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Pricing the Product

Pricing the Product. Chapter Objectives. importance of pricing monetary & non-monetary forms of pricing pricing objectives for planning pricing strategies. Chapter Objectives. using costs, demands, and revenue to make pricing decisions environmental factors

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Pricing the Product

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  1. Pricing the Product

  2. Chapter Objectives • importance of pricing • monetary & non-monetary • forms of pricing • pricing objectives • for planning pricing strategies

  3. Chapter Objectives • using costs, demands, and revenue • to make pricing decisions • environmental factors • affecting pricing strategies

  4. Chapter Objectives • key pricing strategies • pricing tactics • for single products • multiple products, • pricing on the Internet

  5. Chapter Objectives • Internet pricing strategies • Psychological aspects of pricing • Legal aspects of pricing • ethical aspects of pricing

  6. “Yes, but what does it cost?” • Price: • the assignment of value, • or the amount the consumer must exchange • to receive the offering • Offerings: Money, goods, services, favors, votes, anything else that has value to the other party

  7. Figure 11.1:Steps in Price Planning

  8. ROLLS-ROYCE Step 1: Develop Pricing Objectives • Sales or market share objectives • Profit objectives • Competitive effect objectives • Customer satisfaction objectives • Image enhancement objectives

  9. Step 2 Estimate demand

  10. Step 2: Estimate Demand • Demand: • customers’ desires for a product • How much of a product are customers willing to buyas its price goes up or down?

  11. Demand Curves • Law of demand: • as price goes up, • quantity demanded goes down. • For prestige products, • a price increase may actually result in an increase in quantity demanded.

  12. Shifts in Demand Curve 1. Changes in marketing strategy (improved product, new advertising) or 2. non-marketing activities can cause upward or downward shifts in demand. At a given price, demand is greater or less than before the shift.

  13. Estimating Demand • Marketers predict total demand by • estimating potential buyers for a product, • then multiplying number of buyers times • average amount of each buyer’s purchase. • Then they predict what the company’s share of the total market will be.

  14. Elastic Demand • A change in price results • in a substantial change in quantity demanded. If price is increased, revenues decrease, and vice-versa. Non-necessities (pizza) generate elastic demand. Availability of close substitute products facilitates elastic demand.

  15. Inelastic Demand • A change in price • has little or no effect on quantity demanded. • If price is increased, revenues increase. • The demand for necessities • (food and electricity) • is generally inelastic.

  16. Cross-elasticity of Demand • Changes in prices of other products affect a product’s demand. • Products are substitutes: • increase in price of one will increase demand for other (bananas vs. strawberries). • One product is essential for use of second: • increase in price of one decreases demand for other (increasing price of gas lowers demand for tires).

  17. Step 3 Determine costs

  18. Step 3: Determine Costs • Variable costs: • costs of production that are tied to and vary depending on the number of units produced. • Average variable costs may change • as the number of products produced changes.

  19. Step 3: Determine Costs • Fixed costs: • costs of production that don’t change with number of units produced Rent, cost of owning/maintaining factory, utilities, equipment, fixed salaries of firm’s executives

  20. Step 3: Determine Costs • Fixed costs: Average fixed cost: fixed cost per unit (total fixed costs divided by number of units produced) will decrease as number of units produced increases.

  21. Step 3: Determine Costs (cont’d) • Total costs: • total of fixed costs & • variable costs • for a set number of units produced.

  22. Break-Even Analysis • the number of units a firm must produce and sell • at a given price to cover all its costs. • Break-even point: • point at which a firm doesn’t lose any money and doesn’t make any profit. Song Airlines Video

  23. Break-Even Analysis (cont’d) • Break-even point (in units) • = (total fixed costs) • divided by (contribution per unit) • Contribution per unit: • the difference between the price the firm charges for a product & the variable costs

  24. Break-Even Analysis (cont’d) • Break-even point (in dollars) • = (total fixed costs) • divided by [1 - (variable cost per unit divided by price)]

  25. Marginal Analysis • A method that uses • cost and demand • to identify the price • that will maximize profits.

  26. Marginal Analysis • Marginal cost: • increase in total costs from producing one additional unit of a product • Marginal revenue: • increase in total income or revenue from selling one additional unit of a product (decreases with each additional unit sold) • Profit is maximized • where marginal cost is exactly equal to marginal revenue.

  27. Step 4: Evaluate the Pricing Environment

  28. Step 4: Evaluate the Pricing Environment • The economy Broad economic trends Recessions, Inflation • The competition • Consumer trends

  29. Step 5: Choose a Price Strategy

  30. Step 5: Choose a Price Strategy • Pricing strategies based on cost Simple to calculate and relatively risk free Cost-plus pricing: total all product costs and add markup

  31. PRICELINE.COM Step 5: Choose a Price Strategy (cont’d) • Pricing strategies based on demand • Based on estimate of quantity • a firm can sell at different prices

  32. PRICELINE.COM Step 5: Choose a Price Strategy (cont’d) • Pricing strategies based on demand • Target costing: • identify quality and functionality • customers need and • price they’re willing to pay • before designing product.

  33. PRICELINE.COM Step 5: Choose a Price Strategy (cont’d) • Pricing strategies based on demand • Yield management pricing: • charge different prices • to different customers • to manage capacity

  34. Step 5: Choose a Price Strategy (cont’d) • Pricing strategies based on the competition • Pricing near, at, above, or below the competition • Price leadership strategy: • industry giant announces price, and • competitors get in line • or drop out

  35. Step 5: Choose a Price Strategy (cont’d) • Pricing strategies based on customers’ needs • Value pricing or • everyday low pricing (EDLP): • pricing strategy in which a firm sets prices • that provide ultimate value to customers.

  36. HP FINANCIAL CALCULATORS Step 5: Choose a Price Strategy (cont’d) • New-product pricing Skimming price: a very high premium price

  37. HP FINANCIAL CALCULATORS Step 5: Choose a Price Strategy (cont’d) • New-product pricing Penetration pricing: a very low price to encourage more customers to purchase

  38. HP FINANCIAL CALCULATORS Step 5: Choose a Price Strategy (cont’d) • New-product pricing Trial pricing: low price for a limited period of time

  39. Step 6: Develop Pricing Tactics

  40. Step 6: Develop Pricing Tactics • Pricing for individual products Two-part pricing: offering two separate types of payments to purchase the product

  41. Step 6: Develop Pricing Tactics • Pricing for individual products Payment pricing: breaking total price into smaller amounts payable over time

  42. Step 6: Develop Pricing Tactics (cont’d) • Pricing for multiple products Price bundling: selling two or more goods or services as a single package for one price

  43. Step 6: Develop Pricing Tactics (cont’d) • Pricing for multiple products Captive pricing: pricing two products that work only when used together

  44. Step 6: Develop Pricing Tactics (cont’d) • Distribution-based pricing F.O.B. (free on board) origin pricing F.O.B delivered pricing Basing-point pricing Uniform delivered pricing Freight absorption pricing

  45. Step 6: Develop Pricing Tactics (cont’d) • Discounting for channel members • List price (suggested retail price): • price that manufacturer sets • as appropriate • for end consumer to pay

  46. Step 6: Develop Pricing Tactics (cont’d) • Discounting for channel members • Trade or functional discounts: • set percentage discounts • off list price • for each channel level

  47. Step 6: Develop Pricing Tactics (cont’d) • Discounting for channel members • Quantity discounts: • reduced prices • for purchases of larger quantities

  48. Step 6: Develop Pricing Tactics (cont’d) • Discounting for channel members Cash discounts: enticements to customers to pay bills quickly (2% 10 days, net 30 days) (2/10 net 30)

  49. Step 6: Develop Pricing Tactics (cont’d) • Discounting for channel members Seasonal discounts: price reductions offered during certain times of year

  50. Other pricing issues

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