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Pricing

•Chapter 12

•Powerpoint slides

•Extendit! version

•Instructor name

•Course name

•School name

•Date

Principles of Marketing: 6th Canadian Edition

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Learning Objectives

• After studying this chapter, you should be able to:– Identify and define the internal factors affecting a firm’s pricing

decisions

– Identify and define the external factors affecting pricing decisions, including the impact of consumer perceptions of price and value

– Contrast the two general approaches to setting prices

– Discuss how companies adjust their prices to take into account different types of customers and situations

– Discuss the key issues related to initiating and responding to price changes

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Opening Vignette: Priceline.com

• Priceline.com was started in 1998 by Jay Walker

• Concept: empower consumers to name their own price and let sellers choose which offers they want to serve

• Priceline.com survived the dot.com crash of 2000 and continues to be one of the few profitable companies online

• Deal primarily in travel-related products and services, such as: airplane tickets, hotel rooms, rental cars, cruises and vacation packages; buy and re-sell

• Customer base: 13.5 million, visits per month: 9 million

• Non-time sensitive products are not as successful; cars, financial products

• Matching process works well on the Internet

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What is a Price?

• Price: the amount of money charged for a product or service, or the sum of values exchanged for the benefits of having or using the product or service

• Also known as rent, tuition, fee, fare, rate, interest

• Historically, most pricing was dynamic, arrived at through negotiation

• Fixed pricing is more recent

• Price is the only marketing mix element that produces revenue

• Pricing best practices:– Develop a 1% pricing mindset (do

not underprice when not needed)

– Consistently deliver more value (not necessary in recessions)

– Price strategically, not opportunistically (price before product)

– Know your competition (it gives you a better understanding of the value of your product)

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Factors Affecting Pricing Decisions

Figure 12.1

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Factors Affecting Pricing Decisions

• Marketing objectives: companies may set prices based on

– Survival

– Current profit maximization

– Market share leadership

– Product quality leadership; recover high R&D expenses

– Disincentive to market entry

Figure 12.1

– Partial cost recovery (universities, NPO)

– Social price (varying income clients)

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Factors Affecting Pricing Decisions (continued)

• Marketing mix strategy: – Price strategy should be consistent with the other mix

elements• 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

• Non-price positions: de-emphasize price

Figure 12.1– Differentiate the market offering to make it

worth a higher price (understand what the customer really expects – price attached strictly to the product is not necessarily an issue – other considerations may be important)

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Factors Affecting Pricing Decisions (continued)

• Costs– Set the floor, or lowest amount that should be charged– Ideally, prices charged cover all costs and leave something left

over for profit

– Fixed costs: costs that do not vary with production; also known as overhead, eg. Rent, utilities, insurance, management salaries

– Variable costs: costs that vary directly with the level of production, such as raw materials, labour, supplies

– Total costs: the sum of fixed and variable cost Figure 12.2

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Cost Per Unit/Accumulated Production

• Costs at different levels of production - Average cost to produce will lower as volumes increase due to economies of scale

• Experience (learning) curve: the drop in the average per-unit production cost that comes with accumulated production experience– Companies want to produce at the most efficient volume to minimize their

production costs– This gives them the flexibility to offer lower prices, if they choose– This also works with the increased competition as a product ages– But, progressively lowering prices may not be consistent with the product;

luxury goodsFigure 12.3

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Factors Affecting Pricing Decisions (continued)

• Product considerations– New-Product Pricing

• Market skimming pricing: setting a high price to skim maximum revenues layer by layer, from the segments willing to pay the high price

• Used when the product is new technology, and not easily copied

• Market penetration pricing: setting a low price for a new product to attract a large number of buyers and achieve a large market share

• Used when there are advantages to be gained by large volumes early in the life cycle

Figure 7.7

Skimming price drops in steps

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Factors Affecting Pricing Decisions (continued)

– Product line pricing: • Setting the price steps between products in a line (how

different)• Based on cost differences, customer evaluations of different

features, and competitors’ prices

• Organizational considerations:

Figure 12.1

– Deciding who will set prices and who will have the ability to change them

– Management versus sales?

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Factors Affecting Pricing Decisions (continued)

• Types of markets: – Pure competition: many buyers and sellers; no one company

has influence over prices charged (commodities, financial securities)

– Monopolistic competition: many buyers and sellers trading over a range of prices charged (sellers can differentiate their offers to buyers)

– Oligopolistic competition: few sellers who are highly sensitive to each other’s pricing and marketing strategies

– Pure monopoly: only one seller in the market who sets prices; may be regulated

Figure 12.1

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Factors Affecting Pricing Decisions (continued)

• Competition: • A high-price, high margin price strategy will attract competition

• Companies will attempt to benchmark costs to compare their operations – must match the competitor’s price for similar products (still at profit?)

– Consumers will compare alternatives to determine value

Figure 12.1

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Factors Affecting Pricing Decisions (continued)

• The Price-Demand Relationship– Demand curve: a curve that shows the number of units the market will buy

at different possible prices in a given time period

– Price elasticity: Calculated as the % change in quantity demanded divided by the % change in price; values >1 and <-1 are elastic

– Availability of product substitutes will influence elasticity• Elastic products:

lower price to maximize revenue

• Inelastic products: raise price to maximize revenue

• Prestige goods: behave in a contrary fashion due to consumer perception of value

Figure 12.4

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Factors Affecting Pricing Decisions (continued)

• Other factors:– Economic conditions

– Reseller cooperation

– Government

– Social concerns (AIDS medication)

Figure 12.1

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General Pricing Approaches

• Cost-based pricing: adding a standard markup to the cost of the product; using formula:

– Average unit cost equals variable cost plus (fixed cost/unit sales)

– Markup price equals Unit cost/(1 minus desired return on sales)

– Example: $10 + ($300,000/50,000) = $16

– Selling price based on 20%: $16/(1 - .20) = $20

– Double-check: $4 profit/selling price = 20% profit margin

Figure 12.5

• Note: multiplying $16 by 1.2 equals a selling price of $19.20, and a profit margin of only 17%

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Cost base pricing - Break-even Chart

• Break-even (target profit) pricing: setting price to break even (or make a target profit) on the total costs of making and marketing a product

• Break-even equals fixed cost divided by (price minus variable cost)

• Used primarily when judging feasibility of a marketing action

• Example (a): BE pricing

• B/E = $300,000/($20 - $10)

• B/E = 30,000 units

• Example (b): TP pricing

• B/E = ($300,000 + $75,000 profit)/($20 - $10)

• B/E = 37,500 units

• Refer to Table 12.1 (p 481)

Figure 12.6

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General Pricing Approaches (continued)

• Value-based pricing: setting price based on buyers’ perceptions of value rather than on the seller’s cost; what the customer is willing to pay sets the upper limit for pricing strategy– Everyday low pricing (EDLP): charging a constant low price with few

discounts or promotional sales; used successfully by Wal-Mart, suits busy consumers, encourages impulse buying due to trust

– High-low pricing: charge higher and have special sales. Very expensive to run and can create customer’s negative perception

Figure 12.7

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Price Adjustment Strategies

Table 12.2

Discount andAllowance pricing

Segmentedpricing

Psychologicalpricing

Promotionalpricing

Geographicalpricing

Internationalpricing

Reducing prices to reward customerresponses such as paying early

Adjusting prices to allow for differencesin customers (age), products, or locations (seats)

Adjusting prices for psychologicaleffect; reference pricing

Temporarily reducing pricesto increase short-run sales

Adjusting prices to account forgeographic location of customers

Adjusting prices forinternational markets

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Geographical Pricing

• FOB-origin pricing: goods are placed “free on board” a carrier; the customer pays the freight from the factory to the destination

– Lets the customer choose how they want to get the goods there

– Many suppliers offer free freight for truck-load sized orders

• Uniform-delivered price: the company charges the same price including freight to all customers, regardless of their location

– Company averages the freight charges to not penalize those located far away

• Zone pricing: the company sets up two or more zones, all customers within a zone pay the same price, the more distant the zone, the higher the price

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Responding to Price Changes

• Note to user: this figure is from the U.S. edition of this text

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Public Policy and Pricing

• The Competition Act: Sections 34, 36, and 38

– Price fixing: cannot collude to restrict pricing competition, such as bid rigging

– Price discrimination: customers must be offered proportionally equal discounts when used

– Deceptive pricing: cannot mislead customers as to value received

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In Conclusion…

• The learning objectives for this chapter were:– Identify and define the internal factors affecting a firm’s pricing

decisions

– Identify and define the external factors affecting pricing decisions, including the impact of consumer perceptions of price and value

– Contrast the two general approaches to setting prices

– Discuss how companies adjust their prices to take into account different types of customers and situations

– Discuss the key issues related to initiating and responding to price changes