Chapter 10 Pricing Products: Pricing Considerations and Approaches 1

Price Price is the sum of all the values that consumers exchange for the benefits of having or using the product or service.

Price has been the major factor affecting buyer choice; nonprice factors have become increasingly important in buyer-choice behavior.

Price is the only element in the marketing mix that produces revenues; all others represent costs.

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Factors Affecting Price Decisions ( Fig. 10.1) Internal Factors Marketing Objectives Marketing Mix Strategy Costs Organizational considerations Pricing Decisions External Factors Nature of the market and demand Competition Other environmental factors (economy, resellers, government) 3

Internal Factors Affecting Pricing Decisions: Marketing Objectives

Survival

Low Prices to Cover Variable Costs and Some Fixed Costs to Stay in Business.

Marketing Objectives

Current Profit Maximization

Choose the Price that Produces the Maximum Current Profit, Etc.

Market Share Leadership

Low as Possible Prices to Become the Market Share Leader.

Product Quality Leadership

High Prices to Cover Higher Performance Quality and R & D.

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Internal Factors Affecting Pricing Decisions: Marketing Objectives Other specific objectives include:  Set prices low to prevent competition from entering the market,  Prices might be reduced temporarily to create excitement or draw more customers.

Nonprofit and public organization may have other pricing objectives such as:  University aims for partial cost recovery,   Hospital may aim for full cost recovery, Theater may price to fill maximum number of seats.

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Internal Factors Affecting Pricing Decisions: Marketing Mix Product Design Nonprice Positions Price Promotion Distribution 6

Types of Cost Factors that Affect Pricing Decisions Variable Costs Fixed Costs (Overhead) Costs that don’t vary with sales or production levels.

Costs that do vary directly with the level of production.

Executive Salaries, Rent Raw materials Total Costs Sum of the Fixed and Variable Costs for a Given Level of Production 7

Costs Considerations Cost Per Unit at Different Levels of Production Per Period

1 2 3 4 SRAC LRAC Quantity Produced per Day

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Types of Cost Factors that Affect Pricing Decisions As a firm gains experience in production, it learns how to do it better.

The experience curve (or the learning curve) indicates that average cost drops with accumulated production experience.

Strategy: company should price products low; sales increases; costs continue to decrease; and then lower prices further. Risks are present with this strategy. 9

External Factors Affecting Pricing Decisions Market and Demand

Competitor Costs This ad by LCI International accuses its competitors of using unfair practices in pricing, hiding fees incurred by rounding up.

Why is LCI focusing on this practice?

Hidden fees, defined as “cramming” by the FCC, are the number one source of billing complaints among long-distance customers.

Competitors’ Costs, Prices, and Offers Other External Factors Economic Conditions Reseller Needs Government Actions Social Concerns 10

Market and Demand Factors Affecting Pricing Decisions Pricing in Different Types of Markets Pure Competition Many Buyers and Sellers Who Have Little Effect on the Price Pure Monopoly Single Seller Monopolistic Competition Many Buyers and Sellers Who Trade Over a Range of Prices Oligopolistic Competition Few Sellers Who Are Sensitive to Each Other’s Pricing/ Marketing Strategies 11

Demand Curves and Price Elasticity of Demand A Demand Curve is a Curve that Shows the Number of Units the Market Will Buy in a Given Time Period at Different Prices that Might be Charged.

Price Elasticity Refers to How Responsive Demand Will be to a Change in Price.

Price Elasticity of Demand = % Change in Quantity Demanded % Change in Price 12

Price Elasticity of Demand A. Inelastic Demand Demand Hardly Changes With a Small Change in Price.

P 2 P 1 P’ 2 P’ 1 Q 2 Q Quantity Demanded per Period B. Elastic Demand Demand Changes Greatly With a Small Change in Price.

Q Q Quantity Demanded per Period 1 13

Major Considerations in Setting Price (Fig. 10.5) 14

Cost-Based Pricing Certainty About Costs Pricing is Simplified Price Competition Is Minimized Ethical Pricing is an Approach That Adds a Standard Markup to the Cost of the Product.

Much Fairer to Buyers & Sellers Simplest Pricing Method Ignores Current Demand & Competition 15

Breakeven Analysis or Target Profit Pricing Tries to Determine the Price at Which a Firm Will Break Even or Make a Certain Target Profit.

12 10 8 6 4 2 Total Revenue Target Profit ($2 million) Total Cost Fixed Cost 200 400 600 800 Sales Volume in Units (thousands) 1,000 16

Cost-Based Versus Value Based Pricing (Fig. 10.7) Cost-Based Pricing Product Value-Based Pricing Customer Cost Price Value Customers Value Price Cost Product 17

Discussion Connections A few years ago, Buick pitched its top-of the-line Park Avenue model as “America’s best car value.”  Does this fit with your understanding of value?

Pick two competing brands from a familiar product category (watches, perfume, etc) one low priced and the other high priced. Which, if either, offers the greatest value?

Does “value” mean the same thing as “low price”? How do these concepts differ?

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Competition-Based Pricing Setting Prices Going-Rate Company Sets Prices Based on What Competitors Are Charging.

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Sealed-Bid Company Sets Prices Based on What They Think Competitors Will Charge .

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Review of Concept Connections Identify and define the internal factors affecting a firm's pricing decisions.

Identify and define the external factors affecting pricing.

Contrast the three general approaches to setting prices.

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