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