Chapter Objectives
• importance of pricing
• monetary & non-monetary
forms of pricing
• pricing objectives
Chapter Objectives
• using costs, demands, and
revenue
to make pricing decisions
• environmental factors
Chapter Objectives
• key pricing strategies
• pricing tactics
for single products multiple products,
Chapter Objectives
• Internet pricing strategies
• Psychological aspects of pricing • Legal aspects of pricing
“Yes, but what does it cost?”
• Price:
the assignment of value,
or the amount the consumer must exchange
• to receive the offering
• Offerings:
Money, goods, services, favors, votes,
Figure 11.1: Steps in
Step 1: Develop Pricing Objectives
• Sales or market share objectives
• Profit objectives
• Competitive effect objectives
• Customer satisfaction objectives
• Image enhancement objectives
Step 2
Step 2: Estimate Demand
• Demand:
• customers’ desires for a product
• How much of a product are customers willing to buy
Demand Curves
• Law of demand:
as price goes up,
quantity demanded goes down.
• For prestige products,
Shifts in Demand Curve
1. Changes in marketing strategy
(improved product, new advertising) or
2. non-marketing activities
can cause upward or downward shifts in demand.
At a given price,
Estimating Demand
• Marketers predict total demand by
estimating potential buyers for a product,
then multiplying number of buyers times
• average amount of each buyer’s purchase.
Elastic Demand
• A change in price results
• in a substantial change in quantity demanded.
If price is increased, revenues decrease, and vice-versa.
Non-necessities (pizza)
generate elastic demand.
Inelastic
Demand• A change in price
• has little or no effect on quantity demanded.
If price is increased, revenues increase.
The demand for necessities
Cross-elasticity of Demand
• Changes in prices of other
products affect a product’s demand.
Products are substitutes:
• increase in price of one will increase demand for other (bananas vs. strawberries).
One product is essential for use of second:
Step 3
Step 3: Determine Costs
• Variable costs:
• costs of production that are tied to and vary depending on the number of units produced.
Average variable costs may change
Step 3: Determine Costs
• Fixed costs:
• costs of production that don’t change with number of units produced
Rent,
cost of owning/maintaining factory, utilities,
equipment,
Step 3: Determine Costs
• Fixed costs:
Average fixed cost:
fixed cost per unit (total fixed costs divided by number of units produced)
Step 3: Determine Costs (cont’d)
• Total costs:
• total of fixed costs & • variable costs
Break-Even Analysis
• the number of units a firm must produce and sell
at a given price to cover all its costs.
• Break-even point:
point at which a firm doesn’t lose any money and doesn’t make any profit.
Break-Even Analysis (cont’d)
• Break-even point (in units) • = (total fixed costs)
• divided by (contribution per unit)
Contribution per unit:
Break-Even Analysis (cont’d)
• Break-even point (in dollars) • = (total fixed costs)
Marginal Analysis • A method that uses
• cost and demand
• to identify the price
Marginal Analysis • Marginal cost:
increase in total costs from producing one additional unit of a product
• Marginal revenue:
increase in total income or revenue from selling one additional unit of a product (decreases with each
additional unit sold)
• Profit is maximized
Step 4:
Step 4: Evaluate the Pricing Environment
• The economy
Broad economic trends
Recessions, Inflation
• The competition
Step 5:
Step 5: Choose a Price Strategy
• Pricing strategies based on cost
Simple to calculate and relatively risk free
Cost-plus pricing:
Step 5: Choose a Price Strategy (cont’d)
• Pricing strategies based on
demand
Step 5: Choose a Price Strategy (cont’d)
• Pricing strategies based on demand
Target costing:
• identify quality and functionality
–customers need and
• price they’re willing to pay
–before designing product.
Step 5: Choose a Price Strategy (cont’d)
• Pricing strategies based on demand Yield management pricing:
Step 5: Choose a Price Strategy (cont’d)
• Pricing strategies based on the
competition
Pricing near, at, above, or below
the competition
Price leadership strategy:
• industry giant announces price, and • competitors get in line
Step 5: Choose a Price Strategy (cont’d)
• Pricing strategies based on customers’
needs
Value pricing or
everyday low pricing (EDLP):
Step 5: Choose a Price Strategy (cont’d)
• New-product pricing
Skimming price:
a very high premium price
Step 5: Choose a Price Strategy (cont’d)
• New-product pricing
Penetration pricing: a very low price
Step 5: Choose a Price Strategy (cont’d)
• New-product pricing
Trial pricing:
low price for a limited period of time
Step 6:
Step 6: Develop Pricing Tactics
• Pricing for individual products
Two-part pricing:
offering two separate
Step 6: Develop Pricing Tactics
• Pricing for individual products
Payment pricing: breaking total price
Step 6: Develop Pricing Tactics (cont’d)
• Pricing for multiple products
Price bundling:
selling two or more goods or services as a single package
Step 6: Develop Pricing Tactics (cont’d)
• Pricing for multiple products Captive pricing:
pricing two products
Step 6: Develop Pricing Tactics (cont’d)
• Distribution-based pricing
F.O.B. (free on board) origin pricing F.O.B delivered pricing
Basing-point pricing
Step 6: Develop Pricing Tactics (cont’d)
• Discounting for channel members
List price (suggested retail price):
• price that manufacturer sets • as appropriate
Step 6: Develop Pricing Tactics (cont’d)
• Discounting for channel members
Trade or functional discounts:
set percentage discounts
• off list price
Step 6: Develop Pricing Tactics (cont’d)
• Discounting for channel members
Quantity discounts:
reduced prices
Step 6: Develop Pricing Tactics (cont’d)
• Discounting for channel members Cash discounts:
enticements to customers to pay bills quickly
(2% 10 days, net 30 days)
Step 6: Develop Pricing Tactics (cont’d)
• Discounting for channel members
Seasonal discounts:
price reductions
Pricing and Electronic Commerce
• Dynamic pricing strategies:
• seller easily adjusts price
Pricing and Electronic Commerce
• Dynamic pricing strategies:.
Cost of changing prices on Internet is practically zero.
Firms can respond quickly and frequently
to changes in costs, supply, and/or demand.
Pricing and Electronic Commerce
• Online auctions (eBay.com)
E-commerce allows shoppers to purchase products
Pricing and Electronic Commerce (cont’d)
• Pricing advantages for online shoppers
Consumers gain control.
Search engines and “shopbots”
• make customers more price-sensitive.
Consumers have more negotiating
Psychological Issues in Pricing
• Buyer’s pricing expectation
Internal reference price:
consumers use a price/price range to evaluate product’s cost.
• Assimilation effect
Psychological Issues in Pricing
• Buyer’s pricing expectation
Price/quality inferences:
• consumers assume higher-priced product
Psychological Pricing Strategies
• Odd-even pricing:
prices ending in 99 rather than 00 lead to increased sales.
• Price lining:
Legal and Ethical Considerations
• Deceptive pricing practices
Legal and Ethical Considerations
• Unfair sales acts
Loss-leader pricing Unfair sales acts
Legal and Ethical Considerations in Pricing (cont’d)
• Price fixing:
two or more companies conspire to keep prices at a certain level
Horizontal price fixing
Legal and Ethical Considerations in Pricing (cont’d)
• Predatory pricing:
• company sets a very low price
• for purpose of driving
Real People, Real Choices
• Taco Bell (Danielle Blugrind) • In order to differentiate itself
from the competition, Taco Bell needed to update its value
pricing menu.
Option 1: price entire menu at $1.29
Option 2: price items at 99 cents and $1.29
Option 3: price items at 99 cents, $1.19, and $1.29
Real People, Real Choices
• Taco Bell (Danielle Blugrind) • Danielle chose option 3:
price items at 99 cents, $1.19, and $1.29
Marketing Plan Exercise
• A new seaside resort offers luxury rentals for a few days, a week, or longer. Consider
possible pricing strategies -- cost-plus, yield management, everyday low pricing,
skimming, and penetration and trial pricing.
--What pricing strategy do you recommend for the resort ? --What pricing tactics do
Marketing in Action Case: You Make the Call
• What is the decision facing True Religion? • What factors are important in
understanding this decision situation?
• What are the alternatives?
• What decision(s) do you recommend? • What are some ways to implement your
Keeping It Real: Fast-Forward to Next Class, Decision Time at General Motors R*Works
• Meet Vince O’Brien, VP-Regional Managing Director for General Motors R*Works
• R*Works: regional promotional agency for GM; manages partnerships with sports organizations • The decision: How to get dealers to support
Group Activity
• Your group are marketers for a candy bar manufacturer. You feel it’s time to increase price, but you’re concerned the increase might not be profitable.
Marketing Math Activity
• You and your friend have decided to go into business together manufacturing
handbags.
--You know fixed costs will be $120,000 a year, and you expect variable costs to be $28 per bag.
Discussion
• In what ways is a price leadership strategy
good or bad for consumers?
Discussion
• In pricing new products, marketers may
choose a skimming or a penetration pricing strategy.
--What is the advantage or disadvantage of this practice for consumers?
Discussion
• Consumers often make
price-quality inferences about products.
--What are some products for which you make price-quality inferences?
Discussion
• In loss-leader pricing, retailers advertise
and sell an item below cost to get customers into the store.
--Do you consider this an unethical practice?
--Who benefits and who is hurt by it?
--Should the practice be made illegal (some states have done so)?
Price Elasticity of Demand
• The percentage change in unit sales that
