Chapter 11: Pricing Fundamentals

1. Chapter 11:Pricing Fundamentals Pride/Ferrell Foundations of Marketing Fourth Edition Prepared by Milton Pressley University of New Orleans

2. Objectives • Understand the role of price. • Identify the characteristics of price and nonprice competition. • Be familiar with demand curves and the price elasticity of demand. • Understand the relationships among demand, costs, and profits. • Describe key factors that may influence marketers’ pricing decisions. • Be familiar with the major issues that affect the pricing of products for business markets.

3. Price • Price • the value paid for a product in a marketing exchange • The Nature of Price • price does not always take the form of money • the oldest form of trade is barter

4. The Importance of Price to Marketers • price can be changed quickly in response to changing demand • price is related to total revenue and profit: • Profit = Total Revenue – Total Costs • Profits = (Price x Quantity Sold) – Total Costs • price can determine quantity sold • price has a psychological dimension

5. Discussion Question • Click on the @ symbol and explore the web site that results. Would you say that this website is based predominately on price or barter? @

6. Terms Used to Describe Price • Tuition • Premium • Fine • Fee • Fare • Toll • Rent • Tips • Deposit • Dues • Interest • Taxes

7. Price Competition • emphasizing price as an issue and matching or beating competitors’ prices • to compete effectively, firm must be the low cost seller • relies on standardized products • frequent price changes • provides flexibility Price Competition Consumer electronics stores compete on the basis of price.

8. Nonprice Competition • Emphasizing factors other than price to distinguish a product from competing brands • Features • Quality • Promotion • Packaging

9. The Demand Curve • A graph of the quantity of a product taken by buyers in the market at various prices, given that all other factors are held constant

10. Demand Curve Illustrating the Relationship Between Price and Quantity for Prestige Products

11. Factors Contributing to Demand Fluctuations

12. Analysis of Demand • Price Elasticity of Demand • a measure of the sensitivity of demand to changes in price • Assessing the Price Elasticity of Demand • elastic demand • a change in price causes an opposite change in total revenue • an increase in price will decrease total revenue • price changes have a big impact on sales • inelastic demand • a change in price results in a change in the same direction as total revenue • an increase in price will increase total revenue • price changes have little impact on quantity demanded

13. Elasticity of Demand

14. Marginal Analysis • Examines what happens to a firm’s costs and revenues when production (or sales volume) changes by one unit - Fixed costs: costs that do not vary with changes in the number of units produced or sold - Average fixed costs: the fixed costs per unit produced - Variable costs: costs that vary directly with changes in the number of units produced or sold - Average variable costs: the variable cost per unit produced

15. Marginal Analysis - Total cost: the sum of average fixed costs and average variable costs times the quantity produced - Average total costs: the sum of the average fixed cost and the average variable cost - Marginal cost (MC): the extra cost a firm incurs when it produces one more unit of a product

16. Costs and Their Relationships

17. Typical Marginal Cost and Average Total Cost Relationship

18. Figure 11.5 Typical Marginal Revenue and Average Revenue Relationship • Marginal revenue (MR) - the change in total revenue resulting from the sale of an additional unit of a product

19. Marginal Analysis Method for Determining the Most Profitable Price Profit is the highest where MC = MR

20. Figure 11.6 Combining the Marginal Cost and Marginal Revenue Concepts for Optimal Profit

21. Fixed Costs Breakeven Point = Per-Unit Contribution to Fixed Costs (Price – Variable Costs) Breakeven Analysis • Break-Even Point • point at which the costs of producing a product equal the revenue made from selling the product

22. Factors That Affect Pricing Decisions

23. Types of Pricing Objectives • Prices are set consistent with the organization’s mission and goals. • Market share • iPhone • Lower prices • Costco • Raise cash quickly • early season promotions • Temporary price reductions

24. Price Affects Promotion Decisions Price Affects Promotion Decisions Most fragrance advertisements do not include prices.

25. Discussion Question • Would you say that an ad for the BMW X1 Crossover vehicle should stress price or something else. After discussing this, click on the TV below to see the first commercial for the BMW X1.

26. Factors Affecting Pricing Decisions • Channel Member Expectations • channel member expects to receive profit • compensated with discounts for large orders and prompt payments • provide support activities such as training, service, and promotions • Customer Interpretation and Response • Internal reference price • developed in the buyer’s mind through experience • External reference price • comparison price provided by others • Value-conscious • concerned about price and quality • Price-conscious • striving to pay low prices • Prestige-sensitive • drawn to products that signify prominence and status

27. Factors Affecting Pricing Decisions-Costs • crucial component of price • ideally goods are sold above cost, exceptions: • match competition • generate cash flow • increase market share • in elastic markets, focus on cost reduction • costs shared with others in product line

28. Discussion Question • Does a internet-based pricing site, like Shopzilla, provide an internal reference price or an external reference price? @ To explore Shopzilla, click here 

29. Discussion Questions • Give an example of a situation where you, or someone you know, acted in a value-conscious manner when shopping for a product. • Give an example of a situation where you, or someone you know, acted in a price-conscious manner when shopping for a product. • Give an example of a situation where you, or someone you know, acted in a prestige-sensitive manner when shopping for a product.

30. Impact of Other Marketing Mix Variables • All marketing mix variables are highly interrelated • Price affects demand • Perceived price/quality relationships influence image of products or brands • be careful not to discount too frequently • Distribution is linked to price • Promotions vary by price of goods

31. Factors Affecting Pricing Decisions • Reference Pricing • Internal - develops in buyer’s mind through experience with product • External - a comparison price provided by others • Competition • Legal and Regulatory Issues • Price discrimination (providing price differentials that injure competition by giving one or more buyers a competitive advantage)

32. Pricing for Business Markets Unlike selling to consumers, where prices remain fairly consistent, sellers must sometimes adjust prices in business markets by using: • Trade (functional) discounts – given to an intermediary for performing certain functions • Quantity discounts – for purchasing large quantities • Cumulative discounts – aggregated over certain period • Noncumulative discounts – one time only • Cash discounts – for prompt or cash payment • Seasonal discounts – for purchasing out of season • Allowances – a concession to achieve a desired goal

33. Discounts Used for Business Markets

34. Pricing for Business Markets Pricing for Business Markets Network Solutions offers computer-based marketing services to small businesses.

35. Pricing for Business Markets • Geographic Pricing – reductions for transportation - F.O.B. factory – price of the merchandise at the factory, before shipment - F.O.B. destination – indicates the producer is absorbing the shipping costs - Uniform geographic pricing – charging all customers the same price, regardless of shipping - Zone pricing – based on transportation costs within major geographic zones - Base-point pricing – combines factory price and freight charges from base point nearest the buyer - Freight absorption pricing - indicates the seller is absorbing all shipping costs

36. Pricing for Business Markets • Transfer Pricing – prices on products sold from one unit to another within a company - Actual full cost – dividing all fixed and variable expenses for a period into the number of units produced - Standard full cost – based on what it would cost to produce the goods at full capacity - Cost plus investment – full cost plus the cost of a portion of the selling unit’s assets used for internal needs - Market-based cost – market price less a small discount to reflect lack of sales efforts/expenses

37. After Reviewing This Chapter You Should: • Understand the role of price. • Be able to identify the characteristics of price and nonprice competition. • Be familiar with demand curves and the price elasticity of demand. • Understand the relationships among demand, costs, and profits. • Know how to describe key factors that may influence marketers’ pricing decisions. • Be familiar with the major issues that affect the pricing of products for business markets.

38. Key Concepts • Price • Barter • Price competition • Nonprice competition • Demand curve • Price elasticity of demand • Fixed costs • Average fixed cost • Variable costs • Average variable cost • Marginal cost (MC) • Marginal revenue (MR) • Breakeven point • Internal reference price • External reference price • Value-conscious • Price-conscious • Prestige-sensitive • Price discrimination • Trade (functional) discount • Quantity discounts • Cumulative discounts • Noncumulative discounts • Seasonal discounts • Allowance • Geographic pricing • F.O.B. factory • F.O.B. destination • Uniform geographic pricing • Zone pricing • Base-point pricing • Freight absorption pricing • Transfer pricing • Total cost • Cash discount