Pricing Concepts & Setting the Right Price

The Importance of Price to Marketing Managers

Revenue
The price charged to customers multiplied by the number of units sold.

Profit

Revenue minus expenses

Price Cost = Profit

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The Importance of Price

Revenue = Unit Price X Number of Units Sold Revenue pays for every activity. Whats left over is Profit.

To earn a profit, marketers must select a price that is not too high or too low, a price that equals the perceived value to target consumers
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Trends Influencing Price Setting

Flood of new product introductions Increased availability of bargain-priced private and generic brands Price cutting as a strategy to maintain or regain market share A general decline in consumer confidence after terrorist attacks
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Trends in the Market

Pricing Objectives
Profit-Oriented Pricing Objectives
Sales-Oriented Pricing Objectives Status Quo Pricing Objectives

Profit-Oriented Pricing Objectives

Profit-Oriented Pricing Objectives

Profit Maximization

Satisfactory Profits

Target Return on Investment

Sales-Oriented Pricing Objectives

Sales-Oriented Pricing Objectives

Market Share

Sales Maximization

Status Quo Pricing Objectives

Status Quo Pricing Objectives

Maintain existing prices

Meet competitions prices

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The Cost Determinant of Price

Types of Costs

Variable Costs

Fixed Costs

Change with changes in level of output

Do not change as level of output changes

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The Cost Determinant of Price

Markup pricing
Methods Used to Set Prices Key Stoning

Profit Maximization Pricing

Break-Even Pricing Introductory Price Point
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Markup Pricing
Markup Pricing
The cost of buying the product from the producer plus amounts for profit and for expenses not otherwise accounted for.

Keystoning

The practice of marking up prices by 100%, or doubling the cost.

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Profit Maximization
Profit Maximization
A method of setting prices that occurs when marginal revenue equals marginal cost.

Marginal Revenue

The extra revenue associated with selling an extra unit of output, or the change in total revenue with a one-unit change in output.
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Break-Even Pricing
Total Revenue
4,000

Variable Costs $

Total Costs Break-even point

2,000

Fixed costs

1,000

2,000

3,000

4,000

5,000

6,000
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Quantity

Fixed and Variable Costs

Fixed costs do not change as

production or sales quantity changes. Variable costs change as production changes

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Average Variable Cost (AVC)

Assuming $2.00 AVC per unit (raw

materials, labor, packaging, distribution, etc.) 50,000 units produced = $100,000 variable costs 250,000 units produced = $500,000 variable costs
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Steps to Find Break Even Price

1. Total Fixed Costs + (AVC x # of Units Sold) = Total Costs 2. Total Costs / # of Units Sold = Break Even Price

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Other Determinants of Price

Stages of the Product Life Cycle
Competition Distribution Strategy Promotion Strategy Perceived Quality
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Stages in the Product Life Cycle

Introductory Stage Growth Stage Maturity Stage Decline Stage

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Steps in Setting the Right Price

Establish pricing goals Estimate demand, costs, and profits

Choose a price strategy

Fine tune with pricing tactics

Results lead to the right price

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Choosing a Price Strategy

Price Skimming

Basic Strategies for Setting Prices

Penetration Pricing

Status Quo Pricing

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Price Skimming
Inelastic Demand

Situations when Price Skimming Is Successful

Unique Advantages/Superior Legal Protection of Product Technological Breakthrough Blocked Entry to Competitors
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Penetration Pricing
Advantages Disadvantages

Discourages or blocks competition from market entry Boosts sales and provides large profit increases.

Requires gear up for mass production

Selling large volumes at low prices Strategy to gain market share may fail
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Status Quo Pricing

Advantages Disadvantages

Simplicity Safest route to longterm survival for small firms

Strategy may ignore demand and/or cost

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The Legality and Ethics of Price Strategy

Unfair Trade Practices

Price Fixing

Issues That Limit Pricing Decisions

Price Discrimination

Predatory Pricing

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Price Fixing

An agreement between two or more firms on the price they will charge for a product.

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Price Discrimination
The Robinson-Patman Act of 1936: Prohibits any firm from selling to two or more different buyers at different prices if the result would lessen competition

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Robinson-Patman Act Defenses

Seller Defenses

Cost

Market Conditions

Competition

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Predatory Pricing
The practice of charging a very low price for a product with the intent of driving competitors out of business or out of a market.
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Tactics for Fine-Tuning the Base Price

Discounts

Geographic Pricing

Special Pricing Tactics

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Tactics for Fine-Tuning the Base Price

Quantity Discounts Cash Discounts Functional Discounts Seasonal Discounts

Promotional Allowances
Rebates Value-Based Pricing

Zero Percent Financing

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Geographic Pricing
FOB Origin Pricing Uniform Delivered Pricing
The buyer absorbs the freight costs from the shipping point (free on board). The seller pays the freight charges and bills the purchaser an identical, flat freight charge.

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Geographic Pricing
Zone Pricing Freight Absorption Pricing
The U.S. is divided into zones and a flat freight rate is charged to customers in a given zone.
The seller pays for all or part of the freight charges and does not pass them on to the buyer. The seller designates a location as a basing point and charges all buyers the freight costs from that point.
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Basing-Point Pricing

Special Pricing Tactics

Single-Price Tactic
All goods offered at the same price Different customers pay different price Used by professionals with experience, training or certification Several line items at specific price points Sell product at near or below cost Lure customers through false or misleading price advertising Odd-number prices imply bargain Even-number prices imply quality Combining two or more products in a single package
33 Two separate charges to consume a single good

Flexible Pricing Professional Services Pricing Price Lining

Leader Pricing Bait Pricing

Odd-Even Pricing
Price Bundling Two-Part Pricing