inc

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

Marketing: Real People, Real Choices 3rd edition 12-12©2003 Prentice Hall, Inc

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

Marketing: Real People, Real Choices 3rd edition 12-13©2003 Prentice Hall, Inc

Influences on 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

– Change in income affects demand for a product even if its price remains the same

• normal goods, luxury goods, inferior goods

Marketing: Real People, Real Choices 3rd edition 12-14©2003 Prentice Hall, Inc

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

Marketing: Real People, Real Choices 3rd edition 12-15©2003 Prentice Hall, Inc

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

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

Marketing: Real People, Real Choices 3rd edition 12-17©2003 Prentice Hall, Inc

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

Marketing: Real People, Real Choices 3rd edition 12-18©2003 Prentice Hall, Inc

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