Pricing ConceptsChapters 13

Price and Value

• Value = perceived benefits/price• Price = perception of quality• Price = consumer perception of

prestige• Example:

– Swiss firm TAG HEUER– Changed prices from $250 to $1000– Sales volume increased sevenfold

Step 1: Pricing Objectives

• Survival• Maximum current profit/profit

oriented pricing• Maximum market share/sales

oriented pricing• Maximum market skimming• Product quality leadership

Step 2: Determining Demand

Quantity demanded

S

S

Pri

ce

.50

1.00

1.50

2.00

2.50

0 20 40 60 80 100 120

D

D

SurplusSurplus

ShortageShortage

PricePriceEquilibriumEquilibrium

Elasticity of DemandConsumers sensitivity to price

changes

Price Goes...Price Goes...Price Goes...Price Goes... Revenue Goes...Revenue Goes...Revenue Goes...Revenue Goes... Demand is...Demand is...

Down Up Elastic

Down Down Inelastic

Up Up Inelastic

Up Down Elastic

Up or Down Stays the Same Unitary Elasticity

Factors that Affect Elasticity

• DEMAND LESS ELASTIC IF:– Few or no substitutes– Buyers don’t notice higher price– Buyers are slow to change habits– Buyers think higher prices are

justified

Step 3: Estimating Cost• Variable costs – changes with level of output• Fixed costs – no change with output level• Marginal costs – the change in total costs

associated with a 1 unit change in output• Average variable costs – total variable costs

divided by quantity of output• Average total costs – total costs divided by

quantity of output

Step 4: Analyzing Competition

• Analyze competitors costs, prices and offers

Step 5: Methods of Setting Prices

• Markup pricing– Keystoning

• Target return pricing• Perceived value pricing• Value pricing• Going Rate pricing• Auction type pricing• Group pricing

Step 6: Selecting Final Price

• Psychological pricing• Marketing mix• Company policies

Fine Tuning the Base Price

• Geographical pricing• Quantity discounts• Cash discounts• Functional discounts• Seasonal discounts• Promotional discounts• Rebates

Special Pricing TacticsSingle-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