Pricing Chapters 11 & 12. 11- 1 “Buyer-driven commerce” concept offers lower prices to consumers...

Pricing Pricing

Chapters 11Chapters 11

& 12& 12

11- 2

““Buyer-driven commerce” Buyer-driven commerce” concept offers lower prices to concept offers lower prices to consumers and the ability to consumers and the ability to sell excess inventory to sell excess inventory to sellerssellers13.5 million user customer 13.5 million user customer basebaseTremendous growthTremendous growth

Most deals relate to Most deals relate to travel or time sensitive/ travel or time sensitive/ perishable servicesperishable servicesNot all ventures have Not all ventures have been profitablebeen profitable Some customers find it Some customers find it difficult to commit to difficult to commit to purchase prior to purchase prior to learning detailslearning details

cPriceline.comPriceline.com

11- 3

Dynamic Pricing on the Web allows Dynamic Pricing on the Web allows SELLERS to:SELLERS to: Charge lower prices, reap higher margins.Charge lower prices, reap higher margins. Monitor customer behavior and tailor offers.Monitor customer behavior and tailor offers. Change prices on the fly to adjust for changes Change prices on the fly to adjust for changes

in demand or costs.in demand or costs. Negotiate prices in Negotiate prices in

online auctions and online auctions and exchanges.exchanges.

What is Price?

11- 4

MySimon is one of several independent web sites that provides product price comparisons.

MySimon

11- 5

Objectives

Understand the Understand the internal factorsinternal factors affecting affecting a firm’s pricing decisions.a firm’s pricing decisions.Understand the Understand the external factorsexternal factors affecting affecting pricing decisions, including the impact pricing decisions, including the impact of consumer perceptions of price and of consumer perceptions of price and value.value.Be able to contrast the Be able to contrast the three general three general approachesapproaches to setting prices. to setting prices.

11- 6

Objectives

Learn how companies Learn how companies adjust adjust their prices to take into their prices to take into account different types of account different types of customers and situations.customers and situations.

Know the key issues related Know the key issues related to initiating and responding to to initiating and responding to price changes.price changes.

11- 7

What is Price?

Price Has Many NamesPrice Has Many Names

RentRentFeeFeeRateRateCommissionCommissionAssessmentAssessment

TuitionTuitionFareFareTollTollPremiumPremiumRetainerRetainer

BribeBribeSalarySalaryWageWageInterestInterestTaxTax

11- 8

Price and the Marketing Mix:Price and the Marketing Mix: Only element to produce revenuesOnly element to produce revenues Most flexible elementMost flexible element Can be changed quicklyCan be changed quickly

Price Competition Price Competition

Common Pricing Common Pricing MistakesMistakes

What is Price?

11- 9

PriceMonetary or non-monetary Monetary or non-monetary compensations exchanged compensations exchanged for the ownership or use of for the ownership or use of

a product or a servicea product or a service

11- 10

Factors to Consider When Setting Prices

Factors to Consider When Setting Prices

Internal FactorsInternal Factors

PricingDecisionsPricing

Decisions

External FactorsExternal Factors

Target Market

Positioning Objectives

11- 11

Internal Factors Affecting Pricing

Decisions

Internal Factors Affecting Pricing

DecisionsMarketing Objectives

Marketing-MixStrategy

Costs

OrganizationalConsiderations

11- 12

Marketing Objectives that Affect

Pricing Decisions

Marketing Objectives that Affect

Pricing Decisions

Marketing

Objectives

Marketing

Objectives

SurvivalSurvival

Current Profit MaximizationCurrent Profit Maximization

Market Share LeadershipMarket Share Leadership

Product Quality LeadershipProduct Quality Leadership

11- 13

Product quality leadership:

Four Seasons starts with very high quality service, then charges a price to match.

11- 14

Marketing Mix Variables that Affect Pricing DecisionsMarketing Mix Variables that Affect Pricing Decisions

Marketing-Mix Strategy

Product Designand Quality

Product Designand Quality

DistributionDistribution

PromotionPromotion

Non-Price Factors

Non-Price Factors

11- 15

Swatch used target costing to manage costs carefully and create a watch offering the right blend of fashion and functions at a price consumers would pay.

11- 16

Types of Cost Factors that

Affect Pricing Decisions

Types of Cost Factors that


Total CostsSum of the Fixed and Variable Costs for a Given

Level of Production

Total CostsSum of the Fixed and Variable Costs for a Given

Level of Production

Fixed Costs(Overhead)Costs that don’t Vary with sales or production levelsEx) Salary, rent

Variable Costs

Costs that do varyDirectly with the level of production

Ex) Raw material

11- 17

Costs Considerations

Costs Considerations

Co

st p

er u

nit

12

3 4SRAC

LRAC

Quantity Produced per Day

1,00

0

2,00

0

3,00

0

4,00

0

Cost Per Unit at Different Levels of Production Per Period

11- 18

Factors to Consider When Setting Price

Who sets the price?Who sets the price? Small companies: CEO Small companies: CEO

or top managementor top management Large companies: Large companies:

Divisional or product Divisional or product line managersline managers

Price negotiation is Price negotiation is common in industrial common in industrial settingssettings

Some industries have Some industries have pricing departmentspricing departments

Marketing Marketing objectivesobjectivesMarketing mix Marketing mix strategiesstrategiesCostsCostsOrganizational Organizational considerationsconsiderations

Internal FactorsInternal Factors

11- 19

External Factors Affecting PricingDecisionsExternal Factors Affecting PricingDecisions

Market andDemand

Competitors’ Costs, Prices, and Offers

Other External Factors

Price/DemandRelationship

11- 20

The Market and Demand Factors that


The Market and Demand Factors that

Affect Pricing Decisions Pure CompetitionPure CompetitionPure CompetitionPure Competition Monopolistic CompetitionMonopolistic CompetitionMonopolistic CompetitionMonopolistic Competition

Oligopolistic CompetitionOligopolistic Competition Pure MonopolyPure Monopoly

Different Types of MarketsDifferent Types of Markets

11- 21

Demand Curves

Demand Curves

Pri

ce

Quantity Demanded per Period

A. Inelastic Demand - Demand Hardly Changes Witha Small Change in Price.

P2

P1

Q1Q2

Pri

ce

Quantity Demanded per Period

P’2

P’1

Q1Q2

B. Elastic Demand -Demand Changes Greatly Witha Small Change in Price.

11- 22

How would you characterize How would you characterize the type of market – in terms the type of market – in terms of level of competition – for of level of competition – for the following:the following:

• Electricity and gas utilitiesElectricity and gas utilities• Cable TV, Internet servicesCable TV, Internet services• Local, long-distance, wireless Local, long-distance, wireless telephone service telephone service

Discussion Question

11- 23

Figure 11-4:

Demand Curves

11- 24

Demand curves sometimes slope upward— Gibson learned that its high-quality guitars didn’t sell as well at lower prices

11- 25

PC marketing has become extremely price competitive.

Knowledge of competitive prices, offers, and costs is key to pricing strategy.

11- 26

Factors to Consider When Setting Price

Economic conditionsEconomic conditions Affect production costs Affect production costs Affect buyer perceptions Affect buyer perceptions

of price and valueof price and value

Reseller reactions to Reseller reactions to prices must be prices must be consideredconsideredGovernment may limit or Government may limit or restrict pricing optionsrestrict pricing optionsSocial considerations Social considerations may be taken into may be taken into accountaccount

Nature of market Nature of market and demandand demandCompetitors’ Competitors’ costs, prices, and costs, prices, and offersoffersOther Other environmental environmental elementselements

External FactorsExternal Factors

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Major Considerations in Setting Price

11- 28

General Pricing Approaches*

Cost BasedCost Based

cost pluscost plus

break-even - target profit pricingbreak-even - target profit pricing

Buyer BasedBuyer Based

perceived valueperceived value

Competitor BasedCompetitor Based

going rategoing rate

sealed bidsealed bid

11- 29

Cost-Based Pricing ExampleCost-Based Pricing Example

Variable costs: $20 Fixed costs: $ 500,000Variable costs: $20 Fixed costs: $ 500,000

Expected sales: 100,000 units Desired Sales Markup: 20%Expected sales: 100,000 units Desired Sales Markup: 20%

Variable Cost + Fixed Costs/Unit Sales = Unit CostVariable Cost + Fixed Costs/Unit Sales = Unit Cost

$20 + $500,000/100,000 = $25 per unit$20 + $500,000/100,000 = $25 per unit

Unit Cost/(1 – Desired Return on Sales) = Markup PriceUnit Cost/(1 – Desired Return on Sales) = Markup Price

$25 / (1 - .20) = $31.25$25 / (1 - .20) = $31.25

General Pricing Approaches

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MinimizesPrice

Competition

MinimizesPrice

Competition

What is Cost-Plus Pricing and Why

is it Popular?

What is Cost-Plus Pricing and Why

is it Popular?

PerceivedFairness to

Both Buyersand Sellers

PerceivedFairness to

Both Buyersand Sellers

Sellers Are MoreCertain AboutCosts Than

Demand

Sellers Are MoreCertain AboutCosts Than

Demand

Adding a Standard Markup to the Cost of the Product

11- 31

Cost-Based Pricing: Cost-Based Pricing: Break-Even Analysis Break-Even Analysis and Target Profit Pricingand Target Profit Pricing Break-even charts show total cost and total Break-even charts show total cost and total

revenues at different levels of unit volume.revenues at different levels of unit volume. The intersection of the total revenue and total The intersection of the total revenue and total

cost curves is the break-even point.cost curves is the break-even point. Companies wishing to make a profit must Companies wishing to make a profit must

exceed the break-even unit volume.exceed the break-even unit volume.


11- 32

Breakeven Analysis or Target Profit PricingBreakeven Analysis or Target Profit Pricing

200

400

600

800

1,000

1,200

10 20 30 40 50

Total Revenue

Total Cost

Fixed Cost

Target Profit($200,000)

Sales Volume in Units (thousands)

Co

st i

n

Do

llar

s (t

ho

usa

nd

s)Tries to Determine the Price at Which a Firm Will

Break Even or Make a Target Profit

11- 33

Assume the following costs: Assume the following costs:

• Fixed costs (FC): $ 500,000Fixed costs (FC): $ 500,000• Variable cost/unit (VC): $ 10.00Variable cost/unit (VC): $ 10.00

Recalling that BE = FC/(P-VC), calculate Recalling that BE = FC/(P-VC), calculate the break-even unit volume at selling the break-even unit volume at selling prices of $15.00 and $20.00 per unit.prices of $15.00 and $20.00 per unit.

How many units would need to be sold How many units would need to be sold if a profit of $250,000 was desired?if a profit of $250,000 was desired?

Discussion Question

11- 34

Value-Based Pricing

Value-Based PricingProductProduct

CostCost

PricePrice

ValueValue

CustomersCustomers

CustomerCustomer

ValueValue

PricePrice

CostCost

ProductProduct

Cost-Based Pricing Value-Based Pricing

11- 35

Perceived value reflects more than just the functional benefits of a product.

The pen at left costs $185.00

11- 36

Value-Based Pricing:Value-Based Pricing: Business-to-business firms Business-to-business firms

seek to retain pricing powerseek to retain pricing power Value-added strategies Value-added strategies

can help can help Value pricing at the retail levelValue pricing at the retail level

Everyday low pricing (EDLP) Everyday low pricing (EDLP) vs. high-low pricing vs. high-low pricing


11- 37

Competition-Based Pricing

Competition-Based Pricing

Setting PricesSetting Prices

Sealed-BidCompany Sets Prices Based on What They Think Competitors

Will Charge.

Sealed-BidCompany Sets Prices Based on What They Think Competitors

Will Charge.

Going-Rate Company Sets Prices Based on What

Competitors Are Charging.

Going-Rate Company Sets Prices Based on What

Competitors Are Charging.

??

11- 38

Metreo Video Clip

Pricing in business-to-business sales is often negotiable.

Metreo’s software helps companies make pricing decisions.

BusinessNow

Click the picture above to play video

11- 39

New Product Pricing Strategies

New Product Pricing Strategies

Market SkimmingMarket Skimming Market PenetrationMarket Penetration

>Setting a High Price for a New Product to Maximize Revenues from the Target Market.

>Results in Fewer, More Profitable Sales.

> Setting a Low Price for a New Product in Order to Attract a Large Number of Buyers.

>Results in a Larger Market Share.

11- 40

Which pricing strategy does Dell appear to use?

11- 41

Product Line PricingProduct Line PricingSetting Price Steps Between Product Line Items

i.e. $299, $399

Product Line PricingProduct Line PricingSetting Price Steps Between Product Line Items

i.e. $299, $399

Optional-Product PricingOptional-Product PricingPricing Optional or Accessory Products

Sold With The Main Producti.e. Car Options

Optional-Product PricingOptional-Product PricingPricing Optional or Accessory Products

Sold With The Main Producti.e. Car Options

Captive-Product PricingCaptive-Product PricingPricing Products That Must Be Used

With The Main Producti.e. Razor Blades, Film, Software

Captive-Product PricingCaptive-Product PricingPricing Products That Must Be Used

With The Main Producti.e. Razor Blades, Film, Software

By-Product PricingBy-Product PricingPricing Low-Value By-Products To Get Rid

of Themi.e. Lumber Mills, Zoos

By-Product PricingBy-Product PricingPricing Low-Value By-Products To Get Rid

of Themi.e. Lumber Mills, Zoos

Product-Bundle PricingProduct-Bundle PricingPricing Bundles Of Products Sold Together

i.e. Season Tickets, Computer Makers

Product-Bundle PricingProduct-Bundle PricingPricing Bundles Of Products Sold Together

i.e. Season Tickets, Computer Makers

Product Mix Pricing StrategiesProduct Mix Pricing Strategies

ProductMix

PricingStrategies

ProductMix

PricingStrategies

11- 42

Product Mix-Pricing Strategies:

Product Line PricingInvolves setting price Involves setting price steps between various steps between various products in a product line products in a product line based on:based on: Cost differences Cost differences

between products,between products, Customer evaluations Customer evaluations

of different features, of different features, and and

competitors’ prices.competitors’ prices.

11- 43

Product Line PricingProduct Line Pricing Setting price steps between Setting price steps between

product line items.product line items. Price pointsPrice points

Product Mix Pricing Strategies

11- 44

Optional-Product PricingOptional-Product Pricing Pricing optional or Pricing optional or

accessory products sold accessory products sold with the main productwith the main product

Supplemental software, Supplemental software, digital cameras, and digital cameras, and printers sold with a new printers sold with a new PC are examplesPC are examples


11- 45

Captive-Product PricingCaptive-Product Pricing Pricing products that must Pricing products that must

be used with the main be used with the main productproduct

High margins are often High margins are often set for supplies set for supplies

Services: two-part pricing Services: two-part pricing strategystrategy

Fixed fee plus a Fixed fee plus a variable usage rate variable usage rate


11- 46

By-Product By-Product PricingPricing Pricing of Pricing of

low-value low-value by-products by-products to get rid of to get rid of themthem


11- 47

Product Bundle Product Bundle PricingPricing Pricing bundles of Pricing bundles of

products sold products sold togethertogether

Common in fast Common in fast food industryfood industry


11- 48

Price-Adjustment Strategies

Price-Adjustment Strategies Price Adjustment StrategiesPrice Adjustment Strategies

Discount & AllowanceReducing Prices to Reward

Customer Responses such asPaying Early or Promoting

the Product.

Discount & AllowanceReducing Prices to Reward

Customer Responses such asPaying Early or Promoting

the Product.

SegmentedAdjusting Prices to Allow

for Differences in Customers,Products, or Locations.

SegmentedAdjusting Prices to Allow

for Differences in Customers,Products, or Locations.

Cash DiscountCash Discount

Quantity DiscountQuantity Discount

Functional DiscountFunctional Discount

Seasonal DiscountSeasonal Discount

CustomerCustomer

Product FormProduct Form

LocationLocation

TimeTime

Trade-In AllowanceTrade-In Allowance

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• Adjusting Prices for Psychological Effect.•Price Used as a Quality Indicator.

• Temporarily Reducing Prices to Increase Short-Run Sales.• i.e. Loss Leaders, Special-Events

• Adjusting Prices to Account for the Geographic Location of Customers.

•

Adjusting prices to foreign markets.•

Psychological Pricing

Promotional Pricing

Geographical Pricing

International Pricing

11- 50

Metreo Video Clip

Whether or not to match competitor’s pricing in an attempt to win a sale is a question faced by many B2B marketers.

BusinessNow

Click the picture above to play video

11- 51

Has excess capacityHas excess capacity Faces falling market Faces falling market

share due to price share due to price competitioncompetition

Desires to be a Desires to be a market share leadermarket share leader

Price Changes

Initiating Price Cuts is Desirable Initiating Price Cuts is Desirable When a Firm:When a Firm:

11- 52

Price Increases Price Increases are Desirable:are Desirable: If a firm can If a firm can

increase profit, increase profit, faces cost faces cost inflation, or faces inflation, or faces greater demand greater demand than can be than can be supplied.supplied.

Price Changes

11- 53

Methods of Increasing PriceMethods of Increasing Price Eliminating discountsEliminating discounts Adding higher-priced units to the Adding higher-priced units to the

product lineproduct line

Alternatives to Increasing PriceAlternatives to Increasing Price Reducing product sizeReducing product size Using less expensive materialsUsing less expensive materials Unbundling the productUnbundling the product

Price Changes

11- 54

Competitors are more likely to Competitors are more likely to react to price changes under react to price changes under certain conditions.certain conditions. Number of firms is smallNumber of firms is small Product is uniformProduct is uniform Buyers are well informedBuyers are well informed

Price Changes

11- 55

Respond To Price Changes Only If: Respond To Price Changes Only If: Market share / profits will be negatively Market share / profits will be negatively

affected if nothing is changed.affected if nothing is changed. Effective action can be taken:Effective action can be taken:

Reducing priceReducing price Raising perceived qualityRaising perceived quality Improving quality and increasing priceImproving quality and increasing price Launching low-price “fighting brand”Launching low-price “fighting brand”

Price Changes

11- 56

Price-Quality Association

Tend to be stronger whenTend to be stronger when

Tend to be weaker whenTend to be weaker when

Empirical evidenceEmpirical evidence Correlation: .25Correlation: .25 25% of the cases: 25% of the cases:

11- 57

Public Policy Issues in Pricing

Price FixingPrice Fixing sellers must set prices without talking to sellers must set prices without talking to

competitorscompetitorsPrice DiscriminationPrice Discrimination sellers must offer the same price terms to sellers must offer the same price terms to

a given level of trade (may be permitted if a given level of trade (may be permitted if seller can prove costs are different to seller can prove costs are different to different retailers - must be used in good different retailers - must be used in good faith)faith)

Deceptive PricingDeceptive Pricing seller states prices that are not available seller states prices that are not available

to consumersto consumers

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Public Policy Issues in Pricingcontinued

Predatory PricingPredatory Pricing selling below cost to destroy selling below cost to destroy

competition (Wal-Mart pharmacy competition (Wal-Mart pharmacy case)case)

Resale Price MaintenanceResale Price Maintenance manufacturer can not require manufacturer can not require

dealers to charge a specific price, dealers to charge a specific price, they can however suggest .they can however suggest .

Pricing Chapters 11 & 12. 11- 1 “Buyer-driven commerce” concept offers lower prices to consumers...

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