AM_5 Pricing Objectives

8/3/2019 AM_5 Pricing Objectives

1/33

1

Pricing Concepts &

Setting the Right Price


2/33

2

The Importance of Price

to Marketing Managers

Revenue

Profit

The price charged to customersmultiplied by the

number of units sold.

Revenue minus expenses

Price Cost = Profit


3/33

3

The Importance of Price

To earn a profit,marketers must select a price

that is not too highor too low,a price that equals

the perceived value to target consumers

Revenue = Unit Price X Number of Units Sold

Revenue pays for every activity.

Whats left over is Profit.


4/33

4

Trends Influencing Price Setting

Flood of newproduct introductions

Increased availability of

bargain-priced private andgeneric brands

Price cutting as a strategy tomaintain or regain

market share

A general decline in consumerconfidence after terrorist attacks

Trendsin the

Market


5/33

5

Pricing Objectives

Profit-Oriented Pricing Objectives

Sales-Oriented Pricing Objectives

Status Quo Pricing Objectives


6/33

6



Profit

Maximization

Satisfactory

Profits

TargetReturn on

Investment


7/33

7


Market

Share

Sales

Maximization



8/33

8


Maintainexistingprices

Meetcompetitions

prices



9/33

9

The Cost Determinant of Price

Change with changesin level of output

Types of Costs

VariableCosts

Fixed Costs

Do not changeas level of output changes


10/33

10

The Cost Determinant of Price

MethodsUsed to Set

Prices

Markup pricing

Key Stoning

Profit Maximization Pricing

Break-Even Pricing

Introductory Price Point


11/33

11

Markup Pricing

MarkupPricing

The cost of buying the product fromthe producer plus amounts for

profit and for expenses not

otherwise accounted for.

KeystoningThe practice of marking up pricesby 100%, or doubling the cost.


12/33

12

Profit Maximization

ProfitMaximization

A method of setting prices thatoccurs when marginal revenue

equals marginal cost.

MarginalRevenue

The extra revenue associated with

selling an extra unit of output, orthe change in total revenue with a

one-unit change in output.


13/33

13

Break-Even Pricing

Quantity

$

2,000

0 1,000 2,000 3,000 4,000 5,000 6,000

4,000

Fixed costs

Total Revenue

Total Costs

Break-even pointVariable Costs


14/33

14

Fixed and Variable Costs

Fixed costs do not change asproduction or sales quantity

changes.Variable costs change as

production changes


15/33

15

Average Variable Cost (AVC)

Assuming $2.00 AVC per unit (rawmaterials, labor, packaging,

distribution, etc.)50,000 units produced = $100,000

variable costs

250,000 units produced = $500,000variable costs


16/33

16

Steps to Find Break Even Price

1. Total Fixed Costs + (AVC x # of Units Sold)

= Total Costs

2. Total Costs / # of Units Sold = Break EvenPrice


17/33

17

Other Determinants of Price

Perceived Quality

Promotion Strategy

Distribution Strategy

Competition

Stages of theProduct Life Cycle


18/33

18

Stages in the

Product Life CycleIntroductory

StageGrowthStage

DeclineStage

MaturityStage


19/33

19

Steps in Setting the Right Price

Results lead to the right price

Fine tune with pricing tactics

Choose a price strategy

Estimate demand, costs, and profits

Establish pricing goals


20/33

20

Choosing a Price Strategy

Basic Strategiesfor

Setting Prices

Status Quo Pricing

Price Skimming

Penetration Pricing


21/33

21

Price Skimming

Situations

whenPrice

SkimmingIs

Successful

Unique Advantages/Superior

Legal Protection of Product

Blocked Entry to Competitors

Technological Breakthrough

Inelastic Demand


22/33

22

Penetration Pricing

Advantages

Discourages or blockscompetition frommarket entry

Boosts sales and

provides large profitincreases.

Disadvantages

Requires gear up formass production

Selling large volumesat low prices

Strategy to gainmarket share may fail


23/33

23

Status Quo Pricing

Advantages

Simplicity

Safest route to long-term survival for small

firms

Disadvantages

Strategy may ignoredemand and/or cost


24/33

24

The Legality and Ethics of

Price Strategy

IssuesThat LimitPricingDecisions

Unfair Trade Practices

Price Fixing

Price Discrimination

Predatory Pricing


25/33

25

Price Fixing

An agreement between

two or more firms on theprice they will charge

for a product.


26/33

26

Price Discrimination

The Robinson-Patman Act of 1936:

Prohibits any firm from selling to two ormore different buyers at different pricesif the result would lessen competition


27/33

27

Robinson-Patman Act Defenses

Seller Defenses

CostMarket

ConditionsCompetition


28/33

28

Predatory Pricing

The practice of charging a

very low price for a

product with the intent of

driving competitors out of

business or out of amarket.


29/33

29

Tactics for Fine-Tuning

the Base Price

Special Pricing Tactics

Discounts

Geographic Pricing


30/33

30

Tactics for Fine-Tuning

the Base Price

Quantity Discounts

Cash Discounts

Functional Discounts

Seasonal Discounts

Promotional Allowances

Rebates

Value-Based Pricing

Zero Percent Financing


31/33

31

Geographic Pricing

FOB OriginPricing

The buyer absorbs the freightcosts from the shipping point

(free on board).

UniformDelivered

Pricing

The seller pays the freight chargesand bills the purchaser an

identical, flat freight charge.


32/33

32

Geographic Pricing

Zone Pricing

FreightAbsorption

Pricing

Basing-PointPricing

The U.S. is divided into zones anda flat freight rate is charged to

customers in a given zone.

The seller pays for all or part ofthe freight charges and does not

pass them on to the buyer.

The seller designates a location asa basing point and charges allbuyers the freight costs from that

point.


33/33

33

Special Pricing Tactics

Single-Price Tactic

Flexible Pricing

Professional

Services PricingPrice Lining

Leader Pricing

Bait Pricing

Odd-Even Pricing

Price Bundling

Two Part Pricing

All goods offered at the same price

Different customers pay different price

Used by professionals with experience,training or certification

Several line items at specific price points

Sell product at near or below cost

Lure customers through false or misleading

price advertisingOdd-number prices imply bargainEven-number prices imply qualityCombining two or more products in asingle package

Two separate charges to consume a single good

Documents

AM_5 Pricing Objectives