9: Pricing

Price: monetary amount exchanged for a product or service.

Transaction price: price charged - discounts/rebates/promo/third party fees

Total price paid: consumer concept; non-monetary costs

Prices send quality and positioning hints.

Purchases tend to occur when perceived value > price.

Willingness to pay: maximum price a customer accepts.

Value is shaped by benefits and costs.

Pricing approaches

  • Demand oriented: set price based on customer value and demand patterns.

    • Skimming: high initial price to determine the willingness to pay, see price declines.

    • Penetration: low entry price to build volume and share, elastic demand and scale economics.

    • Prestige: luxury categories. Signify status and exclusivity.

    • Target pricing: start with WTP target price, design to cost. Reverse engineering.

    • Bundles: combine offers to extract consumer surplus.

    • Dynamic: vary price by time, segments and capacity.

  • Cost oriented: add a markup to the cost.

    • Standard markup: fixed % of cost added.

    • Cost-plus: price = cost + (cost*markup)

  • Profit-oriented: back into price from desired profits

    • Target profit: choose price and volume to hit absolute profit level

    • Target ROI: set price to achieve a return on invested assets.

  • Competition-oriented: price relative to market norms and competitors.

    • Customary pricing: match long-standing norms; “expected price points” for products like coke.

    • Above/at/below market pricing: price signals positioning and strategy compared to competition.

    • Loss-leader: prices select items below cost to drive store traffic.

Price Elasticity of Demand

  • Refer to microeconomics.

  • Elastic: consumers change buying a lot when price changes.

    • Impacted by substitution, essential, delays/switches and weak brand attachment.

  • Inelastic: customers change their buying a little when price changes.

    • Few substitutes, must-have/urgent, strong brand.

Break Even Analysis

Breakeven where total revenue = total cost.

  • Fixed costs: paid regardless of units sold

  • Variable costs: pay for per unit sold.

  • TC = TVC + TFC

At what sales volume does profit and loss equal 0?

How do price, unit cost or fixed cost change?

Contribution margin: how much one unit contributes to covering FC and profits.

CM = P - VC

Break even point in units: sales volume where profit = 0

Q* = FC / CM

Ethics & Legal

  • Price fixing: competitors agreeing on prices; any agreement with rivals on price is illegal.

  • Predatory pricing: below-cost pricing by a dominant firm to eliminate rivals, then raise prices once they’re gone. Rare and hard to prove.

  • Deceptive pricing:

    • bait-and-switch, advertising bargains with no stock, then push costlier stock.

    • False benchmarks: fake sales

    • Drip pricing: advertising headline prices but adding mandatory fees late in checkout. Ticketmaster.