Pricing

Fall 2006

A customer might ask, “What does that cost?”

To the customer, what are costs?

Pricing Products Price is the amount of money charged

for a product. This is not the same as the COSTS of product acquisition.

          

          

1995 FERRARI 355    $95,000.00

Pricing Terms Fixed Costs Variable Costs Price Elasticity: sensitivity of demand to

changes in price Quantity Demanded/ Price

Break Even Point

Knothole Skiers Costs:

– $25,000 rent for studio– $2 materials for manufacture of CD– $.50 royalty to artists

$ 5 price

Internal Factors Affecting Pricing

Marketing Objectives– profits– market share– survival– middleman loyalty– discourage competitors– product-line consistency– visibility for product

Internal Factors Affecting Pricing

Costs– Production and efficient use of capacity– Experience curve– Variable Costs

External Factors Affecting Pricing Competition Demand Economy Government Societal Concerns

Setting Price

Cost Based Competition Based Demand/Value Based

$40,137.00

Pricing Strategies: The Familiar

Market-Skimming Pricing Market-Penetration Pricing

Pricing Strategies: The Familiar Product Line Pricing

Pricing Strategy

Sells: 100,000 units Price: $10 Fixed Costs: $500,000 for a capacity of

200,000 Units Variable Costs: $1 Request to sell in a new market. What

is the minimum selling price the firm should accept?

Second Market Discounting

Sells: 100,000 units Price: $10 Fixed Costs: $500,000 for a capacity of

200,000 Units Variable Costs: $1 Request to sell in a new market. What

is the minimum selling price the firm should accept?

Pricing Strategy

Average Economic Costs (all costs plus profit)– $55 at 20 Units– $40 at 40 Units

40 Consumers per period are interested in product. 20 want it at beginning of period and willing to pay

$50. 20 are price sensitive and will pay no more than $30

per unit. At which price should the firm sell its product?

Periodic/Seasonal Discounting

Average Economic Costs (all costs plus profit)– $55 at 20 Units– $40 at 40 Units

40 Consumers per period are interested in product. 20 want it at beginning of period and willing to pay

$50. 20 are price sensitive and will pay no more than $30

per unit. At which price should the firm sell its product?

Pricing Strategy

Distribute two films: Halloween XVI (a) and Chucky’s In Love (b). Albany (x) and Corvallis (y) theatres are interested. Discrimination is illegal as is tying.

Corvallis will pay $25K for (a) and $10K for (b)

Albany will pay $12K for (a) and $18K for (b). What pricing strategy do you use?

Price Bundling

Distribute two films: Halloween XVI (a) and Chucky’s In Love (b). Albany (x) and Corvallis (y) theatres are interested. Discrimination is illegal as is tying.

Corvallis will pay $25K for (a) and $10K for (b)

Albany will pay $12K for (a) and $18K for (b). What pricing strategy do you use?

Pricing Strategy

Produce computer printers. Ave. Economic Cost is $100 with a life of 3 years. During that time, product uses ink cartridges for which AEC is .50 per month. Consumers willing to pay $50 for printer and $2 per month for supplies. What pricing?

Captive Product Pricing

Produce computer printers. Ave. Economic Cost is $100 with a life of 3 years. During that time, product uses ink cartridges for which AEC is .50 per month. Consumers willing to pay $50 for printer and $2 per month for supplies. What pricing?

Other Pricing Issues

Segmented Pricing: different customers pay different prices

Psychological Pricing

Other Pricing Issues

Price cuts and price increases: jnd Channel members

– Bad: price fixing (collusion), predatory pricing, price discrimination, resale price maintenance, deceptive pricing