Chapter 13: Pricing Products and Services PDF

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! Nature and Importance of Price ! What is a Price? Price is the money or other considerations exchanged for the ownership or use of a good or service. For most products and services, money is exchanged, although the amount is not always the same as the list or quoted price because of the discounts, allowances, and extra fees.! ! Price as an Indicator of Value From a consumers perspective, price is often used to indicate value when it is compared with the benefits of the product. Value is defined as the ratio of perceived benefits to price. At a given price, as perceived benefits increase, perceived value increases. Many marketers often engage in the practice of value pricing— increasing products or service benefits while maintaining or decreasing price.! ! Price in the Marketing Mix " " " " " " " " PROFIT = TOTAL REVENUE — TOTAL COST! " " " " " " " " " " " " or! " " " " " " " " PROFIT= (UNIT PRICE X QUANTITY SOLD) — TOTAL COST! Pricing decisions influence both total revenue and total cost, which makes pricing one of the most important decisions marketing executives face.! 1. Identifying pricing constraints and objectives! 2. Estimating demand and revenue! 3. Estimating cost, volume, and profit relationship! 4. Setting the list or quoted price! 5. Making special adjustments to the list or quoted price! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! Step 1: Identifying Pricing Constraints and Objectives With such a variety of alternative pricing strategies available, a marketing manager must consider the pricing constraints and pricing objectives that will narrow the range of choices. Pricing constraints existing in the marketing, while pricing objectives frequently reflect corporate goals.! ! Identifying Pricing Constraints Factors that limit the latitude of prices a firm may set are pricing constraints. Consumer demand for the product clearly affects the price that can be charged.! ! ! ! ! ! ! ! !

! Demand for the Product Class, Product, and Brand The number of potential buyers for the product class, product, and brand clearly affects the price a seller can charge.! Newness of the Product: Stage in the Product Life Cycle The newer a product and the earlier it is in the life cycle, the higher the price that can usually be charged.! Cost of Producing and Marketing the Product A firms price must cover all the costs of producing and marketing a product. If the price does not cover the cost, the firm will fail, and so in the long term, a firms costs set a floor under its price. Marketers must also ensure that firms in their channels of distribution make an adequate profit.! Cost of Changing Prices and the Time Period They Apply Research indicates that most firms change the price for their major products once a year. But in the online environment, prices can change from minute to minute.! Type of Competitive Markets A firm recognizes the general type of competitive market it is in to understand the latitude of both its price and non-price strategies.! • Pure monopoly! • Oligopoly! • Monopolistic competition! • Pure competition! ! Competitors Prices and Consumers Awareness of Them A company must know what specific prices its present and potential competitors are charging now as well as what they are likely to charge in the near future. The company then develops a marketing mix strategy— including setting prices— to respond to its competitors prices.! ! Identifying Pricing Objectives Expectations that specify the role of price in an organizations marketing and strategic plans are pricing objectives. To the extent possible, these organizational pricing objectives are also carried to lower levels in the organization, such as in setting objectives for marketing managers responsible for an individual brand.! ! Profit One objective is managing for long-run profits, which is followed by many Japanese firm as that are willing to forgo immediate profits in cars, TV sets, or computers to develop quality products that can penetrate competitive markets in the future. A maximizing current profit objective, such as during this quarter or year, is common in many firms because the targets can be set and performance measured quickly. A target return objective involves a firm setting a goal. Three profit objectives have different implications for a firms pricing objective. ! Market Share Market share is the ratio of the firms sales revenue or unit sales to those of the industry. Companies often pursue a market-share objective when industry sales are relatively flat or declining.! Social Responsibility A firm may forgo higher profit on sales and follow a pricing objective that recognizes its obligations to customers and society in general. ! ! Step 2: Estimating Demand and Revenue Fundamentals of Estimating Demand How much are you willing to pay for a good or service? What factors affect that decision? ! ! The Demand Curve A demand curve is a graph that relates the quantity sold and price, showing the maximum number of units will be sold at a given price.! 1. Consumer tastes 2. Price and availability of similar products

3. Consumer income

! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! Price Elasticity of Demand Marketing managers are especially interested in price elasticity of demand, the percentage change in quantity demanded relative to a percentage change in price.! ! Fundamentals of Estimating Revenue Demand curves lead directly to essential revenue concept critical to pricing decisions: total revenue— the total money received from the sale of a product. Total revenue (TR) equals the unit price (P) times the quantity sold (Q)" ! " " " " " TR= P X Q! ! Step 3: Estimating Cost, Volume, and Profit Relationships While revenues are the monies received by a firm from selling its products or services to customers, cost or expenses are the monies the firm pays out its employees and suppliers.! ! The Importance of Controlling Costs Total cost is the total expenses incurred by a firm in producing and marketing a product.! Fixed cost is the firms expenses that are stable and do not change with the quantity of product that is produced and cost. ! Variable cost is the sum of the expenses of a firm that vary directly with the quantity of products that is produced and sold.! ! Break Even Analysis Marketing managers often employ an approach that considers cost, volume, and profit relationships, based on the profit equations. Break-even analysis is a technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output. Break-even point (BEP) is the quantity at which total revenue and total costs are equal.! ! BEPquantity = FIXED COST / UNIT PRICE-UNIT VARIABLE COST. Application of Break-Even Analysis Break-even analysis is used extensively in marketing, most frequently to study the impact of profit on changes in price, fixed cost, and variable cost. ! ! ! ! !

! ! Step 4: Selecting an Approximate Price Level A key to a marketing managers setting a final price for a product is to find an approximate price level to use as a reasonable starting point.! 1. Demand-oriented 2. Cost-oriented approaches! 3. Profit-oriented approaches! 4. Competition oriented approaches! ! Demand Oriented •Skimming pricing: A firm introducing a new or innovative product can use skimming pricing, setting the highest initial price that customers who really desire a product are willing to pay.! • Penetration pricing: Setting a low initial price for immediate appeal.! •Prestige pricing: Setting a high price so that quality or status conscious consumers will be attracted to the product.! •Price lining: A firm that is selling a single product but a lone of products may price them at a number of different specific pricing points.! •Odd-Even pricing: the price at which products are priced — $499.99 vs. $500! • Bundle pricing: marketing of two or more products in a single package price.! •Yield management pricing: charging of different prices to maximize revenue for a set amount of capacity at any given time. Ex) Airlines only have a certain amount of seats on the plane they can offer.! ! Cost-Oriented Approaches The price setter stresses the supply or cost side of the pricing problem, not the demand. Price is set by looking at the production and marketing costs and then adding enough to cover direct expenses, overhead, and profit.! •Standard markup pricing: adding a fixed percentage to the cost of all items in a specific product class by estimating the demand for each product.! •Cost-Plus pricing: Involves summing the total unit cost of providing a product or service and adding a specific amount to the cost to arrive at a price.! •Experience curve pricing: based on learning effect, which holds that the unit cost of many products and services by 10 to 30 percent each time a firms experience at producing and selling them doubles.! ! Profit Oriented Approaches A price setter may choose to balance both revenues and costs to set prices using this method. Involving a target of a specific dollars volume of profit or express this target profit as a percentage of sales or investment.! ! Competition-Oriented Approaches Rather than emphasize demand, cost, or profit factors, a price setter can stress what competitors are doing! •Customary pricing: For some products, when tradition, standardized channels of distribution, or other competitive factors dictate the price.! •Above-, At-, or Below-Marketing pricing: For most products it is difficult to identify a specific market price for a product or product class.Marketing managers often have subjective feel for the competitors price or market price.! •Loss-Leader pricing: Purpose is to not increase sales of that particular product but to attract consumers in the hope they will buy other products as well.! ! Step 5: Setting the List or Quoted Price One-Price Policy Versus Flexible-Price Policy A seller must decide whether to follow a one-price policy or a flexible price policy. A one-price policy (fixed pricing) is setting one price for all buyers of a product or service.! A flexible price policy (dynamic pricing) involves setting different prices for products and services depending on individual buyers and purchase decisions. Gives sellers considerable discretion in setting the final price in

light of demand, cost, and competitive factors. A price war involves successive pricing by competitors to increase or maintain their unit sales or market share.! Social Media Impact on Pricing Social media campaigns play a big part in lowering marketing costs, customer service, support and driving up profit as its much more efficient then a customer service call vs. A twitter message.! ! Step 6: Marketing Special Adjustments to the List or Quoted Price The price at which a good is set at. Wholesalers also must adjust list or quoted prices they set for retailers. (1) discounts, (2) allowances, (3) geographical adjustments ! •Geographical adjustments: made by manufacturers or wholesalers to list or quoted prices to reflect the cost of transportation of the products from seller to buyer.! ◦FOB origin pricing: seller pays the cost of shipping.! ◦Uniform delivered pricing: the price the seller quotes includes all transportation costs. Seller pays shipping.! ! Legal and Regulatory Aspects of Pricing Five pricing practices receive the most scrutiny. ! 1. Price fixing! 2. Price discrimination: the practice of charging different prices to different buyers for goods of like grade and quality. The competition act prohibits this.! 3. Deceptive pricing: deals that mislead consumers.! 4. Predatory pricing! A. Geographic predatory pricing: sellers are prohibited from engaging in a policy of selling products or services in one region in Canada at a lower price than another region with the intent of lessening competition or eliminating competition.! B.Unreasonable low: a policy of selling products or services at “unreasonably low” prices in an attempt to substantially lessen competition.!...