Pricing

Pricing Approaches (4)

Demand-oriented, Cost-oriented, Profit-Oriented, Competition oriented

Price

the amount of money charged for a product our service

Final price =

List price − Incentives + Allowances + Extra fees

Price relationship to value

The relationship shows that for a given price, as perceived benefits increase, value increases.

value

the ratio of perceived benefit to price

or

value = perceived benefits/ price

profit equation

types of demand-oriented approaches

skimming, penetration, prestige, price lining, odd-even, target, bundle, yield management

types of cost-oriented approaches

standard markup, cost-plus

Profit-oriented approaches

target profit, target return on sales, target return on investment

Competition-oriented approaches

customary, above at or below, loss leader

price skimming

• setting the highest initial price that those customers who really want the product are willing to pay

• not very price sensitive

penetration pricing

• Setting a lower, more affordable initial price on a new product to appeal immediately to the mass market

• opposite of price skimming

• make sense when consumers are price sensitive

prestige product

• setting a high price so that quality- or status-conscious consumers are attracted to the product and buy it.

• The higher the price of a prestige product, the greater the status associated with it and the greater its exclusivity, because fewer people can afford to buy it

• prices remain high during the lifecycle

price lining

a firm that is selling not just a single product but a line of products may sell them at a number of different specific price points

example of price lining

Apple offering iPads at $449, $599, and $1,099 depending on the generation

odd-even pricing

• involves setting prices a few dollars or cents under an even number.

• psychological effect

• overuse of this strategy tends to mute its effect on demand

target pricing

Manufacturers will sometimes estimate the price that the ultimate consumer would be willing to pay for a product. They then work backward through markups taken by retailers and wholesalers to determine what price they can charge for the product

bundle pricing

• marketing of two or more products for a single “package” price.

• based on the idea that consumers value the package more than the individual items.

example of bundle pricing

Air Canada offering vacation packages that include airfare, car rental, and hotel.

yield management pricing

charging of different prices to maximize revenue for a set amount of capacity at any given time.

(airplane seat fares)

standard markup pricing

• In order to make a profit, firms sell their products at a price that exceeds their costs of producing or sourcing the items and the costs of marketing them

• Manufacturers commonly express markup as a percentage of cost, which is the difference between selling price and cost, divided by cost.

markup

The difference between the selling price of an item and its cost is referred to as the markup

cost-plus pricing

summing the total unit cost of providing a product or

service and adding a specific amount to the cost to arrive at a price

• most common in B2B settings

benefits to cost-plus pricing

• less risky → sellers can be more certain about costs than demand

• simple

• Price competition is minimized

drawbacks to cost-plus pricing

Ignores demand and competitors’ prices

profit

= the difference between revenue and costs.

profit oriented approach strives to

balance both revenues and costs to set price

competition-oriented approach is based on

an analysis of what competitors are doing.

customary pricing

Setting a price that is dictated by tradition, a standardized channel of distribution, or other competitive factors.

above, at or below market pricing

Setting a market price for a product or product class based on a subjective feel for the competitor's price or market price as the benchmark.

loss-leader pricing

Deliberately selling a product below its customary price, not to increase sales, but to attract customers' attention to it in hopes that they will buy other products with large markups as well.

downside to loss-leader pricing

some consumers move from store to store, making purchases only on those products that are loss leaders.

the only part of the marketing mix that creates revenue for the company

Price

market price

what customers are generally willing to pay, not necessarily the price that the firm sets

demand oriented approach

• Emphasizes expected customer tastes and preference while using the concept of demand as an asset

cost-oriented approach

• Used when a price is more affected by the cost side of the pricing problem

• Price is set by looking at the production & marketing costs and then adding enough to cover direct expenses, overhead and some level of profit.

markup chain

sequence of markups used by firms at each level in a channel

Break-even analysis

determines unit volume and dollar sales to be profitable given a particular price and cost structure

forecasting methods

qualitative methods, regression methods, multiple equation methods, and time-series methods.

qualitative methods

market experts coming to consensus using nonquantitative means to achieve projections.

Regression methods

link the forecast to a number of other variables through an equation

multiple equations methods

equations related to one another can also be used to forecast

time-series methods

assume that the variable being forecast is affected by time

demand curve represents

the number of products sold at a given price.

factors affecting demand other than price

1. consumer taste

2. price and availability of similar products

3. consumer income

how does consumer income affect demand

as consumer income (allowing for inflation) increases, demand for a product also increases

movement along the curve occurs when

a quantity change occurs and other factors remain the same

a shift of the demand curve occurs when

a price change occurs.

example: when consumer income increases

elastic demand

slight decrease in price results in a relatively large increase in demand, or units sold.

or

slight increase in price results in a relatively large decrease in demand

inelastic demand

slight increases or decreases in price will not significantly affect the demand, or units sold, for the product.

• ex: necessities, such as the dentist

how revenue is estimated

total revenue = P x Q

variable costs

sum of the expenses of the firm that vary directly with the quantity of product that is produced and sold

fixed costs

sum of the expenses of the firm that are stable and do not change with the quantity of product that is produced and sold

total cost

total expense incurred by a firm in producing and marketing the product

break even analysis

technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output

break even point (BEP)

the quantity at which total revenue and total cost are equal

profit comes from

any units sold after the BEP

advantages of a break even analysis

ensures you don’t lose money

pricing objectives

Expectations that specify the role of price in an organization’s marketing and strategic plans.

• usually measured in ROI

the six pricing objectives

1. profit

2. sales

3. market share

4. volume

5. survival

6. social responsibility

three profit objectives

1. managing for long-run profits

2. maximizing current profit objective

3. target return objective

managing for long-run profits

a company gives up immediate profit in exchange for achieving a higher market share

target return objective

occurs when a firm sets its price to achieve a profit goal

steps to setting an adequate price (4)

1. Select an approximate price level

2. Set the list or quoted price

3. Make special adjustments

4. Monitor and adjust

Market share

the ratio of the firm’s sales to those of the industry

when might a firm pursue a market share objective?

when industry sales are relatively flat or declining

volume

the quantity produced or sold

social responsability

A firm may forgo higher profit on sales and follow a pricing objective that recognizes its obligations to customers and society in general

types of pricing constraints

demand for the product, competitors pricing, newness of the product, cost of producing

Price elasticity

How sensitive consumer demand and the firm’s revenues are to changes in the product’s price.

when setting a price, a seller must decide whether to follow which two price setting policies

one-price policy or flexible price policy

one-price policy

involves setting one price for all buyers of a product or service.

flexible price policy

setting different prices for products and services depending on individual buyers and purchase situations in light of demand, cost, and competitive factors

examples of special adjustments made to a price

discounts, allowances, geographical adjustments

geographical adjustments

made by manufacturers or even wholesalers to list or quoted prices to reflect the cost of transportation of the products from seller to buyer