Chapter 10

Pricing edit Master Click to Products: subtitle style Pricing Considerations and Approaches

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Price
Price is the sum of all the values that consumers exchange for the benefits of having or using the product or service. Price has been the major factor affecting buyer choice; nonprice factors have become increasingly important in buyer-choice behavior. Price is the only element in the marketing mix that produces revenues; all others represent costs.
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Factors Affecting Price Decisions ( Fig. 10.1)

Internal Factors External Factors

Marketing Objectives Marketing Mix Strategy Costs Organizational considerations

Pricing Decisions

Nature of the market and demand Competition Other environmental factors (economy, resellers, government)

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Internal Factors Affecting Pricing Decisions: Marketing Objectives

Survival Low Prices to Cover Variable Costs and Some Fixed Costs to Stay in Business. Current Profit Maximization Choose the Price that Produces the Maximum Current Profit, Etc. Market Share Leadership Low as Possible Prices to Become the Market Share Leader. Product Quality Leadership High Prices to Cover Higher Performance Quality and R & D.
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Marketing Objectives

Internal Factors Affecting Pricing Decisions: Marketing Objectives

Other specific objectives include:
n

Set prices low to prevent competition from entering the market, Prices might be reduced temporarily to create excitement or draw more customers.

Nonprofit and public organization may have other pricing objectives such as:
n n n

University aims for partial cost recovery, Hospital may aim for full cost recovery, Theater may price to fill maximum number of seats.
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Customers Seek Products that Give Them the Best Value in Terms of Benefits Received for the Price Paid. Product Design

Internal Factors Affecting Pricing Decisions: Marketing Mix

Nonprice Positions

Price

Distribution

Promotion

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Types of Cost Factors that Affect Pricing Decisions

Costs that dont vary with sales or production levels. Executive Salaries, Rent

Fixed Costs (Overhead)

Variable Costs
Costs that do vary directly with the level of production. Raw materials

Total Costs Sum of the Fixed and Variable Costs for a Given Level of Production

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Costs Considerations
Cost Per Unit at Different Levels of Production Per Period

Cost per unit

SRA C

LRA C

1,000

2,000

3,000

Quantity Produced per Day

4,000

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Types of Cost Factors that Affect Pricing Decisions

As a firm gains experience in production, it learns how to do it better. The experience curve (or the learning curve) indicates that average cost drops with accumulated production experience. Strategy: company should price products low; sales increases; costs continue to decrease; and then lower prices further. Risks are present with this strategy.
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External Factors Affecting Pricing Decisions

Market and Dema nd Compe titors Costs, Prices, and Offers
Economic Conditions Reseller Needs Governmen t Actions Social Concerns

Other External Factors

Competitor Costs
This ad by LCI International accuses its competitors of using unfair practices in pricing, hiding fees incurred by rounding up. Why is LCI focusing on this practice? Hidden fees, defined as cramming by the FCC, are the number one source of billing complaints among long-distance customers.

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Market and Demand Factors Affecting Pricing Decisions

Pricing in Different Types of Markets
Pure Monopoly Pure Competition
Many Buyers and Sellers Who Have Little Monopolistic Effect on the Competition Price Many Buyers and Sellers Who Trade Over a Range of Prices Single Seller

Few Sellers Who Are Sensitive to Each Others Pricing/ Marketing Strategies 1111

Oligopolistic Competition

Demand Curves and Price Elasticity of Demand

A Demand Curve is a Curve that Shows the Number of Units the Market Will Buy in a Given Time Period at Different Prices that Might be Charged. Price Elasticity Refers to How Responsive Demand Will be to a Change in Price.
Price Elasticity of Demand = % Change in Quantity Demanded % Change in Price

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Price Elasticity of Demand

P 2 P 1 Q Q Quantity Demanded per 2 1

A. Inelastic Demand Demand Hardly Changes With a Small Change in Price.

Pric e

Period Pric e
P 2 P 1

B. Elastic Demand Demand Changes Greatly With a Small Change in Price.

Q 2 Quantity Demanded per

Q 1

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Major Considerations in Setting Price (Fig. 10.5)

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Cost-Based Pricing
Unexpected Situational Factors
Certainty About Costs

Pricing is Simplified

Price Competition Is Minimized

Cost-Plus Pricing EthicalApproach is an That Adds a Standard Markup to the Cost of the Product.
Attitudes of Others

Simplest Pricing Method

Much Fairer to Buyers & Sellers

Ignores Current Demand & Competition

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Breakeven Analysis or Target Profit Pricing

Tries to Determine the Price at Which a Firm Will Break Even or Make a Certain Target Profit.
12 Total Revenue
Target Profit ($2 million)

Cost in Dollars (millions)

10 8 6 4 2

Total Cost Fixed Cost

200

Sales Volume in Units (thousands)

400

600

800

1,000

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Cost-Based Versus ValueBased Pricing (Fig. 10.7)

Cost-Based Pricing Value-Based Pricing

Customer Price Cost Value Product

Product PriceValue Cost Customers

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Competition-Based Pricing

Setting Prices

Compan y Sets Prices Based on What Competi tors Are Chargin g. Compan y Sets Prices Based on What They Think Competi tors Will Charge.

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