Title: Pricing Products: Pricing Considerations and Approaches
1- Chapter 10
- Pricing Products Pricing Considerations and
Approaches
2Learning Goals
- Identify and define the internal factors
affecting a firms pricing decisions - Identify and define the external factors
affecting pricing decisions, including the impact
of consumer perceptions of price and value - Contrast the three general approaches to setting
prices
3Case StudyPriceline.com
- Buyer-driven commerce concept offers lower
prices to consumers and the ability to sell
excess inventory to sellers - 13.5 million user customer base
- Tremendous growth
- Most deals relate to travel or time
sensitive/perishable services - Not all ventures have been profitable
- Some customers find it difficult to commit to
purchase prior to learning details
10 - 3
4Learning Goals
- Identify and define the internal factors
affecting a firms pricing decisions - Identify and define the external factors
affecting pricing decisions, including the impact
of consumer perceptions of price and value - Contrast the three general approaches to setting
prices
5Definition
- Price
- The amount of money charged for a product or
service, or the sum of the values that consumers
exchange for the benefits of having or using the
product or service.
6Price has Many Names
- Tuition
- Fare
- Toll
- Premium
- Retainer
- Rent
- Fee
- Rate
- Commission
- Assessment
- Bribe
- Salary
- Wage
- Interest
- Tax
7What is Price?
- Dynamic Pricing on the Web allows SELLERS to
- Monitor customer behavior and tailor offers.
- Change prices on the fly to adjust for changes in
demand or costs. - Aid consumers with price comparisons.
- Negotiate prices in online auctions and
exchanges.
8Online travel seller Orbitz guarantees the lowest
price
Click on screenshot for website
10 - 8
Marketing in Action
9What is Price?
- Price and the Marketing Mix
- Only element to produce revenues
- Most flexible element
- Can be changed quickly
- Common Pricing Mistakes
- Reducing prices too quickly to get sales
- Pricing based on costs, not customer value
10Factors to Consider When Setting Price
- Market positioning influences pricing strategy
- Other pricing objectives
- Survival
- Current profit maximization
- Market share leadership
- Product quality leadership
Internal Factors
- Marketing objectives
- Marketing mix strategies
- Costs
- Organizational considerations
11In these ads, State Farm positions on
relationship, but Allstate positions on price
10 - 11
Marketing in Action
12Factors to Consider When Setting Price
Internal Factors
- Pricing must be carefully coordinated with the
other marketing mix elements - Target costing is often used to support product
positioning strategies based on price - Non-price positioning can also be used
- Marketing objectives
- Marketing mix strategies
- Costs
- Organizational considerations
13Discussion Question
- You are the marketer of a new high-end coffee
maker. What should you consider when planning
your - Price
- Product
- Place
- Promotion
10 - 13
14Factors to Consider When Setting Price
Internal Factors
- Types of costs
- Variable
- Fixed
- Total costs
- How costs vary at different production levels
will influence price setting
- Marketing objectives
- Marketing mix strategies
- Costs
- Organizational considerations
15Cost per Unit atVarying Production LevelsFigure
10.2
10 - 15
16Factors to Consider When Setting Price
Internal Factors
- Types of costs
- Variable
- Fixed
- Total costs
- How costs vary at different production levels
will influence price setting - Experience (learning) curve affects price
- Marketing objectives
- Marketing mix strategies
- Costs
- Organizational considerations
17The Experience CurveFigure 10.3
10 - 17
18Factors to Consider When Setting Price
- Who sets the price?
- Small companies CEO or top management
- Large companies Divisional or product line
managers - Price negotiation is common in industrial
settings where pricing departments may be created
Internal Factors
- Marketing objectives
- Marketing mix strategies
- Costs
- Organizational considerations
19Learning Goals
- Identify and define the internal factors
affecting a firms pricing decisions - Identify and define the external factors
affecting pricing decisions, including the impact
of consumer perceptions of price and value - Contrast the three general approaches to setting
prices
20Factors to Consider When Setting Price
- Types of markets
- Pure competition
- Monopolistic competition
- Oligopolistic competition
- Pure monopoly
- Consumer perceptions of price and value
- Price-demand relationship
- Demand curve
- Price elasticity of demand
External Factors
- Nature of market and demand
- Competitors costs, prices, and offers
- Other environmental elements
21- The Mastercard Priceless campaign helps show
that prices are somewhat intangible and can be
relative to the consumer and the situation
10 - 21
Marketing in Action
22Factors to Consider When Setting Price
- Types of markets
- Pure competition
- Monopolistic competition
- Oligopolistic competition
- Pure monopoly
- Consumer perceptions of price and value
- Price-demand relationship
- Demand curve
- Price elasticity of demand
External Factors
- Nature of market and demand
- Competitors costs, prices, and offers
- Other environmental elements
23The Demand CurveFigure 10.4
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24Factors to Consider When Setting Price
- Consider competitors costs, prices, and possible
reactions when developing a pricing strategy - Pricing strategy influences the nature of
competition - Low-price low-margin strategies inhibit
competition - High-price high-margin strategies attract
competition - Benchmarking costs against the competition is
recommended
External Factors
- Nature of market and demand
- Competitors costs, prices, and offers
- Other environmental elements
25Prices for MP3 players get more competitive with
the help of online shopping agents like
PriceGrabber.com
Click on screenshot for website
10 - 25
Marketing in Action
26Factors to Consider When Setting Price
External Factors
- Economic conditions
- Affect production costs
- Affect buyer perceptions of price and value
- Reseller reactions to prices must be considered
- Government may restrict or limit pricing options
- Social considerations may be taken into account
- Nature of market and demand
- Competitors costs, prices, and offers
- Other environmental elements
27Learning Goals
- Identify and define the internal factors
affecting a firms pricing decisions - Identify and define the external factors
affecting pricing decisions, including the impact
of consumer perceptions of price and value - Contrast the three general approaches to setting
prices
28Major Considerations in Setting PriceFigure 10.5
10 - 28
29General Pricing Approaches
- Cost-Based Pricing Cost-Plus Pricing
- Adding a standard markup to cost
- Ignores demand and competition
- Popular pricing technique because
- It simplifies the pricing process
- Price competition may be minimized
- It is perceived as more fair to both buyers and
sellers
30General Pricing Approaches
- Cost-Based Pricing Example
- - Variable costs 20 - Fixed costs
500,000 - - Expected sales 100,000 units - Desired
Sales Markup 20 - Variable Cost Fixed Costs/Unit Sales Unit
Cost - 20 500,000/100,000 25 per unit
- Unit Cost/(1 Desired Return on Sales) Markup
Price - 25 / (1 - .20) 31.25
31General Pricing Approaches
- Cost-Based Pricing Break-Even Analysis and
Target Profit Pricing - Break-even charts show total cost and total
revenues at different levels of unit volume. - The intersection of the total revenue and total
cost curves is the break-even point. - Companies wishing to make a profit must exceed
the break-even unit volume.
32General Pricing Approaches
- Break-Even Analysis and Target Profit Pricing
Revenues
1000 800 600 400 200
Target Profit 200,000
Total Costs
Thousands of Dollars
Break-even point
Fixed Costs
0 10 20 30 40
Quantity To Be Sold To Meet Target Profit
Sales Volume in Thousands of Units
33Cost-based versus Value-based PricingFigure 10.7
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34General Pricing Approaches
- Value-Based Pricing
- Uses buyers perceptions of value rather than
sellers costs to set price. - Measuring perceived value can be difficult.
- Consumer attitudes toward price and quality have
shifted during the last decade. - Value pricing at the retail level
- Everyday low pricing (EDLP) vs. high-low pricing
Video Snippet Song uses value based pricing
35The discount retailer Target has begun to offer
no wait medical clinics in some stores at lower
prices than traditional health care institutions
10 - 35
Marketing in Action
Source Business Week
36General Pricing Approaches
- Competition-Based Pricing
- Also called going-rate pricing
- May price at the same level, above, or below the
competition - Bidding for jobs is another variation of
competition-based pricing - Sealed bid pricing
37Competitive Prices on Music Downloads
10 - 37
Marketing in Action
38Learning Goals
- Identify and define the internal factors
affecting a firms pricing decisions - Identify and define the external factors
affecting pricing decisions, including the impact
of consumer perceptions of price and value - Contrast the three general approaches to setting
prices