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Pricing Concepts & Setting the Right

Price

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The Importance of Priceto Marketing Managers

RevenueRevenue

ProfitProfit

The price charged to customers multiplied by the

number of units sold.

The price charged to customers multiplied by the

number of units sold.

Revenue minus expensesRevenue minus expenses

Price – Cost = Profit

3

The Importance of Price

To earn a profit, To earn a profit, marketers must select a price marketers must select a price

that is not too highthat is not too high or too low, or too low,

a price that equals a price that equals the perceived value to target consumersthe perceived value to target consumers

Revenue = Unit Price X Number of Units Sold

Revenue pays for every activity. What’s left over is Profit.

4

Trends Influencing Price Setting

Flood of new product introductions

Flood of new product introductions

Increased availability ofbargain-priced private and

generic brands

Increased availability ofbargain-priced private and

generic brands

Price cutting as a strategy tomaintain or regain

market share

Price cutting as a strategy tomaintain or regain

market share

A general decline in consumer confidence after terrorist attacksA general decline in consumer

confidence after terrorist attacks

Trends Trends in thein the

MarketMarket

Trends Trends in thein the

MarketMarket

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Pricing Objectives

Profit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing Objectives

Sales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing Objectives

Status Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing Objectives

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Profit-Oriented Pricing Objectives

Profit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing ObjectivesProfit-Oriented Pricing Objectives

ProfitMaximization

ProfitMaximization

SatisfactoryProfits

SatisfactoryProfits

Target Return on

Investment

Target Return on

Investment

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Sales-Oriented Pricing Objectives

MarketShare

MarketShare

SalesMaximization

SalesMaximization

Sales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing ObjectivesSales-Oriented Pricing Objectives

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Status Quo Pricing Objectives

Maintainexistingprices

Maintainexistingprices

Meetcompetition’s

prices

Meetcompetition’s

prices

Status Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing ObjectivesStatus Quo Pricing Objectives

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The Cost Determinant of Price

Change with changes in level of output

Change with changes in level of output

Types of CostsTypes of CostsTypes of CostsTypes of Costs

VariableVariableCostsCosts

VariableVariableCostsCosts Fixed CostsFixed CostsFixed CostsFixed Costs

Do not change as level of output changes

Do not change as level of output changes

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The Cost Determinant of Price

Methods Used to Set

Prices

• Markup pricing

• Key Stoning

• Profit Maximization Pricing

• Break-Even Pricing

• Introductory Price Point

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Markup Pricing

Markup Pricing

Markup Pricing

The cost of buying the product from the producer plus amounts for

profit and for expenses not otherwise accounted for.

The cost of buying the product from the producer plus amounts for

profit and for expenses not otherwise accounted for.

KeystoningKeystoning The practice of marking up pricesby 100%, or doubling the cost.The practice of marking up pricesby 100%, or doubling the cost.

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Profit Maximization

ProfitMaximization

ProfitMaximization

A method of setting prices that occurs when marginal revenue

equals marginal cost.

A method of setting prices that occurs when marginal revenue

equals marginal cost.

MarginalRevenueMarginalRevenue

The extra revenue associated with selling an extra unit of output, or the change in total revenue with a

one-unit change in output.

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

QuantityQuantity

$$

2,0002,000

00 1,0001,000 2,0002,000 3,0003,000 4,0004,000 5,0005,000 6,0006,000

4,0004,000

Fixed costsFixed costs

LossLoss

ProfitProfitTotal RevenueTotal Revenue

Total CostsTotal CostsBreak-even pointBreak-even pointVariable CostsVariable Costs

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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

Perceived QualityPerceived Quality

Promotion StrategyPromotion Strategy

Distribution StrategyDistribution Strategy

CompetitionCompetition

Stages of theProduct Life Cycle

Stages of theProduct Life Cycle

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Stages in the Product Life Cycle

IntroductoryIntroductoryStageStage

GrowthGrowthStageStage

DeclineDeclineStageStage

MaturityMaturityStageStage

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Steps in Setting the Right Price

Results lead to the right price

Fine tune with pricing tacticsFine tune with pricing tactics

Choose a price strategyChoose a price strategy

Estimate demand, costs, and profitsEstimate demand, costs, and profits

Establish pricing goalsEstablish pricing goals

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Choosing a Price Strategy

Basic StrategiesBasic Strategiesforfor

Setting PricesSetting Prices

Basic StrategiesBasic Strategiesforfor

Setting PricesSetting Prices

Status Quo Pricing Status Quo Pricing

Price SkimmingPrice Skimming

Penetration PricingPenetration Pricing

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Price Skimming

SituationsSituationswhenwhenPrice Price

SkimmingSkimmingIs Is

SuccessfulSuccessful

SituationsSituationswhenwhenPrice Price

SkimmingSkimmingIs Is

SuccessfulSuccessful

Unique Advantages/Superior

Legal Protection of Product

Blocked Entry to Competitors

Technological Breakthrough

Inelastic Demand

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Penetration Pricing

AdvantagesAdvantagesAdvantagesAdvantages

Discourages or blocks competition from market entry

Boosts sales and provides large profit increases.

DisadvantagesDisadvantagesDisadvantagesDisadvantages

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

AdvantagesAdvantagesAdvantagesAdvantages

Simplicity

Safest route to long-term survival for small firms

DisadvantagesDisadvantagesDisadvantagesDisadvantages

Strategy may ignore demand and/or cost

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The Legality and Ethics ofPrice Strategy

Issues Issues That LimitThat LimitPricing Pricing DecisionsDecisions

Issues Issues That LimitThat LimitPricing Pricing DecisionsDecisions

Unfair Trade PracticesUnfair Trade Practices

Price FixingPrice Fixing

Price DiscriminationPrice Discrimination

Predatory PricingPredatory 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 Seller Defenses Seller Defenses Seller Defenses

CostCost MarketConditions

MarketConditions CompetitionCompetition

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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

Special Pricing Tactics Special Pricing Tactics

DiscountsDiscounts

Geographic PricingGeographic Pricing

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Tactics for Fine-Tuning the Base Price

Quantity DiscountsQuantity Discounts

Cash DiscountsCash Discounts

Functional DiscountsFunctional Discounts

Seasonal DiscountsSeasonal Discounts

Promotional AllowancesPromotional Allowances

RebatesRebates

Value-Based PricingValue-Based Pricing

Zero Percent FinancingZero Percent Financing

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Geographic Pricing

FOB OriginPricing

FOB OriginPricing

The buyer absorbs the freight costs from the shipping point

(“free on board”).

The buyer absorbs the freight costs from the shipping point

(“free on board”).

UniformDelivered

Pricing

UniformDelivered

Pricing

The seller pays the freight charges and bills the purchaser an

identical, flat freight charge.

The seller pays the freight charges and bills the purchaser an

identical, flat freight charge.

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Geographic Pricing

Zone PricingZone Pricing

FreightAbsorption

Pricing

FreightAbsorption

Pricing

Basing-PointPricing

Basing-PointPricing

The U.S. is divided into zones and a flat freight rate is charged to

customers in a given zone.

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 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.

The seller designates a location as a basing point and charges all

buyers the freight costs from that point.

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Special Pricing Tactics

Single-Price Tactic Single-Price Tactic

Flexible PricingFlexible Pricing

Professional Services PricingProfessional Services Pricing

Price LiningPrice Lining

Leader PricingLeader Pricing

Bait PricingBait Pricing

Odd-Even PricingOdd-Even Pricing

Price Bundling Price Bundling

Two-Part PricingTwo-Part Pricing

All goods offered at the same price All goods offered at the same price

Different customers pay different priceDifferent customers pay different price

Used by professionals with experience,training or certificationUsed by professionals with experience,training or certification

Several line items at specific price pointsSeveral line items at specific price points

Sell product at near or below costSell product at near or below cost

Lure customers through false or misleading price advertisingLure customers through false or misleading price advertisingOdd-number prices imply bargainEven-number prices imply qualityOdd-number prices imply bargainEven-number prices imply qualityCombining two or more products in a single package Combining two or more products in a single package

Two separate charges to consume a single goodTwo separate charges to consume a single good