Ch. 11 Media Pricing the Product edit

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2 Chapter Objectives

• importance of pricing

• monetary & non-monetary

_{forms of pricing}

• pricing objectives

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• using costs, demands, and

revenue

_{to make pricing decisions}

• environmental factors

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• key pricing strategies

• pricing tactics

_{for single products} _{multiple products,}

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• Internet pricing strategies

• Psychological aspects of pricing • Legal aspects of pricing

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6 “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,

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Figure 11.1: Steps in

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Kotler

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Step 1: Develop Pricing Objectives

• Sales or market share objectives

• Profit objectives

• Competitive effect objectives

• Customer satisfaction objectives

• Image enhancement objectives

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Step 2

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12 Step 2: Estimate Demand

• Demand:

• customers’ desires for a product

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13 Demand Curves

• Law of demand:

as price goes up,

quantity demanded goes down.

• For prestige products,

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15 Figure 11.2: Demand Curves for

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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,

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18 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.

• Then they predict what the company’s

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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.

Availability of close substitute

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Inelastic

Demand

• A change in price

• has little or no effect on quantity demanded.

 If price is increased, revenues increase.

_{The demand for necessities}

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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: • increase in price of one decreases demand for

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Step 3

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23 Step 3: Determine Costs

• Variable costs:

• costs of production (raw, processed

material, parts, labor) that are tied to and vary depending on the number of units

produced.

_{Average variable costs may change}

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• Fixed costs:

• costs of production that don’t change with number of units produced

Rent,

cost of owning/maintaining factory, utilities,

equipment,

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• Fixed costs:

Average fixed cost:

fixed cost per unit (total fixed costs divided by number of units produced)

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26 Step 3: Determine Costs (cont’d)

• Total costs:

• total of fixed costs & • variable costs

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27 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.

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28 Break-Even Analysis (cont’d)

• _{Break-even point}_{(in units)} • = (total fixed costs)

• divided by (contribution per unit)

_{Contribution per unit:}

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29 Break-Even Analysis (cont’d)

• Break-even point (in dollars)

• = (total fixed costs)

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30

Marginal Analysis

• A method that uses

• cost and demand

• to identify the price

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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}

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Step 4:

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33 Step 4: Evaluate the Pricing

Environment

• _{The economy}

Broad economic trends

Recessions (Price sensitive

Consumers), Inflation

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Step 5:

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35 Step 5: Choose a Price Strategy

• Pricing strategies based on cost

Simple to calculate and relatively risk free

Cost-plus pricing:

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36 Step 5: Choose a Price Strategy

(cont’d)

• Pricing strategies based on

demand

_{Based on estimate of quantity} _{a firm can sell at different prices}

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(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.

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(cont’d)

• Pricing strategies based on demand _{Yield management pricing}_:

• charge different prices • to different customers • to manage capacity

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(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

• or drop out

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(cont’d)

• Pricing strategies based on customers’

needs

_{Value pricing or}

_{everyday low pricing (}_EDLP_):

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(cont’d)

• New-product pricing

Skimming price:

a very high premium price (TIVO, RIM, Mobile Phone,

Kindle)

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(cont’d)

Penetration pricing: a very low price

to encourage more customers to purchase

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(cont’d)

Trial pricing:

low price for a limited period of time

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Step 6:

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48 Step 6: Develop Pricing Tactics

• Pricing for individual products

Two-part pricing:

offering two separate

types

of payments to

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49 Step 6: Develop Pricing Tactics

• Pricing for individual products

Payment pricing:

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50 Step 6: Develop Pricing Tactics (cont’d)

• Pricing for multiple products

Price bundling:

selling two or more goods or services as a single package

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• Pricing for multiple products

Captive pricing:

pricing two products

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• Distribution-based pricing

F.O.B. (free on board) origin pricing F.O.B delivered pricing

Basing-point pricing

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• _Discounting_{for channel members}

List price_{(suggested retail price):}

• price that manufacturer sets • as appropriate

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Trade or functional discounts:

_{set percentage discounts}

• off list price

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Quantity discounts:

_{reduced prices}

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Cash discounts:

enticements to customers to pay bills quickly

(2% 10 days, net 30 days)

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Seasonal discounts:

price reductions

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59 Pricing and Electronic Commerce

• _{Dynamic pricing strategies:}

• seller easily adjusts price

• to meet changes in marketplace.

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60 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.

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61 Pricing and Electronic Commerce

• Online auctions (eBay.com)

_{E-commerce allows shoppers} _{to purchase products}

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62 Pricing and Electronic Commerce

(cont’d)

• Pricing advantages for online shoppers

_{Consumers gain control.}

_{Search engines and “}_shopbots_”

• make customers more price-sensitive.

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63 Psychological Issues in Pricing

• Buyer’s pricing expectation

_{Internal reference price:}

_{consumers use a price/price range} _{to evaluate product’s cost.}

• Assimilation effect

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64 Psychological Issues in Pricing

• Buyer’s pricing expectation

Price/quality inferences:

• consumers assume higher-priced product

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65 Psychological Pricing Strategies

• Odd-even pricing:

prices ending in 99 rather than 00 lead to increased sales.

• Price lining:

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67 Legal and Ethical Considerations

• Deceptive pricing practices

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68 Legal and Ethical Considerations

• Unfair sales acts

_{Loss-leader pricing} _{Unfair sales acts}

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69 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

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70 Legal and Ethical Considerations in

Pricing (cont’d)

• Predatory pricing:

• company sets a very low price

• for purpose of driving

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