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Chapter 11
Pricing decisions
External factors Nature of the market and demand Competition Other environmental factors (economy, resellers, government)
Survival Current profit maximization Market share leadership Product quality leadership; recover high R&D expenses Disincentive to market entry
Figure 11.1
Target costing: start with the ideal selling price for the
product and then determine if the costs to produce are within range; follows the marketing concept
Economies of scale Costs fall with cumulative production Drops faster with volume increase Risk of cheap image Assumes no strong response or leap-frog
Costs
production, such as raw materials, labour, supplies Total costs: the sum of fixed and variable cost Average cost to produce will lower as volumes increase due to economies of scale
Figure 11.2
New-Product Pricing
Used when the product is new technology, and not easily copied
Skimming price drops in steps
Used when there are advantages to be gained by large volumes early in the life cycle
Setting the price steps between products in a line Based on cost differences, customer evaluations of different features, and competitors prices General Motors five divisions were originally price stepped
Organizational considerations:
Deciding who will set prices and who will have the ability to change them Management versus sales?
Figure 11.1
Types of markets:
Pure competition: many buyers and sellers; no one company has influence over prices charged Monopolistic competition: many buyers and sellers trading over a range of prices charged Oligopolistic competition: few sellers who are highly sensitive to each others pricing and marketing strategies
Figure 11.1
Pure monopoly: only one seller in the market who sets prices; may be regulated
Competition:
Consumers will compare alternatives to determine value A high-price, high margin price strategy will attract competition Companies will attempt to benchmark costs to compare their operations
Other factors:
Economic conditions Reseller cooperation Government Social concerns
Figure 11.1
Low price
No possible profit at this price Product costs Competitors prices Other internal and External factors
High price
No possible demand at this price
Markup / Markons
markup = % on selling price Example: Selling price = $1.50 cost = $1.00 profit = $0.50 markup = 50/1.50 = 33.3% Mark on = % on cost Example: Mark on = 50/1.00 = 50%
Q: why do markups (or markons) get larger as we move closer to the consumer ? (Hint: think about ratio of fix cost / sales levels)
Cost-based pricing
Product Cost Price Value Customers
Customers
Value
Price
Cost
Product
Value-based pricing
Pricing developed early as part of overall marketing program Target price based on perceived value of the extended product Perceived value dictates design and cost Value pricing strategies Value-added - business markets Everyday low pricing - consumer markets High-low pricing - retail level
Consumers use competitors price as reference for products value Going Rate Pricing Firm benchmarks on competitive price Price differences small and constant Going price as indirect measure of demand Sealed-Bid Pricing Lowest price wins - the winner loses?
Setting a high price to skim maximum revenues layer by layer from segments willing to pay the high price, the company makes fewer but more profitable sales Favourable conditions:
Image and quality must support Production costs shouldnt cancel High barriers to entry
Low initial price - win many buyers and large market share quickly Potential economies of scale Favourable conditions:
Market is price sensitive Economies of scale exist Low price an effective market entry barrier
Promotional pricing
Geographical pricing
International pricing
Discounts
(page 436)
Allowances
Geographical Pricing
(page 439)
Zone pricing: smoothes out delivered prices (Ikea) Uniform or postage stamp pricing: one price for all. Used for high value/low bulk items (jewelry ) FOB = Free on Board
Price-Adjustment Strategies:
Psychological Pricing
p. 437
Psychology considered as well as economics Price as a quality indicator Reference price a mental benchmark
Psychological Pricing
1. 2. 3. 4. 5.
6. 7.
Prestige pricing: high price to lend status & image (Cadillac) Loss leader pricing Bait pricing Odd - even pricing ($1.99 vrs $2.00) (Buick Regal example) Price lining: store sells items at 3 prices at 3 different departments ( to capture 3 different psychographic clients) Demand backward pricing: working backwards. Bundle pricing: (Air Canada vacations or Fido cell phone package)
Questions to consider
In target costing pricing, marketers first design the product, then calculate its cost, and then determine the price. Comment When setting prices, product costs are, by far, the most important factor affecting the companys decision. All other factors are secondary. Comment