Chapter 13 Pricing concepts

1. Chapter 13Pricing concepts

2. Learning objectives 1 Discuss the importance of pricing decisions to the economy and to the individual organisation 2 List and explain a variety of pricing objectives 3 Explain the role of demand in price determination 4 Describe cost-oriented pricing strategies

3. Learning objectives (cont.) 5 Demonstrate how the product life cycle, competition, distribution and promotion strategies, customer demands, the Internet and extranets, and perceptions of quality can affect price 6 Describe the procedure for setting the right price 7 Identify the legal and ethical constraints on pricing decisions 8 Explain how discounts, geographic pricing and other special pricing tactics can be used to fine-tune the base price

4. Learning objective 1 Discuss the importance of pricing decisions to the economy and to the individual organisation Define the term marketing

5. 1 What is price? Price is that which is given up in an exchange to acquire a good or service.

6. 1 The importance of price To the seller… Price is revenue and profit source To the consumer… Price is the cost of something In the broadest sense, price allocates resources in a free-market economy

7. 1 The importance of priceto marketing managers Revenue The price charged to customers multiplied by the number of units sold. Profit Revenue minus expenses.

8. 1 The importance of price Revenue = Unit price  number of units sold • Revenue pays for every activity. • What’s left over is profit. • Marketers must select a price that • is not too high • is not too low • equals the perceived value to target consumers

9. Learning objective 2 Describe four marketing management philosophies. List and explain a variety of pricing objectives

10. 2 Trends influencing price setting • High rate of new product introduction • Increased availability of bargain-priced dealer and generic brands • Price-cutting as a strategy to maintain or regain market share • More efficient and better-informed buyers

11. 2 Pricing objectives • Profit-oriented pricing objectives • Sales-oriented pricing objectives • Status quo pricing objectives

12. 2 Profit-oriented pricing objectives • Profit maximisation • Satisfactory profits • Target return on investment

13. 2 Profit maximisation Setting prices so that total revenue is as large as possible relative to total costs.

14. 2 Return on investment (ROI) Net profit after taxes divided by total assets. ROI = net profit after tax total assets

15. 2 Sales-oriented pricing objectives • Market share • Sales maximisation

16. 2 Market share A company’s product sales as a percentage of total sales for that industry.

17. 2 Sales maximisation • Short-term objective to maximise sales • Ignores profits, competition and the marketing environment • May be used to sell off excess inventory

18. 2 Status quo pricing • Advantages • Simplicity • Safest route to long-term survival for small firms • Disadvantages • Strategy may ignore demand or cost

19. Learning objective 3 Explain the role of demand in price determination

20. 3 Demand and supply Demand The quantity of a product that will be sold in the market at various prices for a specified period. Supply The quantity of a product that will be offered to the market by a supplier at various prices for a specific period.

21. 3 Elasticity of demand Consumers’ responsiveness or sensitivity to changes in price.

22. 3 Elasticity of demand (cont.) Elastic demand Consumers buy more or less of a product when the price changes Inelastic demand An increase or decrease in price will not significantly affect demand

23. 3 Elasticity of demand (cont.) Price goes… Revenue goes… Demand is… down up elastic down down inelastic up up inelastic up down elastic

24. 3 Factors that affect elasticity • Availability of substitutes • Price relative to purchasing power • Product durability • Product’s other uses

25. Learning objective 4 Describe cost-oriented pricing strategies

26. 4 The cost determinant of price Types of costs Variable costs Deviate with changes in level of output Fixed costs Do not deviate as level of output changes

27. 4 The cost determinant of price (cont.) • Methods used to set price • Markup pricing • Break-even pricing

28. 4 Markup pricing Markup pricing The cost of buying the product from the producer plus amounts for profit and for expenses not otherwise accounted for. Example: If a pen costs $1.80 and sells for is $2.20, the markup is $0.40 or 22% of cost.

29. 6000 Total revenue Profit Total costs 4000 Break-even point Price Loss 2000 Fixed costs 3000 4000 5000 6000 0 1000 2000 Quantity 4 Break-even pricing

30. Learning objective 5 Demonstrate how the product life cycle, competition, distribution and promotion strategies, customer demands, the Internet and extranets, and perceptions of quality can affect price

31. 5 Other determinants of price • Stages of the product life cycle • Competition • Distribution strategy • Promotion strategy • Perceived quality

32. Introductory stage Growth stage Maturity stage Decline stage $ High $ Stable $ Decrease $ Decrease Stable High 5 Stages in the product life cycle

33. 5 Distribution strategy Convincing distributors to carry product • Offer a larger profit margin • Give dealers a large trade allowance

34. 5 The impact of the Internet • Allows price and product comparisons. • Prices are coming down. • Data collection allows sellers to tailor products and prices.

35. 5 Extranet A private electronic network that links a company with its suppliers and customers.

36. 5 Prestige pricing Charging a high price to help promote a high-quality image.

37. 5 Indicators of quality • Retailer reputation • Appearance • Price • Brand name

38. Learning objective 6 Describe the procedure for setting the right price

39. 6 Steps in setting the right price Establish pricing goals Estimate demand, costs and profits Choose a price strategy Fine-tune base price with pricing tactics Results lead to the right price

40. 6 Pricing objectives • Profit-oriented pricing objectives • Sales-oriented pricing objectives • Status quo pricing objectives

41. 6 Price strategy A basic, long-term pricing framework which establishes the initial price for a product and the intended direction for price movements over the product life cycle.

42. 6 Choosing a price strategy • Basic strategies for setting prices • Price skimming • Status quo • Penetration pricing

43. 6 Price skimming Situations when price skimming is successful • Inelastic demand • Superior product • Legal protection of product • Technological breakthrough • Limited production

44. 6 Penetration pricing A pricing policy whereby a firm charges a relatively low price for a product initially as a way to reach the mass market.

45. 6 Penetration pricing (cont.) • Advantages • Discourages or blocks competition from market entry • Disadvantages • Requires gear up for mass production • Selling large volumes at low prices • Strategy to gain market share may fail

46. Learning objective 7 Identify the legal and ethical constraints on pricing decisions

47. 7 The legality and ethics of price strategy Issues that limit pricing decisions • Unfair trade • Price fixing • Price discrimination • Predatory pricing

48. Learning objective 8 Explain how discounts, geographic pricing and other special pricing tactics can be used to fine-tune the base price

49. 8 Tactics for fine-tuning the base price • Discounts • Geographic pricing • Special pricing tactics

50. 8 Tactics for fine-tuning the base price (cont.) • Quantity discounts • Cash discounts • Functional discounts • Seasonal discounts • Promotional allowances • Rebates • Value-based pricing