Yes, But What Does It Cost?

1. Yes, But What Does It Cost? • Price is the value that customers give up or exchange to obtain a desired product • Payment may be in the form of money, goods, services, favors, votes, or anything else that has value to the other party

2. The Importance of Pricing Decisions • Price is the only P which represents revenue rather than an expense • Pricing and the Marketing Mix • Price and Place • Price and Product • Price and Promotion

3. Types of Pricing Objectives • Sales or market share objectives • Profit objectives • Competitive effect objectives • Customer satisfaction objectives • Image enhancement objectives

4. Pricing Objectives Purex’s pricing objectives focus on the competition

5. Value People may be willing to pay a premium because they believe it makes a statement about their own worth

6. Demand Curves

7. Types of Costs_1 • Variable costs - per-unit costs of production that will fluctuate depending on how many units or individual products a firm produces • Fixed costs - do not vary with the number of units produced. Costs remain the same regardless of amount produced

8. Types of Costs_2 • Average fixed cost is the fixed cost per unit produced (total fixed costs/number of units produced) • Total costs = variable costs plus fixed costs

9. Break-Even Analysis • Technique used to examine the relationship between cost and price and to determine what sales volume must be reached at a given price before the company will completely cover its total costs and past which it will begin making a profit • All costs are covered but there isn’t a penny left over

10. Break-Even Analysis

11. Evaluating the Pricing Environment • The Economy • Trimming the Fat: Pricing in a Recession • Increasing Prices: Responding to Inflation • The Competition • Consumer Trends • International Environmental Influences

12. Daffy’s When the economy is down, consumers are more interested in lower prices

13. Consumers like getting luxury goods

14. Cost-Plus Pricing • Most common cost-based approach • Marketer figures all costs for the product and then adds desired profit per unit • Straight markup pricing is the most frequently used type of cost-plus pricing • price is calculated by adding a pre-determined percentage to the cost

15. Advantages Simple to calculate Relatively risk free Disadvantages Fails to consider target market demand competition product life cycle product’s image Difficult to accurately estimate Pricing Strategies Based on Cost

16. Business purchasers try to get the supplies they need at the lowest price

17. Steps in Cost-Plus Pricing • Estimate unit cost • Calculate markup • Markup on cost • Markup on selling price - markup percentage is the seller’s gross margin • gross margin is the difference between the cost to the wholesaler or retailer and the price needed to cover overhead and profit

18. Cost Plus Pricing Excerpt • Fixed costs = $2,000,000 • Number of jeans produced = 400,000 • Fixed costs per unit = $5 • Variable costs per unit = $20 • Markup on cost • Price = total cost + (total cost * markup percentage) • Price = $25 + ($25 * .20) = $25 + $5 = $30

19. On Cost Price paid = $30 Markup = 40% Price = total cost + (total cost * markup percentage) Price = $30 + ($30 * .40) = $42 On Selling Price Price paid = $30 Markup = 40% Price = cost/1.00 - markup percentage Price = $30/ 1-.40 = $50 Markup on Cost vs. Markup on Selling Price

20. Pricing Strategies Based on Demand_1 • Demand-based pricing means that the selling price is based on an estimate of volume or quantity that a firm can sell in different markets at different prices • Target costing • Yield management pricing

21. Demand Pricing Dell regularly reviews sales performance and adjusts its prices

22. Communicating Competitive Pricing

23. Pricing Strategies • Value pricing (EDLP) - offers a fair value to consumers (e.g., Kmart’s blue light specials)

24. New Product Pricing • Skimming price - firm charges a high, premium price for its new product with the intention of reducing it in future response to market pressures • Penetration pricing - new product is introduced at a very low price • Trial pricing - product carries a low price for a limited time period

25. Captive Pricing Gillette practices captive pricing. Once customers have bought the razor, they are a “captive” of the company’s blade prices.

26. Discounting for Channel Members • Trade or functional discounts • Quantity discounts • Cash discounts • Seasonal discounts

27. Trade Discounts • Pricing structure built around list price • List price, also called suggested retail price, is the price that the manufacturer sets as the appropriate price for the end consumer • Manufacturers offer discounts because channel members perform selling, credit, storage, and transportation services

28. Pricing with Electronic Commerce • Dynamic pricing strategies • price can be adjusted to meet changes in the marketplace • online price changes can occur quickly, easily, and at virtually no cost • Auctions • sites offer chance to bid on items • sites offer reverse-price auctions

29. Psychological Issues in Pricing • Internal Reference Prices - consumers have a set price or price range in their mind • If the actual price is higher, consumers will feel the product is overpriced • If it is too low below the internal reference price, consumers may assume its quality is inferior • Competition as Reference Price - If the price is close, the assimilation effect will encourage the customer to think the products are similar enough and choose the lower priced product

30. Price-Quality Inferences • If consumers are unable to judge the quality of a product through examination or prior experience, they usually will assume that the higher-priced product is the higher-quality product