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Chapter 11-Students

Chapter 11 - Setting the Right Price

Objectives

  • Discuss the importance of price.

  • Describe the four-step pricing process.

  • Recognize the legalities and ethics of setting price.

What is Price? What is Cost?

  • Price: The total value that customers exchange for the benefits of having or using the product or service (consumers buy value, not just products).

  • Cost: Represents revenue from the seller's perspective.

  • Importance: The dual perspective of price complicates understanding and setting of pricing strategies.

The Importance of Price to Marketing Managers

  • Key Financial Elements:

    • Price directly influences profits and revenue.

Steps in Setting the Right Price

  1. Establish Pricing Objectives.

  2. Estimate Demand, Costs, and Profits.

  3. Choose a Pricing Strategy.

  4. Fine-Tune the Base Price with Pricing Tactics.

Establishing Pricing Objectives

Categories of Pricing Objectives

  • Sales Oriented:

    • Status quo: Maintain existing prices or meet competition, less planning required.

    • Sales maximization: Short-term focus on increasing sales regardless of profits.

  • Profit Oriented:

    • Profit maximization: Target maximum total revenue relative to costs.

    • Satisfactory profits: Achieve reasonable profits related to Corporate Social Responsibility (CSR).

    • Target ROI: Set prices to achieve a specific return on investment.

Profit-Oriented Pricing Objectives

  • Profit Maximization: Setting prices for maximum revenue relative to costs.

  • Satisfactory Profits: Aim for a reasonable profit level connected to CSR.

  • Target Return on Investment: Focus on achieving a specific ROI from pricing.

Price Change through Product Life Cycle (PLC)

  • Introduction: High prices to recover development costs, demand relatively inelastic.

  • Growth: Stabilizing prices, increased product appeal, demand rises.

  • Maturity: Prices decrease due to increased competition, prices stabilize.

  • Decline: Further price reductions possible; prices may increase if the product becomes a specialty.

Step 2 – Estimate Demand, Costs, and Profits

  • Cost Estimation:

    • Variable Costs: Costs that change with output.

    • Fixed Costs: Costs that remain constant regardless of output.

  • Demand Estimation: Determined using historical data, life cycle, price sensitivity, and elasticity of demand.

Elasticity of Demand

Characteristics and Examples

  • Elastic (e.g., Smartphones, Fashion): Nonessential, many alternatives.

  • Inelastic (e.g., Electricity, Basic Food): Essential, few alternatives.

Breakeven Analysis

  • Breakeven Point Calculation: Fixed Costs / (Price - Variable Cost)

  • Fixed Costs: Payable regardless of production level (e.g., rent, insurance).

  • Variable Costs: Change with output (e.g., ingredients in pizza).

Breakeven Example - Pizza

  • Variable Costs:

    • Flour: $0.50

    • Cheese: $3.00

    • Total Variable Cost: $5.56

  • Fixed Costs:

    • Total Fixed Cost: $5,650

  • Breakeven:

    • Price = $10

    • Breakeven Quantity: 1,273 pizzas/month.

Break-Even Pricing Scenario

Example for Furniture Manufacturer

  • Estimated Demand: 8,000 bookcases/month

  • Fixed Costs: $200,000/month

  • Variable Cost: $50/unit

  • Breakeven Price Calculation: Leads to determining required revenue and units for break-even.

Break Even Analysis by Graph

  • Scenario A: Price $100/unit versus Scenario B: Price $75/unit.

  • Displays relationship between price, revenue, total costs, and breakeven quantity.

Step 3 – Choose a Price Strategy

  • Initiate with Current Product Positioning followed by considering costs, demand and PLC stage.

  • Basic Approaches:

    1. Price Skimming

    2. Penetration Pricing

    3. Status Quo Pricing

    4. Competitive Pricing

    5. Cost Plus Pricing

Pricing Strategy Comparison

Skimming vs. Penetration

  • Skimming: High initial price for unique products.

  • Penetration: Low initial price to gain market share.

Value-Based Pricing

  • Pricing based on perceived value to the consumer rather than solely on costs.

Step 4: Using a Price Tactic

  • Establish a base price and adjust using various pricing tactics, always keeping profit in mind.

Discounts and Allowances

  • Types of Discounts:

    • Quantity Discounts

    • Cash Discounts

    • Functional Discounts

    • Seasonal Discounts

Other Pricing Tactics

  • Various tactics for different market strategies include flexible pricing, loss leaders, price bundling, and pay-what-you-want models.

Legality and Ethics

  • Deceptive Practices: False advertising, bait pricing, deceptive pricing, and price fixing are illegal and unethical.

Learning Objectives

  • Reviewed the three major pricing strategies, their importance, and how to adjust prices according to consumer perceptions and market conditions.