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Pricing Products: Pricing Considerations and Approaches

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Identify and define the internal factors affecting a firm's pricing decisions ... more competitive with the help of online shopping agents like PriceGrabber.com ... – PowerPoint PPT presentation

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Title: Pricing Products: Pricing Considerations and Approaches


1
  • Chapter 10
  • Pricing Products Pricing Considerations and
    Approaches

2
Learning 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

3
Case 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
4
Learning 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

5
Definition
  • 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.

6
Price has Many Names
  • Tuition
  • Fare
  • Toll
  • Premium
  • Retainer
  • Rent
  • Fee
  • Rate
  • Commission
  • Assessment
  • Bribe
  • Salary
  • Wage
  • Interest
  • Tax

7
What 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.

8
Online travel seller Orbitz guarantees the lowest
price
Click on screenshot for website
10 - 8
Marketing in Action
9
What 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

10
Factors 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

11
In these ads, State Farm positions on
relationship, but Allstate positions on price
10 - 11
Marketing in Action
12
Factors 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

13
Discussion 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
14
Factors 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

15
Cost per Unit atVarying Production LevelsFigure
10.2
10 - 15
16
Factors 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

17
The Experience CurveFigure 10.3
10 - 17
18
Factors 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

19
Learning 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

20
Factors 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
22
Factors 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

23
The Demand CurveFigure 10.4
10 - 23
24
Factors 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

25
Prices 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
26
Factors 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

27
Learning 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

28
Major Considerations in Setting PriceFigure 10.5
10 - 28
29
General 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

30
General 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

31
General 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.

32
General 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
33
Cost-based versus Value-based PricingFigure 10.7
10 - 33
34
General 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
35
The 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
36
General 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

37
Competitive Prices on Music Downloads
10 - 37
Marketing in Action
38
Learning 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
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