Pricing ConceptsPricing ConceptsSetting the Right PriceSetting the Right Price

The Importance of PriceThe Importance of Price

To the consumer...To the consumer...Price is the cost Price is the cost

of somethingof something

To the consumer...To the consumer...Price is the cost Price is the cost

of somethingof something

In the broadest sense, price allocates resources in a In the broadest sense, price allocates resources in a free-market economyfree-market economy

What is Price?What is Price?What is Price?What is Price?To the seller...To the seller...

Price is revenuePrice is revenueand profit sourceand profit source

To the seller...To the seller...Price is revenuePrice is revenueand profit sourceand profit source

The Importance of PriceThe Importance of Price

Revenue = Unit Price * Number of units sold

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

Marketers must select a price Marketers must select a price that is not too highthat is not too high

or not too low, or not too low, a price that equals a price that equals

the perceived value to target consumersthe perceived value to target consumers

Demand and SupplyDemand and Supply

DemandDemand The quantity of a product that

will be sold in the market at various prices for a specified period.

The quantity of a product that will be sold in the market at various

prices for a specified period.

SupplySupply

The quantity of a productthat will be offered to the marketby a supplier at various prices

for a specific period.

The quantity of a productthat will be offered to the marketby a supplier at various prices

for a specific period.

The Demand CurveThe Demand Curve

D

DPri

ce

.50

1.00

1.50

2.00

2.50

0 20 40 60 80 100 120Quantity demanded

The Supply CurveThe Supply Curve

Quantity supplied

S

S

Pri

ce

.50

1.00

1.50

2.00

2.50

0 20 40 60 80 100 120

Equilibrium PriceEquilibrium Price

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 DemandElasticity of Demand

Elastic Elastic Demand Demand Elastic Elastic

Demand Demand

Consumers buy more or lessof a product when the price changes

InelasticInelasticDemandDemandInelasticInelasticDemandDemand

An increase or decrease in price will not significantly affect demand

UnitaryUnitaryElasticityElasticityUnitaryUnitary

ElasticityElasticity

An increase in sales exactly offsets a decrease in prices, and revenue is unchanged

Elasticity of DemandElasticity of Demand

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

Elasticity of DemandElasticity of Demand

Elastic DemandElastic DemandD

D

Quantity

Pri

ce

D

D

Quantity

Pri

ce

Completely Completely Inelastic DemandInelastic Demand

Factors that Affect ElasticityFactors that Affect Elasticity

FactorsFactorsThat Affect That Affect Elasticity Elasticity

ofofDemandDemand

FactorsFactorsThat Affect That Affect Elasticity Elasticity

ofofDemandDemand

Availability of SubstitutesAvailability of Substitutes

Price relative toPurchasing Power

Price relative toPurchasing Power

Product DurabilityProduct Durability

Product’s Other UsesProduct’s Other Uses

The Cost Determinant of PriceThe Cost Determinant of Price

Deviate with changes in level of output

Deviate with changes in level of output

Types of CostsTypes of CostsTypes of CostsTypes of Costs

VariableVariableCostsCosts

VariableVariableCostsCosts Fixed CostsFixed CostsFixed CostsFixed Costs

Do not deviate as level of output changes

Do not deviate as level of output changes

The Cost Determinant of PriceThe Cost Determinant of Price

Target-ReturnPricing

Target-ReturnPricing

Break-EvenPricing

Break-EvenPricing

Profit Maximization Pricing

Profit Maximization Pricing

KeystoningKeystoning

Markup pricingMarkup pricing

MethodsMethodsUsed toUsed to

Set PricesSet Prices

MethodsMethodsUsed toUsed to

Set PricesSet Prices

Markup PricingMarkup 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.

Profit MaximizationProfit 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.

Break-Even PricingBreak-Even Pricing

QuantityQuantity

Pri

ceP

rice

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 point

Break-Even PricingBreak-Even Pricing

Break-EvenQuantity = Total Fixed Costs

Fixed cost Contribution

Fixed costContribution = Price -- Avg. Variable Cost

Other Determinants of PriceOther Determinants of Price

Perceived QualityPerceived Quality

Promotion StrategyPromotion Strategy

Distribution StrategyDistribution Strategy

CompetitionCompetition

Stages of theProduct Life Cycle

Stages of theProduct Life Cycle

Other Factors Other Factors ThatThat

InfluenceInfluencePricePrice

Other Factors Other Factors ThatThat

InfluenceInfluencePricePrice

Stages in the Product Life CycleStages in the Product Life Cycle

IntroductoryIntroductoryStageStage

GrowthGrowthStageStage

DeclineDeclineStageStage

$$

HighHigh$$

StableStable$$

DecreaseDecrease

MaturityMaturityStageStage

$$DecreaseDecrease

StableStable

HighHigh

Distribution StrategyDistribution Strategy

Offer a larger profit margin

Offer a larger profit margin

Convincing DistributorsConvincing Distributorsto Carry Productto Carry Product

Convincing DistributorsConvincing Distributorsto Carry Productto Carry Product

Give dealers a largetrade allowance

Give dealers a largetrade allowance

Regaining Price ControlRegaining Price Control

DEVELOP BRAND LOYALTY

DEVELOP BRAND LOYALTY

Package marked with selling price

Package marked with selling price

Avoid business withprice-cutting discounters

Avoid business withprice-cutting discounters

FranchisingFranchising

Exclusive distribution system

Exclusive distribution system

MethodsMethodsUsed toUsed toRegainRegain

Price ControlPrice Control

MethodsMethodsUsed toUsed toRegainRegain

Price ControlPrice Control

The Impact of the InternetThe Impact of the Internet

• Allows price and product comparisons

• Prices are coming down

• Data collection allows sellers to tailor products and prices

ExtranetExtranet

A private electronic network that links a

company with its suppliers and customers.

Indicators of QualityIndicators of Quality

Brand NameBrand Name

PricePrice

AppearanceAppearance

Retailer Retailer ReputationReputation

Steps in Setting the Right PriceSteps 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

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

Price StrategyPrice Strategy

A basic, long-term pricing framework, which establishes

the initial price for a product and the intended direction

for price movements over the product life cycle.

Choosing a Price StrategyChoosing 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

Price SkimmingPrice Skimming

SituationsSituationswhenwhenPrice Price

SkimmingSkimmingis is

SuccessfulSuccessful

SituationsSituationswhenwhenPrice Price

SkimmingSkimmingis is

SuccessfulSuccessful

Superior Product

Legal Protection of Product

Limited Production

Technological Breakthrough

Inelastic Demand

Penetration PricingPenetration Pricing

AdvantagesAdvantagesAdvantagesAdvantages

Discourages or blocks competition from market entry

DisadvantagesDisadvantagesDisadvantagesDisadvantages

Requires gear up for mass production

Selling large volumes at low prices

Strategy to gain market share may fail

Status Quo PricingStatus Quo Pricing

AdvantagesAdvantagesAdvantagesAdvantages

Simplicity

Safest route to long-term survival for small firms

DisadvantagesDisadvantagesDisadvantagesDisadvantages

Strategy may ignore demand or cost

Tactics for Fine-Tuning the Base PriceTactics for Fine-Tuning the Base Price

Fine-TuningFine-TuningPricingPricingTacticsTactics

Fine-TuningFine-TuningPricingPricingTacticsTactics

Special Pricing Tactics

Special Pricing Tactics

DiscountsDiscounts

Geographic PricingGeographic Pricing

Tactics for Fine-Tuning the Base PriceTactics for Fine-Tuning the Base Price

CommonCommonTacticsTactics

for for Fine-TuningFine-Tuning

the Base Pricethe Base Price

CommonCommonTacticsTactics

for for Fine-TuningFine-Tuning

the Base Pricethe Base Price

Quantity DiscountsQuantity Discounts

Cash DiscountsCash Discounts

Functional DiscountsFunctional Discounts

Seasonal DiscountsSeasonal Discounts

Promotional AllowancesPromotional Allowances

RebatesRebates

Value-Based PricingValue-Based Pricing

Value-Based PricingValue-Based Pricing

The price is set at a level that seems to the The price is set at a level that seems to the

customer to be a good price compared to the customer to be a good price compared to the

prices of other options.prices of other options.

Trade LoadingTrade Loading

The practice of temporarily lowering the price to The practice of temporarily lowering the price to

induce wholesalers and retailers to buy more induce wholesalers and retailers to buy more

goods than can be sold in a reasonable time.goods than can be sold in a reasonable time.

Geographic PricingGeographic Pricing

Basing-Point Pricing

Basing-Point Pricing

Freight AbsorptionPricing

Freight AbsorptionPricing

Zone PricingZone Pricing

Uniform Delivered Pricing

Uniform Delivered Pricing

FOB PricingFOB Pricing

Common Common Methods ofMethods ofGeographicGeographic

PricingPricing

Common Common Methods ofMethods ofGeographicGeographic

PricingPricing

Geographic PricingGeographic 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.

Zone PricingZone PricingThe 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.

FreightAbsorption

Pricing

FreightAbsorption

Pricing

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.

Basing-PointPricing

Basing-PointPricing

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.

Special Pricing TacticsSpecial 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