PRICE

Rajdeep Chakraborti

Yes, But What Does It Cost?

Price is the value that customers give up or exchange to obtain a desired product Payment may be in the form of money, goods, services, favors, votes or anything else that has value to the other party

Opportunity Costs
The value of something that is given up to obtain something else also affects the price of a decision Example: the cost of going to college is charged in tuition and fees but also includes the opportunity cost of what a student cannot earn by working instead

The price of four different purchases

Steps in setting price

Identify objectives & constraints Estimate demand & revenue Determine cost, volume and profit Set an approximate price level

Set List or Quoted price

Make adjustments to list price

Identifying Pricing constraints

Demand for the Product Class, Product, and Brand Newness of the Product: Stage in the Product Life Cycle Single Product versus a Product Line Cost of Producing and Marketing the Product Cost of Changing Prices & Time Period They Apply Types of Competitive Markets Competitors Prices

Pricing Objectives
Sales or market share objectives Profit objectives Competitive effect objectives Customer satisfaction objectives Image enhancement objectives

Social Responsibility

Estimating Demand

Demand refers to customers desire for products

How much of a product do consumers want? How will this change as the price goes up or down?

Identify demand for an entire product category in markets the company serves Predict what the companys market share is likely to be

The Price Elasticity of Demand

How sensitive are customers to changes in the price of a product? Price elasticity of demand is a measure of the sensitivity of customers to changes in price. Price elasticity of demand = Percentage change in quantity demanded / Percentage change in price

Demand Curves
Shows the quantity of a product that customers will buy in a market during a period of time at various prices if all other factors remain the same Vertical axis represents the different prices a firm might charge Horizontal axis shows the number of units

Demand Curves

Influences on Price Elasticity of Demand

Availability of substitute goods or services

If a product has a close substitute, its demand will be elastic

Time period
The longer the time period, the greater the likelihood that demand will be more elastic

Income effect
Change in income affects demand for a product even if its price remains the same
normal goods, luxury goods, inferior goods

Elastic and Inelastic Demand Curves

Break-Even Analysis

Technique used to examine the relationship between cost and price and to determine what sales volume must be reached at a given price before the company will completely cover its total costs and past which it will begin making a profit All costs are covered but there isnt a penny left over

Break-even analysis chart

Marginal Analysis

Provides a way for marketers to look at cost and demand at the same time Examines the relationship of marginal cost to marginal revenue
marginal cost is the increase in total costs from producing one additional unit of a product marginal revenue is the increase in total income or revenue that results from selling one additional unit of a product

Marginal Analysis

Pricing Strategies Based on Cost

Advantages
Simple to calculate Relatively risk free

Disadvantages
Fail to consider several factors
target market demand competition product life cycle products image

Difficult to accurately estimate costs

Cost-Plus Pricing

Most common cost-based approach Marketer figures all costs for the product and then adds desired profit per unit Straight markup pricing is the most frequently used type of cost-plus pricing
price is calculated by adding a pre-

Price Floor Pricing

Method for calculating price that considers both costs and what can be done to assure that a plant can operate at capacity Typically used when market conditions make it impossible for a firm to sell enough If the price-floor price can be set above the variable costs, the firm can use the difference to increase profits or cover fixed costs

Pricing Strategies Based on Demand

Demand-based pricing means that the selling price is based on an estimate of volume or quantity that a firm can sell in different markets at different prices Demand-Backward Pricing/ChainMarkup Pricing starts with a customer-pleasing price and works backward to costs

Discounting for Channel Members

Trade or functional discounts Quantity discounts Cash discounts Seasonal discounts

Trade Discounts

Pricing structure built around list price

List price, also called suggested retail price, is the price that the manufacturer sets as the appropriate price for the end consumer Manufacturers offer discounts because channel members perform selling, credit, storage and transportation services

Pricing with Electronic Commerce

Dynamic pricing strategies

price can be adjusted to meet changes in the marketplace online price changes can occur quickly, easily, and at virtually no cost

Auctions
sites offer chance to bid on items sites offer reverse-price auctions

Psychological Pricing Strategies (Shapiro, 1968)

Odd-even pricing Price lining

Price Lining

Deceptive Pricing Practices

Retailers must not claim prices are lower than competitors unless it is true A going out-of-business sale should be the last sale before going out of business

Bait-and-switch - consumers are lured into store for a very low price, but then the item is not available. A more expensive product is offered instead
Trading up is acceptable

Price Fixing
Occurs

when two or more companies conspire to keep prices at a certain level

Horizontal price fixing occurs when competitors making the same product jointly determine what price they each will charge Vertical price fixing occurs when manufacturers attempt to force the retailer to charge the suggested retail price