Unit2 Sec5 Pricing 2

8/8/2019 Unit2 Sec5 Pricing 2

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Marketing Management

Unit II Section 5

Price setting - objectives, factors andmethods, Price adapting policies, Initiating

and responding to price changes


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Section Outline

The Nature of Price

Price and Nonprice Competition

Analysis of Demand Demand, Cost, and Profit Relationships

Factors Affecting Pricing Decisions

Pricing for Business Markets


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The Nature of Price

Price

The value exchanged for products in a marketingexchange

Barter

The trading of products; the oldest form ofexchange

Terms Used to Describe Price Tuition, premium, fine, fee, fare, toll, rent,

commission, dues, deposit, tips, interest, taxes


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The Nature of Price (contd)

The Importance of Price to Marketers It is the most readily changeable characteristic (under

favorable circumstances) of a product.

It is a key element in the marketing mix because itrelates directly to generation of revenues and

quantities sold. It is a key component of the profit equation, having

strong effect on the firms profitability.

It has symbolic value to customersprestige pricing.

CostsTotal-RevenuesTotalProfit !

CostsTotal-Sold)Quantityx(PriceProfits !


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Price Competition

Emphasizing price and matching or beatingcompetitors prices

An effective strategy in markets with standardizedproducts

Lowest-cost competitor (seller) will be mostprofitable.

Allows marketers to respond quickly tocompetitors

Price wars can weaken competing organizations.


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(contd)

Nonprice Competition Emphasizing factors other than price to distinguish a

product from competing brands Distinctive product features Service

Product quality Promotion Packaging

Advantage is in increasing brands unit sales withoutchanging price.

Is effective when a product or services features are

difficult to imitate by competitors and customersperceive their value

Builds customer loyalty by focusing on nonpricefeatures


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Analysis of Demand

The Demand Curve

A graph of the quantity of products expected to

be sold at various prices

Decreases in price create increases in quantities

demanded.

Increased demand means larger quantities sold at

the same price. Prestige items sell best in higher price ranges.


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Demand Curve

Illustrating the

Price / QuantityRelationship and

Increase in

Demand


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Demand Curve

Illustrating the

RelationshipBetween Price

and Quantity for

Prestige Products


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Elasticity of Demand


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Analysis of Demand (contd)

Demand Fluctuations Changes in buyers needs

Variations in the effectiveness of the marketing mix

The presence of substitutes

Dynamic environmental/market factors

Assessing Price Elasticity of Demand

Price elasticity

A measure of the sensitivity of demand to changes in price

the greater the change in demand for a specific change inprice, the more elastic demand is

PriceinChange%

DemandedQuantityinChange%DemandofElasticityPrice !


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Demand, Cost, and Profit Relationships

Marginal Analysis

Examines what happens to a firms costs and

revenues when product changes by one unit

Marginal Revenue

The change in total revenue resulting from the

sale of an additional unit of product

Profit is maximized where marginal costs (MC) areequal to marginal revenue (MR).


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Types of CostsCost

Fixed costs Costs that do not vary with changes in theunits produced or sold

Average fixed cost The fixed cost per unit produced

Variable costs Costs that vary directly with changes in thenumber of units produced or sold

Average variable cost The variable cost per unit produced

Total cost The sum of average fixed and averagevariable costs times the quantity produced

Average total cost The sum of the average fixed cost and theaverage variable cost

Marginal cost (MC) The extra cost a firm incurs by producingone more unit of a product


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Typical Marginal Cost and

Average Total Cost Relationship


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Typical Marginal Revenue and

Average Revenue Relationship


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Combining the Marginal Cost and Marginal Revenue

Concepts for Optimal Profit


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Breakeven Analysis

Breakeven Point The point at which the costs of producing a product

equal the revenue made from selling the product

The point after which profitability begins

CostsFixedtoContributionUnit-Per

CostsFixedBreakeven

Point!

CostsUnit VariablePriceUnitCostsFixedTotalBreakeven

Point=


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Determining the Breakeven Point


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Organizational and Marketing Objectives Prices should be set that are consistent with the

organizations goals and mission.

Prices must be compatible with marketing objectives(e.g., setting premium prices to enhance a productsquality image).

Types of Pricing Objectives Setting prices low to increase market share

Using temporary price reductions to gain market share Lowering prices to raise cash quickly


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(contd) Costs

Set a floor priceproducts must be sold above theircosts if the firm is to remain in business.

Reducing costs increases productivity and profitability. Using labor-saving technologies

Focusing on quality

Establishing efficient manufacturing processes

Other Marketing Mix Variables

Price/quality image of the product or brand

Selective or intensive product distribution

Product pricing used as a promotional tool


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(contd)

Channel Member Expectations

To make a profit at least equivalent to thepotential profit from handling a competitors

brand To earn a profit commiserate with the effort and

resources the channel member expends on theproduct

To receive discounts for volume purchases andprompt payment

To be supported by the producer with training,advertising, sales promotion, and return policies


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(contd)

Customers Interpretation and Response

What meaning does the products price have tothe customer?

Does the customer respond to the price bymoving closer to or farther away from making apurchase?

Internal reference price

A price developed in the buyers mind throughexperience with the product

External reference price

A comparison price provided by others


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(contd)

Buyers responses to price

Value consciousness

Concern about price and quality

Price consciousness

Striving to pay low prices

Prestige sensitivity

Being drawn to products that signify prominence andstatus


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(contd)

Competition

Pricing to match competitors prices

Judging competitors responses to adjusting prices

Changes in an industrys market structure cause andcreate pricing opportunities.

Legal and Regulatory Issues

Price controls intended to curb inflation

Controls that set/regulate prices for specific products

Regulations and laws to prohibit price fixing, anddeceptive and discriminatory pricing


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Price Discounting

Trade (Functional) Discounts A reduction off the list price given by a producer to an

intermediary for performing for performing certainfunctions

Quantity Discounts Deductions from list price for purchasing large

quantities

Cumulative Discounts Quantity discounts aggregated over a stated period

Noncumulative Discounts One-time reductions in price based on specific factors


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Price Discounting (contd)

Cash Discount

A price reduction given to buyers for prompt

payment or cash payment

Seasonal Discount

A price reduction given to buyers for purchasing

goods or services out of season

Allowance

A concession in price to achieve a desired goal


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Pricing for Business Markets Geographic Pricing

Reductions for transportation costs and other costs related tothe physical distance between buyer and seller

Type Pricing method

F.O.B. factory The price of the merchandise at the factory, beforeshipment

F.O.B. destination A price indicating that the producer is absorbing

shipping costs

Uniform geo-

graphic pricing

Charging all customers the same price, regardless of

geographic location

Zone pricing Pricing based on transportation costs within majorgeographic zones

Base-point pricing Geographic pricing combining factory price andfreight charges from the base point nearest the buyer

Freight absorptionpricing

Absorption of all or part of actual freight costs by theseller


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Pricing for Business Markets (contd)

Transfer Pricing The price of products that one organizational unit

charges when selling to another unit in the sameorganization

Actual full cost All fixed and variable costs divided by the number of units

produced

Standard full cost Pricing based on what it would cost to produce the goods at

full plant capacity.

Cost plus investment Full cost plus internal cost of assets used in production


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Pricing for Business Markets (contd)

Transfer Pricing (contd)

Market-based pricing

Market price less marketing and selling costs

Unit2 Sec5 Pricing 2

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