chapter 10 copyright john wiley & sons 2007 presentation prepared by robin roberts, griffith...

Chapter 10 Copyright John Wiley & Sons 2007

Presentation prepared by Robin Roberts, Griffith University and Mike Spark, Swinburne University of Technology


Chapter 10 Pricing fundamentals


Chapter Objectives

1. Understand the role of price

2. Identify the characteristics of price and non-price competition

3. Understand demand curves and the price elasticity of demand

4. Explain the relationships among demand, costs and profits


Chapter Objectives (cont.)

5. Describe key factors that may influence marketers’ pricing decisions

6. Recognise the major issues that affect the pricing of products for business markets


The role of price

The purpose of marketing is to facilitate

satisfying exchange relationships between

buyer and seller

Price is the value exchanged for products in a

marketing transaction

Price - The value exchanged for products in a marketing transaction

Barter -The trading of products

This is the oldest form of exchange


The nature of price

Price is the most readily changeable

characteristic of a product

Key element in the marketing mix:– relates directly to generation of revenues– quantities sold

Key component of the profit equation:

(Profit = Total Revenue – Total Costs) – strong effect on product costs – profitability


How important is pricing to customers in your B2B marketing environment?

Simon Bottomley, General Manager, HaveStock Manufacturing

Dial-Up Broadband


Price and non-price competition

Price Competition emphasises price, and

matching or beating competitors’ prices

– Lowest-cost seller will be the most profitable

– Effective strategy in markets with standardised products or commodities

– Allows quick response to competitive or market changes

– Price wars can weaken organisations and thus should be avoided


Price and non-price competition (cont.)

Non-price Competition emphasises factors

other than price to distinguish a product from

competing brands

– Can increase brand’s unit sales without changing the price

– Can build customer loyalty by focusing on distinctive non-price features

– effective when a product or service’s features are difficult to imitate


Can Aldi compete effectively on price?

Dial-Up Broadband


Analysis of demand

The demand curve is a graph of the quantity

of products expected to be sold at various

Prices if other factors remain constant

– 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


Classic demand curve

Figure 10.1

Page 280


Prestige product demand curve

Figure 10.2

Page 281


Demand fluctuations

Influencers of Demand Fluctuations

– Changes in buyers’ needs

– Variations in the effectiveness of the marketing mix

– The presence of substitutes

– Dynamic environmental/market factors


Assessing the price elasticity of demand

Price elasticity of demand is a measure of the sensitivity of demand to changes in price.

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

Price Elasticity of Demand =

% change in quantity demanded

% change in price


Price elasticity of demand

Figure 10.3 Page 281


How does pricing affect the demand for your product?

Dial-Up Broadband

Geoff Rollason, Chief Financial Officer, Story Bridge Adventure Climb


Demand, cost and profit relationships

The analysis of demand, cost and profit is important because customers are becoming less tolerant of price increases forcing manufacturers to find new ways to control costs

Marginal Analysis

Examines what happens to a firm’s costs and revenues when it sells one more unit of product



Marginal RevenueThe change in total revenue resulting from the sale of an additional unit of product

Marginal CostThe additional cost to produce an additional unit of product


Marginal and total costs

Figure 104 Page 283


Marginal and average revenue


Marginal revenue and costs

Profit is maximised where marginal costs (MC) are equal to marginal revenue (MR)




There are two types of total costs:

Fixed costs – costs that do not vary with the changes

in the number of units produced or sold

Variable costs – costs that vary with the changes in the

number of units produced or sold


Breakeven analysis

Breakeven Point is the point at which the costs of producing a product equal the revenue made from selling the product– The point at which profitability starts

Break-even point =

Fixed costs

Per-unit contribution to fixed costs (price – variable costs)


Break-even point



Factors affecting pricing decisions — Internal (company) factors

Pricing decisions can be complex due to the

number of factors to be considered:

Organisational and marketing objectives– set prices that are consistent with the

organisation’s goals and mission– Prices should also be compatible with

marketing objectives


Factors affecting pricing decisions — Internal (company) factors (cont.)

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


Factors affecting pricing decisions – Internal (company) factors (cont.)

Costs– Set a floor price – Reducing costs increases productivity and

profitability– Costs may be shared between products

Other marketing mix variables– Price/quality image of the product or brand– Selective or intensive product distribution– Pricing used as a promotional tool


Factors affecting pricing decisions — External (market) factors

Channel member expectations are:

– To make a profit at least equivalent to the potential profit from handling a competitor’s brand

– To earn a profit commensurate with the time and resources put in

– To receive discounts for large orders and prompt payment

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



Customers’ interpretation and response:Interpretation: What meaning does the

product’s price have to the customer?Customer response: Does the customer

respond to the price by moving closer to, or farther away, from making a purchase?– Internal reference price: A price developed in the

buyer’s mind through experience with the product

– External reference price: A comparison price provided by others


Competition: A marketer needs to know competitors’ prices so it can adjust its own prices accordingly:

– Pricing to match, exceed or beat competitors’ prices

– Judging competitors’ responses to adjusting prices is essential

– Changes in an industry’s market structure both cause and create pricing opportunities



Legal and Regulatory Issues – many regulations and laws affect pricing decisions:– Price controls or freezes can be invoked to

curb inflation– Governments can set and regulate prices for

specific products– Regulations and laws to prohibit price fixing,

and deceptive and discriminatory pricing is illegal in some cases



Pricing for business markets

Producers commonly provide intermediaries with discounts or reductions from list prices

There are many types of discounts:

Trade (or Functional) Discounts: A reduction off the list price given by a producer to an intermediary for performing certain functions

Quantity Discounts: Deductions from list price for purchasing in large quantities

– Cumulative Discounts – Non-cumulative Discounts


Pricing for business markets (cont.)

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– Trade-in or promotional allowances are

common



Geographic Pricing types – Allows for costs incurred through the physical distance between the buyer and seller

– FOB factory– FOB destination– Uniform geographic pricing– Zone pricing– Freight absorption pricing



Transfer pricing — The price of products that one organisational unit charges when selling to another unit in the same organisation

– Actual full cost

– Standard full cost

– Cost plus investment

– Market-based pricing

chapter 10 copyright john wiley & sons 2007 presentation prepared by robin roberts, griffith...

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