Honors Marketing - Mr. SherpinskyCouncil Rock School District

Presentation Objectives

To cover topics like what is price and pricing. Recognize the different forms of pricing. Identify the goals of pricing. Explain the importance of pricing. Factors influencing pricing decision/policy. Analyze methods of pricing/approaches to pricing.

What is price?

• Price: The value in money or its equivalent placed on a good or service.• Usually expressed in monetary terms

like $15.00 for a movie ticket.• Can be expressed in nonmonetary

terms.• Free goods or services in exchange for the

purchase of product

• Price forms the essential basis of a commercial transaction

What is price?

• Price: Oldest form- “bartering”• Involves the exchange of goods or

services for other goods and services• Not money!

• Example: I’ll trade you my bag of chips for your chees crackers

• Today’s methods are more sophisticated, but principle the same

• Example: Exchange products for advertising space in a magazine or newspaper

• Website ads exchanged between complimentary vendors

Why Trade & Barter?What ConnectsMoney & Value?

What is value?

• Price: Value is a matter of anticipated satisfaction• If customers believe they will gain a great deal of

satisfaction from a product, they place a high value on the item• =High Price• Sellers MUST be able to gauge a customer’s

satisfaction• Directly effects pricing decisions

• GOAL: Set the price high enough to make a profit, while NOT exceeding the value potential customer place on the product

BARTERING CHALLENGE

THERE CAN BE ONLY ONE!!

BARTERING CHALLENGE

THERE CAN BE ONLY ONE!!

BARTERING RULESRound 1: Objective-Get to at least three full sets of the cards:

1-Tomoatoes, onions, & carrots,1-Plantains, cassava, & corn, 1-Cumin, garlic, & cilantro, and 1-Chicken

• Once we begin to draw cards from bag, NO talking or showing your cards to anyone else, or trading until I say “trade now.” This is timed.

• You may trade only one ingredient card for one other card. NO trading one card for multiple cards

• Once you obtain three full sets you will return to your seat

ROUND 1

BARTERING CHALLENGE

THERE CAN BE ONLY ONE!!

BARTERING RULESRound 2: Objective-Acquire full sets of ingredients and/or more money:

1-Tomoatoes, onions, & carrots,1-Plantains, cassava, & corn, 1-Cumin, garlic, & cilantro, and 1-Chicken

• Once we begin to draw cards from bag, NO talking or showing your cards to anyone else, or begin trading until I say “trade now.”

• You may trade only one ingredient card for one MONEY card. NO trading ingredient card for ingredient card

• Once you obtain full sets or more money you will return to your seat

• We will total out your bartering score and money score at the end.

ROUND 2

Forms of Pricing?• Price: is involved in every marketing exchange• Fees to have the Dentist clean you teeth• Amount paid for a new pair of shoes• Bridge tolls and bus fares are the costs of use• Rent is the monthly price for an apartment• Interest is the price of a loan• Dues are the price for membership• Tuition is the price you pay for education• Wages, salaries, commissions, and bonuses

are the various costs of labor

Importance of Price

• A Well-planned pricing strategies can:• Result in fair and appropriate

prices• Maintain firm’s image• Competitive edge• Profit

• Customer often use pricing to judge products and value• High price = High quality

• Always True or False?

Goal of Pricing

Main Goal: Earn profits or ROI (Return on Investment):

PROFIT=RETURN Rate of Return = Profit/InvestmentAssume we sell watches:Price $9.00 each Cost to make: $7.50 per unitFormula: $9.00 - $7.50 = $1.50 (profit)Calculation: $1.50/$7.50 = .20 or 20%

What price would we need to sell the watches at make 25% ROI?

What cost would we need to get our down to make 25

Goal of Pricing

Main Goal: Earn profits or ROI (Return on Investment:

PROFIT=RETURNCalculated: Rate of Return = Profit/Investment

•Other goals:•Market share•Competition

Assume we sell watches:Price $9.00 eachCost to make: $7.50 per unit$9.00 - $7.50 = $1.50$1.50/$7.50 = .20 or 20%

Pricing Strategy

• The first thing which we must define, is what is meant by price. Price is defined as:“The amount in money for which something

is offered for sale.”• Formally Defined: Price may be defined as the

value of product attributes expressed in monetary terms which a consumer pays or is expected to pay in exchange and anticipation of the expected or offered utility.

Pricing Strategy

•A Pricing Strategy is defined as:• A plan which determines the best

(at the time of making) pricing decision. • Pricing is the function of determining product

value in monetary terms by the marketing management of a company before it is offered to the target consumer for sale.

DETERMINANTS OF PRICING DECISION

INTERNALFACTORS

EXTERNALFACTORS OTHER

OBJECTIVES

Internal factors• Objectives of pricing –Survival• Current profit maximization

• Market share leadership• Product quality leadership

• Marketing mix strategy• Costs• Organizational

considerations

External factors• Pricing in different types of

markets• Consumer perceptions of

price and value• Competitors Price and

offers• Other external factors like

economic position in the country, resellers reactions and government.

Pricing Strategy• When setting prices we must consider:

Whether to discount or not.The price that the competition charges.The cost of providing the product or service.The company’s market position e.g. is it a market

leader.The type and nature of demand e.g. if an increase

or a decrease in price will effect amounts purchased.

The market segments we are seeking to attract.

Pricing Strategy

• It must be remembered, that price is a key element in the marketing mix because -• for a profit motivated company, it relates directly to the total

revenue, and ultimately the profit of the business.

Profits = Total Revenues – Total Costs

Profits = (Prices x Quantities sold) – Total Costs

OR

Key Determinants for Pricing Strategy• The key determinants of pricing decisions are:• Cost, Demand, Competition• Skimming, Penetration, Discounts, Markup• Legal and regulatory issues• Flexible, lining, one-price, bundling• Buyers perceptions• Consideration of intermediaries (retailers,

wholesalers)• Trade & Quantity• Leadership

Cost Orientated Pricing

• This is where the price of a product or service is calculated and a margin applied to derive a selling price• This is the simplest method of pricing

and is often used by companies for calculating prices.• It has the disadvantage of not taking into

account the economic aspects of supply and demand and often does not relate to pricing objectives

Cost Pricing Factors:• Fixed and variable costs are the major

concerns of a marketer. • In addition, the marketer may sometimes need to

consider other types of costs, such as out-of-pocket costs, incremental costs, opportunity costs, controllable costs, and replacement costs.

• To study the impact of costs on pricing strategy, the following three relationships may be considered:• The ratio of fixed costs to variable costs• The economies of scale available to a firm.• The cost structure of a firm vis-à-vis

competitors.

Other Pricing Factors : Competition• Published competitive price lists and advertising• Competitive reaction to price moves in the past• Timing of competitors’ price changes and initiating factors• Information on competitors’ special campaigns• Competitive product line comparison• Assumptions about competitors’ pricing/marketing

objectives• Competitors’ reported financial performance• Estimates of competitors’ costs—fixed and variable• Strategic posture of competitors• Overall competitive aggressiveness

Competition

• Companies who are selling products and services in competitive markets try to win customers over from rival companies.

•This is achieved in one of two ways:•PRICE COMPETITION•NON PRICE COMPETITION

Price Competition• This involves offering the product

or service at a lower price than that of its competitors products or services.

Non Price Competition• This involves the company trying to

increase market share of its product or service by • leaving the price of its product or

service unchanged but by persuading the target customers of the superiority or advantages associated with it.

• Whether a firm uses price competition or non price competition, depends on the state of the market. • Very competitive market place, the firm is more likely

to have to resort to intense price competition to sell their products and services. • Non-competitive market there is little to be gained from

price competition and firms tend to concentrate much more on non price competition (example)

• Always important for a firm to predict what the competition may do if prices are changed. • Example: You are in charge of pricing of hotel

rooms in a large group in a highly competitive market. You are considering a tactical price reduction in an attempt to gain market share. What may the competition do to respond?

Pricing Competition Concerns

Pricing Competition ConcernsResponse to your tactical price reduction in a number of ways:• Do nothing (highly unlikely).• Reduce prices to same level as yours (or even

lower!).• Stress their advantages/superiority in market

place. Their reaction will depend on: • Position they are in particularly in relation to cost

structure and market power. • It is important, however, that you predict the likely

outcome of your temporary price reduction. • If the competition is very responsive, it may do

little to your overall long term market position• merely generate some extra short term cash

flow.

Demand Orientated Pricing

• This method allows for high prices when the demand is high and lower prices when the demand is low, regardless of the cost of the product or services. • Demand orientated pricing allows a firm to

make higher profits as long as the buyers value the products above the cost price.

Demand Pricing Factors:• Ability of customers to buy.• Willingness of customers to buy.• Place of the product in the customer’s lifestyle

(whether a status symbol or a product used daily).• Benefits that the product provides to customers.• Prices of substitute products.• Potential market for the product (is demand

unfulfilled or is the market saturated?).

New Products: Skimming Strategy• Definition: Setting a relatively high price

during the initial stage of a product’s life.• Purpose/Objective• To serve customers who are not price

conscious while the market is at the upper end of the demand curve and competition has not yet entered the market.• To recover a significant portion of

promotional and research and development costs through a high margin.

New Products: Skimming Strategy• Requirements: Use of marketing mix variables, especially

design and communication efforts. • Heavy promotional expenditure to introduce product, educate

consumers, and induce early buying. • Relatively inelastic demand at the upper end of the demand

curve. • Lack of direct competition and substitutes.

• Expected Results: • Market segmented by price-conscious and not so price

conscious customers. • High margin on sales that will cover promotion and research

and development costs.• Opportunity for the firm to lower its price and sell to the mass

market before competition enters.

New Products: Penetration Strategy• Definition: Setting a relatively low

price during the initial stages of a product’s life.• Purpose/Objectives: To discourage

competition from entering the market by quickly taking a large market share and by gaining a cost advantage through realizing economies of scale

New Products: Penetration Strategy• Requirements: Use of marketing mix

variables, especially design and communication efforts. • Product must appeal to a market large

enough to support the cost advantage.• Demand must be highly elastic in order

for the firm to guard its cost advantage• Expected Results: • High sales volume and large market

share. • Low margin on sales. • Lower unit costs relative to competition

due to economies of scale.

Established Products: Maintain Price• Definition: To maintain position in the

marketplace (i.e., market share, profitability, etc) • Purpose/Objectives: Maintain Status Quo

Established Products: Maintain Price• Requirements: • Firm’s served market is not

significantly affected by changes in the environment. • Uncertainty exists concerning the need

for or result of a price change. • Firm’s public image could be enhanced

by responding to government requests or public opinion to maintain price.

• Expected Results: • Status quo for the firm’s market

position. • Enhancement of the firm’s public

image.

Quantity or Trade Discount

• Quantity discounts: • Deductions from a seller’s list

price that are offered to encourage customers to buy in bulk• eg. Buy a particular resort

package – children fly free

• Trade discounts:• Reductions from the list price

offered to buyers in payment for marketing functions that they will perform

Cash Discounts

• A deduction granted to buyers for paying by cash or within a specified time.• They are usually calculated on a net

amount due after first deducting trade and quantity discounts from the base price.

Cash Discounting• This is also known as a

tactical price reduction and may be introduced for a short period of time, even if it does not cover all costs. • To temporarily match the competitor's prices• To generate substantial cash flow.• To increase market share.

Buyers Perceptions• The marketer must consider the

importance of price to the customer in the target market segments when setting prices. • Try the following activity to illustrate

this:

• You have been given the job of pricing two new products as follows:• Product A – Budget hotel room Target – Families ( lower middle

to low income)

• Product B – Luxury hotel room Target – Business People ( High to middle income )

• How important will the price be to the target customers?• PRODUCT A

• PRODUCT B

Activity

Considerations

• Price will be very important in both markets as follows:• PRODUCT A• Price must be reasonable or cheap to reflect the

nature of the product on offer. • Price will often be the first consideration of the

target customers – value for money is key.

Considerations

• Price will be very important in both markets • PRODUCT B• Prices here will be much higher but price is just as

important to the business traveller • It must be high enough to give a “quality” impression but competitive in relation to other luxury hotels.

Legal and Regulatory Issues

• The marketeer is often restricted in the setting of prices by legal and regulatory issues. • Government intervention. Price controls. • Legal restrictions on price fixing and collusion• The Commerce Act 1986

• Consumer Legislation• Fair Trading Act 1986

Flexible Price Strategy• With a flexible – price strategy, similar customers may

each pay a different price when buying similar quantities of a product.• Trade-in values• Customer ability to negotiate• Established routines• HistoryFlexible Price Strategy: Price

Lining• Involves selecting a limited number of

prices at which a business will sell related products.• A sneaker shop which will sell several styles of

shoes at $69.95 and another group at $89.95.

Flexible Price Strategy: One Price• Definition: Charging the same price to all

customers under similar conditions and for the same quantities.• Objectives: • To simplify pricing decisions. • To maintain goodwill among customers.

• Requirements:• Detailed analysis of the firm’s position and

cost structure as compared with the rest of the industry. • Information on competitive prices;

information on the price that customers are ready to pay.

Flexible Price Strategy: One Price• Expected Results: • Decreased administrative and selling costs. • Constant profit margins.• Favorable and fair image among customers. • Stable market.

Bundling-Pricing Strategy• Definition: Inclusion of an extra margin in the

price to cover a variety of support functions and services needed to sell and maintain the product throughout its useful life.• Purpose/Objective: • In a leasing arrangement, to have assurance

that the asset will be properly maintained and kept in good working condition so that it can be resold or re-leased.• To generate extra revenues to cover the

anticipated expenses of providing services and maintaining the product. • To develop an ongoing relationship with the

customer.

Bundling-Pricing Strategy• Requirements: This strategy is ideally suited for

technologically sophisticated products that are susceptible to rapid technological obsolescence because these products are generally sold in systems and usually require the following:• Extra technical sales assistance.• Custom design and engineering concept for the

customer, • Peripheral equipment and applications,• Training of the customer’s personnel, and• Strong service/maintenance department offering

prompt responses and solutions to customer problems.

Bundling-Pricing Strategy• Expected Results:• Asset is kept in an acceptable condition for

resale or release.• Positive cash flow.• Instant information on changing customer

needs.• Increased sales due to “total package” concept

of selling because customers feel they are getting their money’s worth.

Price Leadership Strategy• Definition: This strategy is used by the leading

firm in an industry in making major pricing moves, which are followed by other firms in the industry.• Purpose/Objectives: To gain control of pricing

decisions within an industry in order to support the leading firm’s own marketing strategy (i.e., create barriers to entry, increase profit margin, etc.).

Price Leadership Strategy• Requirements:• An oligopolistic situation. • An industry in which all firms are affected by the same

price variables (i.e., cost, competition, demand). • An industry in which all firms have common pricing

objectives.• Perfect knowledge of industry conditions; an error in

pricing means losing control.• Expected Results: • Prevention of price wars, which are liable to hurt all

parties involved. • Stable pricing moves. • Stable market share.

• You own a fast food restaurant chain and are considering selling your product at below cost price for a short period of time. Why would you do this?

Activity

Pricing Considerations: Marketing

• Pricing under Normal Conditions• Under normal circumstances, the prices are based upon total

cost of sales so as to cover both fixed as well as variable cost and in addition to this, provide for certain desired margin of profit. • But prices can also be fixed on the basis of marginal cost by

adding a sufficiently high margin to marginal cost so as to cover the fixed cost and profits. • However, under other circumstances, products may have to

be sold at a price below the total cost. • In such circumstances, the prices should be fixed on the basis of

marginal cost in such a manner so as to cover the marginal cost and contribute something towards the fixed expenses.

Pricing Considerations: Marketing

• Selling Price below the Marginal Cost• Sometimes it may become necessary to reduce the

selling prices to the level of marginal cost or even below the marginal cost. In the following circumstances, the selling price may be fixed even below the marginal cost:• To introduce a new product in the market,• To explore foreign markets,• To eliminate the competitor from the market,• To avoid the retrenchment of workers,• To dispose off  perishable products,• To avoid extra losses by closing down the business,• To dispose off surplus stocks,• To utilize idle capacity.

Pricing Considerations: Marketing

The marginal cost of a product is $15 and fixed expenses amount to $225,000. Selling price per unit is $17 and 40,000 units can be sold at this price. Should the company sell the product or not?• Solution:Total marginal cost = • 40,000 units @ $15 per unit    = $600,000• Fixed cost                   = $225,000• Total cost                   = $825,000   

• Total cost per unit = $825,000/40,000 = $20.625

Pricing Considerations: Marketing

Even though the selling price of $17 is below the total cost, yet it is advantageous to sell the product at the selling price of $17 which is more than the marginal cost of $15. This will reduce the loss on account of fixed expenses (if the product is discontinued) by $80,000 as shown below:• Sales = 40,000 units @ $17 per unit = $680,000• Loss = Total Cost - Sales  = $825,000 - $680,000 =

$145,000• Loss if the product is discontinued (fixed expenses) =

$225,000

• Thus, loss of $80,000 (i.e. $225,000 - $145,000) will be reduced if product is sold at $17 per unit.

Supply & Demand

• Supply and Demand are one of the most fundamental concepts in Economics and is the backbone of market economy. • Demand is defined as the willingness to buy a product which is

backed up by money required to buy it. Put it simply, demand is the desire to buy a product at a certain price. • Supply refers to the quantity of product which is available in the

market. The amount of goods the producer is willing to sell in the market at a certain price.

• As we can observe that price is the common factor in both the demand and supply, it is therefore the reflection of supply and demand.

Law of Demand

• The Law of Demand states that if all other things are constant, when the price of a product increases, the demand for the product decreases. • And when the price of

the product decreases, the demand of the product increases.

Law of Demand

•Demand and price of the product share an inversely proportional relationship. • Why? This is because as money is a limited

resource and all the people cant spend the money on just one thing alone. • So, people try to strike balance between the

money they possess and the costs that they can incur. • Ex: The cost of flight ticket from point A to

point B is $1000 and the same journeyed in a train will cost $150, what will you choose? Naturally, people will choose the train.

Law of Supply

• The Law of Supply states that the producer wants to supply more of his product when there is an increase in the price of the product. • As manufacturers produce more output, their total costs increase proportionately.

Law of Supply

• The ratio to the total cost and the quantity of the product increases. • This is the firm’s marginal cost of production. • As marginal cost is the additional cost incurred to produce a good, the price of the product also rises and the firms will definitely charge more for the additional products produced.

Equilibrium

• A market attains equilibrium when both the demand and the supply intersect each other. This can be shown in a curve. Here in the curve, as we can see, the demand and the supply meet at the point X.

Equilibrium

• This is the point where the market attains equilibrium. This is the optimum point where both the consumer and the supplier get maximum satisfaction and profit out of the product respectively. It is the point where the market is in a stable condition..