Chapter 11: Pricing Products and Services

Price the money or other considerations (including other products and services)
exchanged for the ownership or use of a product or service
Barter exchanging goods for other service/product instead of money
Value = perceived benefits/price
As perceived benefits increase, value increase
Profit = total revenue total cost
= (unit price x quantity sold) (fixed cost +variable cost)
1. Demand oriented weigh customer taste, preference more than cost
, profit, competition
Skimming pricing setting the highest initial price that customers really
desire the product and are willing to pay

Enough prospective customers are willing to buy the product immediately at

the high initial price to make these sales profitable
High initial price will not attract competitors
Lowering the price has only a minor effect on increasing the sales volume and
reducing unit cost
Customers interpret the high price as a signal of high quality

Penetration pricing setting lowest initial price on new product to appeal

immediately to mass market

Many segments are price sensitive

Low initial price discourages competitors from entering market
Unit production and marketing costs fall dramatically as production
volume increases
Maintain initial price for a time to gain profit lost from low introductory
level
Lower the price further, counting on the new volume to generate
necessary profit

Prestige pricing setting high price so that quality or status conscious matter will
attract customers
Odd even pricing setting prices a few dollars or cents under an even number $500
to $499.99
Target pricing manufacturer purposely adjusting composition and features of a
product to achieve the target price to consumers
ex. Canon

Bundle pricing marketing of two of more products in a single package price

Yield management pricing the charging of different prices to max revenue for a set
amount of capacity at any given time
2. Cost oriented pricing approach stresses cost side more than demand.
Standard markup pricing adding a fixed percentage to the cost of all items
in a specific product class

high volume products have smaller mark ups then do lower volume products
Cost plus pricing summing the total unit cost of providing a product or
service and adding a specific amount to the cost to arrive at a price
MOST COMMONLY USED METHOD TO SET PRICES FOR BUSINESS PRODUCTS

3. profit oriented pricing balance both revenue and costs to set price. Target
percentage
target profit pricing sets an annual target of a specific dollar volume of
profit
demand is difficult to predict so could be wrong estimate if too high
BEST FOR OFFERING NEW PRODUCTS WITHOUT A LOT OF COMPETITION
Target return on sales pricing to set prices that will give a profit that is a
specified percentage of the sales volume
Method used bc difficult to establish benchmark of sales or investment to
show how much a firm effort is needed to achieve the target
Target return on investment pricing set prices to achieve a return on
investment ROI target such as percentage that is mandated by its board of
directors or regulators
4. competition oriented pricing approach
customary pricing tradition, standardized channel of distribution or other
competitive factor dictate the price
ex. Candy bars
above, at, or below market pricing market price of product is generally
what customers are willing to pay, not necessarily the price the firm set
above rolex
at large department stores, JC penny
below generic products [peanut butter]
loss leader pricing not increase sales but to attract customers in hopes they
will buy other products as well

demand curve a graph relating the quantity sold and the price, which shows
how many units will be sold at a given price
lower the price, higher the demand
1. customer taste
2. Price and availability of similar products law of demand works for
competitors as well. NY times fall in price, more customers. Less
customers for Balt Sun
3. Consumer income real customer income increase, demand for a product
also increase
Movement along demand curve assumes other factors are unchanged
[taste, price, availability of substitute, consumer income]
Price elasticity of demand - percentage change in the quantity demanded
relative to a percentage change in price
Elastic demand one in which a slight decrease in price results in a relatively
large increase in demand, slight increase in price, large decrease in demand
Inelastic demand slight increases or decreases in price will not significantly
affect the demand, or units sold, for the product
Total revenue total money received from the sale of a product, the unit price
of a product multiplied by the quantity sold
Total cost total expense incurred by a firm in producing and marketing a
product; total cost is the sum of fixed costs and variable costs
Break even analysis tech that examines the relationship between total
revenue and total cost to determine profitability at different levels of output
Pricing objective expectations that specify the role of price in an
organizations marketing and strategic plan
Pricing constraints factors that limit the range of prices a firm may set