chp 4 pricing considerations

1Faisal Zulhumadi (3298) A072 2007/2008

CHAPTER 4: PRICING CONSIDERATIONS

DIPLOMA IN INTERNATIONAL BUSINESS

(BUS2513)

1


Part 1 of 2Pricing Decisions


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Strategic Planning for Price

Pricingobjectives

TargetMarket

PricePromotionPlaceProduct

Geographicterms—

who paystransportation

and how

Discounts andallowances—to whom and

when

Price levelsover product

life cycle

Priceflexibility


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The Nature of PriceThe value exchanged for products in a marketing exchange

Definition of Price

Price is the amount of money charged for a product or service, or the sum of all the values that customers give in order to gain benefits of having or using a product or service.

(Armstrong and Kotler, 2007)


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Terms Used To Describe Price

TuitionPremiumFineFeeFareTollRent

CommissionDuesDepositTipsInterestTaxes


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The Importance of Price to Marketers

Profit = Total Revenue – Total CostsProfits = (Price x Quantity Sold) – Total Costs


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Price and Nonprice Competition

• Price Competition Emphasizes price as an issue and matches or

beats competitors’ price To compete effectively- firm should be the low-

cost seller Standardized products Frequent price changes Provides flexibility


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Nonprice Competition

Emphasizes distinctive product:• Features

• Quality

• Promotion

• Packaging

• Other

Distinction must be effective


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Analysis Of Demand

Demand Curve

Demand Fluctuations

Assessing Price Elasticity


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Demand Curve

A graph of the quantity expected to be sold at various prices if other factorsremain constant


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Demand Curve, Price-Quantity Relationship and Increase in Demand


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Demand Curve, Relationship Between Price and Quantity for Prestige Products


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Sample Demand CurveSample Demand CurveSlide12-1

Figure12.1

10

20

30

40

50

60

10,000 20,000 30,000 40,000 50,000

Price per Unit

Quantity Demanded in Units


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Demand Fluctuations

Changes in buyers’ needs

Variations in effectiveness of other marketing mix variables

Presence of substitutes

Environment factors


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Elasticity Of Demand


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Price/Demand Elasticity

Elastic- change in price causes opposite change in total revenue• Price = Total Revenue • Price = Total Revenue

Inelastic- change in price causes same change in total revenue• Price = Total Revenue • Price = Total Revenue


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Price Elasticity Of Demand

Price Elasticity of

Demand= (% Change In Quantity Demanded)

% Change in Price


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Demand, Cost, and Profit Relationships

Marginal AnalysisFixed costsAverage fixed costVariable costsAverage variable costTotal costAverage total costMarginal cost (MC) Marginal revenue (MR)


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Costs AndTheir Relationships


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Pricing Based on CostPricing Based on CostSlide12-6

Markup pricing a pricing approach that adds a percentage to the producer’s cost in order to arrive at a selling price.

Rate of return pricing a pricing approach that involves total costs and then adding a desired rate of return to them to determine the selling price.

Breakeven analysis a technique for determining the sales volume needed to cover all costs at a specific rate.


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Typical Marginal Costs And Average Total Cost Relationship


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Typical Marginal Revenue And Average Revenue Relationship


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Combining Marginal Cost And Marginal Revenue Concepts For Optimal Profit


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Marginal Analysis RelationshipsMarginal Analysis Relationships

DollarsProfit

Quantity Produced and Sold

Dollars


Total Cost

Total Revenue

Marginal Cost

Marginal Revenue


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Demand, Cost, and Profit Relationships

Break-Even AnalysisBreak-even point – point at which the costs of

producing a product equal the revenue made from selling the product


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Determining TheBreak-Even Point


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Breakeven AnalysisBreakeven AnalysisSlide12-7

Figure12.5

Dollars


Total Cost

BreakevenPoint

Total Revenue

Loss

Profit


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Breakeven Point

Breakeven Point =

Fixed CostsPer-Unit Contribution to Fixed Costs

(Price – Variable Costs)


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Factors ThatAffect Pricing Decisions


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Pricing Objectives

Dollar or UnitSales Growth

Growth in Market Share

TargetReturn

MaximizeProfits

MeetingCompetition

NonpriceCompetition

PricingObjectives

SalesOriented

ProfitOriented

Status QuoOriented


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Organizational AndMarketing Objectives

Set prices consistent with organization’s goals and mission

Pricing decisions should be compatible with firm’s marketing objectives


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Costs

Why price below cost?

Match competition

Generate cash flow

Increase market share

Focus on cost reduction

Costs shared with others in product line


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Pricing Decisions Influence Other Mix VariablesDemand

Distribution Intensive

Selective

Exclusive

PromotionPremium = little advertising, personal selling

Complex = potential buyer confusion


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Channel Member Expectations

Profit

Competing product

Time/resources required

Discounts

Support activities- associated costs


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Reference Prices

Internal- developed in buyer’s mind through experience with product

External- comparison price provided by others


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Context Of Price-Buyers Characterized

Value-conscious - concerned about price and quality

Price-conscious - want to pay low prices

Prestige-sensitive - purchase products that signify prominence and status


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Competition

Monopoly Whatever market will bear Government regulation

Oligopoly Barriers to entry Little advantage in price cuts

Monopolistic Competition Distinguishable product Usually nonprice competition

Perfect competition All products the same No flexibility in pricing


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Pricing Based on CompetitionPricing Based on CompetitionSlide12-8

Pricing Below Competition pricing to gain market share and attract cost-conscious buyers. Especially useful to companies with low cost positions.

Matching Competition pricing at competitor’s levels with the intent of distinguishing the product in other ways. Common in oligopolies.

Pricing Above Competition pricing for products that offer greater value, quality, convenience or prestige.

Sealed-Bid Pricing pricing in which the buyer asks potential sellers to submit sealed bids containing the seller’s pricing and availabilities.


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Trade

Quantity Seasonal

DiscountPricing

Sale Cash

Discount Pricing


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Business-To-BusinessPrice Discounting


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Trade (Functional) Discount

A reduction off the list price by a producer to an intermediary for performing certain functions


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Quantity Discount

Deduction from list price that reflect(s) the economies of purchasing in large quantities


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Cumulative Discount

A quantity discount aggregated over a stated time period


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Noncumulative Discounts

A one-time price reduction based on the number of units purchased, the dollar value of the order, or the product mix purchased


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Cash Discount

A price reduction given to buyer for prompt payment or cash payment


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Seasonal Discount

A price reduction to buyers that purchase goods or services out of season


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Allowance

A concession in price to achieve a desired goal


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Allowances

Common Kindsof

Allowances

AdvertisingAllowance

Push MoneyAllowance

Trade-InAllowance

StockingAllowance


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Price Flexibility PoliciesOne-price policy

The same price to all customers who purchase products under essentially the same conditions and quantities

Exchange rate changes may make this difficult in international markets

Flexible pricing (e.g., in channels, business markets, expensive consumer shopping products) Issues:

Use is increasing because of impact of information technology, customer databases, scanners, etc.

Selling costs may be higher if prices are negotiated“Signals” to competitors Customer dissatisfaction may be a problem “Gray channels” and cross-shipping

17-4


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Geographic Pricing Policies

Common Geographic

PricingPolicies

F.O.B.

UniformDelivered

FreightAbsorption

Zone


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Geographic Pricing

F.O.B.FactoryDestination

Uniform geographic (Postage-Stamp)ZoneBase-pointFreight Absorption


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Geographic PricingGeographic PricingSlide13-7

Geographic Pricing Pricing a good or service according to where it is delivered.

FOB Origin Pricing Seller’s price is for the goods at point of shipment, where title passes from buyer to seller.

Uniform Delivered Pricing Seller’s price includes shipping; title passes where buyer receives the goods.

Single-zone Pricing Pricing in which all buyers pay the same price, including delivery.

Multiple-zone pricing Pricing in which buyers in different zones pay different delivery prices.

FOB with freight allowed Pricing in which the seller allows the buyer to deduct shipping costs from the quoted price of the product.

Basing point pricing Pricing in which the seller charges the quoted price plus the cost of delivering from a basing point where the product is made.


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• What is the location of potential buyers?

• Are they organizational buyers or consumers?

• What is the consumption rate of potential buyers?

• What is the financial condition of potential buyers?

• How many potential buyers are in the market?

Demographic Pricing FactorsDemographic Pricing FactorsSlide12-2


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• Will potential buyers be favorably attracted by odd pricing such as 99 cents instead of $1, or $177 instead of $180?

• Will potential buyers perceive the price to be too high relative to what the product offers?

• Are potential buyers concerned enough with prestige to pay more for the product?

• How much will potential buyers be willing to pay for the product?

• Will potential buyers use price as an indicator of the product’s quality?

Psychological Pricing FactorsPsychological Pricing FactorsSlide12-3


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Psychological PricingPsychological PricingSlide13-6

Table13.3

Table 13.3 missing

TYPETYPE DESCRIPTIONDESCRIPTION EXAMPLEEXAMPLE

ProductPricing TechniquePricing Technique

Prestige Pricing

DefinitionDefinition ExampleExample

Setting a high price to convey an image of high quality or exclusivity

Odd-even pricing

Bundle pricing

Setting prices a few dollars or cents below a round number

Offering several products as a package at a single price

The Porsche 911 turbo coupe has a base price of $105,000.

Office Depot advertises a GE cellular phone for $39.99.

A hotel quotes a rate for an over-night stay that includes breakfast the next morning.


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Price Level Policies

“Skim the cream” pricing involves selling at a high

price to those who are willing to pay before aiming at

more price-sensitive consumers.

Price

Quantity

Initialskimmingprice

Secondprice

Finalprice

Skimming Pricing

Sell at highprice beforereducing tonext price leveland repeat


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a

Price

Quantity

Penetration Pricing

Wholemarket price

Penetration pricing involves selling the

whole market at one low price.

Price Level Policies


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Penetration Pricing vs. Price SkimmingPenetration Pricing vs. Price Skimming

Time$

New Product Pricing Strategies

Price Skimming

PenetrationPricing


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Pricing Based on Customer ValuePricing Based on Customer ValueSlide12-9

Dominant Backward Pricing a pricing approach that involves setting a price by starting with the estimated price customers will pay and working backwards with retail and wholesale margins.

Value Pricing a pricing approach that involves setting prices so that the exchange value is higher than the value of competing exchanges.


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Value Pricing

Fits with StrategyPlanning

Fits with StrategyPlanning

Target Market andCompetition

Target Market andCompetition

Focus on CustomerRequirements

Focus on CustomerRequirements????????

????????????????????????????????

$$


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Basic Value PositionsBasic Value PositionsSlide13-1

Table13.1

Price LevelPrice Level

High relative to product class

Value PositionValue Position

High value because of quality and prestige.

ExamplesExamples

Nike athletic shoes (such as Air Jordans); dental work by a widely respected specialist.

Keds tennis shoes; dental work by the neighborhood family dentist.

High value because of good quality at a reasonable price.

High value because of acceptable quality at a low price.

Around average for product class

Low relative to product class

Generic or private-label shoes at a drugstore or discount store; dental work by students being trained at a university clinic.


Part 2 of 2Setting Prices


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Development of Pricing Objectives

Pricing objectives – goals that describe what a firm wants to achieve through pricing


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Slide13-2

Figure13.2

Evaluate Customer Response and other Pricing Constraints

Set Pricing Objectives

Analyze Profit Potential

Set Initial PriceMake Price Adjustments as Needed

The Pricing ProcessThe Pricing Process


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Stages For Establishing Prices


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Pricing Objectives And Typical Actions To Achieve Them


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Pricing Objectives

SurvivalProfitReturn on Investment (ROI)Market ShareCash FlowStatus QuoProduct Quality


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High-quality products are usually priced to reflect the quality level

© 2005 BMW of North America, LLC, used with permission. The BMW name and logo are registered trademarks.


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Assessment of the Target Market’s Evaluation of Price

Price depends on:Type of productType of target marketPurchase situation (e.g: price of concessions at

movies)


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Evaluation of Competitors’ Prices

Regular function of marketing researchImportance of customer view of pricing

and marketing mix variables Pricing above competition – creates an

exclusive imagePricing below competition – gains market share


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Some prices are set higher than the competition to create an exclusive image

FIJI ® and all other trademarks, copyrights and intellectual property used herein are the property of FIJI Water Company LLC or its affiliates." Used by permission


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Selection of a Basis of Pricing

CostDemandCompetition


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Cost Based Pricing

Cost-based pricing – a dollar amount to the cost of the product

Cost-plus pricing – adding a specified dollar amount to the seller’s costs

Markup – Adding to the cost of the product a predetermined percentage of that cost


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Markup as % of Cost = Markup

Cost= 15 45

= 33.3 %

Markup as %

of Selling Price= Markup

Selling Price= 15 60

= 25.0 %


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Demand-Based Pricing

Customers pay a higher price when demand for the product is strong and a lower price when demand is weak


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Non-Price FactorsAffecting Demand

Product Quality

Range

Nature- essential/luxury

Substitutes

Support Service at point of sale

& after

Advertising/promotion

Distribution Methods

Market

Degree of competition

Competitor action/reaction

General economic conditions

“Demand based pricing”, N. Coulthurst, 4/3/02, http://www.accaglobal.com/publications/studentaccountant/404831


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Point-of-sale service affects demand

Reprinted with permission of Lowe's Companies


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Competition-Based Pricing

Pricing influenced primarily by competitors’ pricesmethod increases when:

competing products are homogeneous organization is serving markets in which price

is a key consideration

www.zillow.com


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Selection of a Pricing Strategy

Differential Pricing – different prices to different buyers for the same product

New-Product PricingProduct-Line Pricing – establishing prices of multiple

products within a product linePsychological Pricing – influence customer perception

to make a product’s price attractiveProfessional Pricing – fees set by experienced people

in particular fieldPromotional Pricing


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Common Pricing Strategies


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Differential Pricing Techniques

Negotiated – final price established through buyer/seller bargaining

Secondary-market – one price for primary target market and different price for another

Periodic discounting – systematic temporary price reduction

Random discounting – unsystematic temporary price reduction


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Steps In Developing New Product Pricing

1) Develop Marketing Strategy

2) Make Marketing Mix Decisions

3) Estimate Demand Curve

4) Calculate Cost

5) Understand Environmental Factors

6) Set Pricing Objectives

7) Determine Pricing

NetMBA, “Pricing Strategy”, 2005,

http://www.netmba.com/marketing/pricing/


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New-Product Pricing

Price skimming – charging the highest possible price that buyers who most desire the product will pay

Penetration pricing – prices set below competing brands to penetrate market and gain market share quickly


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Product-Line Pricing Strategies

Captive – basic product in a product line low while related items higher

Premium – pricing highest-quality product higher than other models

Bait – low pricing on one item in line with intention of selling higher-priced item in the line

Price Lining – limited number of prices for selected lines of merchandise


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For Premium Pricing,Engage The Emotions

1) Taking Care of Me - overstressed people want to pamper selves

2) Connect with Friends & Family - serious money to nurture family, romantic getaways, cosmetic surgery, etc.

3) Questing - consumers appreciate adventure

4) Individual Style - personal taste, differentiate self from others

iBizResources, “For Premium Pricing, engage the Emotions”, 2006,

http://www.familybusinessstrategies.com/articles4/041404f.html


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Psychological Pricing Techniques

Reference pricing – moderate pricing positioned next to a more expensive brand

Bundles pricing – packaging multiple products to be sold at a single price

Multiple-unit pricing – packaging together two or more identical products to be sold at a single price

Everyday low prices (EDLP) – pricing products low on a consistent basis


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More Psychological Pricing Techniques

Odd-even pricing – ending the price with a certain number to influences buyers’ perceptions

Customary pricing – on the basis of traditionPrestige pricing – setting prices at a high level to

convey prestige


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Consumers associate higher prices with higher quality

Reprinted with permission of Mannington Mills, Inc.


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Concept of Professional Pricing

Professional pricing carries the idea that professional have an ethical responsibility not to overcharge customers


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Types OfPromotional Pricing

Price Leader- firm prices a few products below the usual markup, near cost, or below cost

Special-Event- advertised sales or price-cutting linked to a holiday, a season, or an event

Comparison Discounting- price is set at a specific level and simultaneously compares it with a high price


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Special events are often seasonal and employ special-event pricing

Reprinted with permission of Montage, Inc.


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Determination of Price: Pricing Strategy

Yields a certain price- may need refining

Helps in setting final price

In absence of government price controls, remains flexible and convenient to adjust the marketing mix


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Adjusting PricesAdjusting PricesSlide13-5a

Table13.2

DiscountDiscount

Quantity discount


Reduction in the price per unit for purchasing a larger quantity

Price reduction offered during times of slow demand

Percentage reduction from list price offered to resellers

A catalog for Gardener’s Supply Company offers 1 cedar planter for $32.95 and 2 or more for $30.00 each.

A ski resort offers lower prices during the summer.

Seasonal discount

Trade discount

Cash discount

A publisher sells books to a chain of stores for a fraction of the retail price.

Incentive for buyers to pay quickly or a lower price for payment of cash

An organization receives an invoice that reads, “2/10 net 30.”


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Adjusting PricesAdjusting PricesSlide13-5b

Table13.2

DiscountDiscount

Trade-in allowance


Discount for providing a product along with monetary payment

Price reduction in exchange for the reseller performing certain promotional activities

A car dealer offers $1,000 off the list price in exchange for a buyer trading in her used car.

A frozen-pizza maker gives a price break to a supermarket that promises to feature the product in its advertising.

Promotional allowance


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Adjusting PricesAdjusting PricesSlide13-5c

Table13.2

ProductDiscountDiscount

Promotional discount


Short-term discount to stimulate sales or convince buyers to try a product

Setting prices near or below cost in order to attract customers to a store

A Jiffy Lube franchise passes out flyers offering $5 off on an oil change; the discount is good for 30 days.

A supermarket features bananas at 20 cents a pound and Pampers diapers at 50 percent off; the price is below cost, but the store expects buyers to purchase additional items selling at a profit.

Loss leader pricing


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Laws Limiting Pricing PracticesLaws Limiting Pricing PracticesSlide12-10

Table12.3

LawLaw

Price Fixing

Resale Price Maintenance

Deceptive Pricing Practices

Price discrimination that lessens or damages competition; discrimination in the use of promotional pricing

Dumping

Pricing PracticesPricing Practices

Laws of most countries

Sherman Antitrust Act

Consumer Goods Pricing Act

Federal Trade Commission Act

Robinson-Patman Act


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Pricing Product LinesPricing Product LinesSlide13-4

Price Lining Uniform Pricing

all books

$40.00

all CD’s

$15.95

all Cassettes

$9.95 $1.00

$1.00

$1.00

chp 4 pricing considerations

Business

total revenue price

selling price

price causes

price levels

competitors price

context of price

nature of price

pricequantity relationship