Pricing the Product

Chapter Eleven

Chapter Objectives

Explain the importance of pricing and how prices marketers set objectives for pricing strategies

Describe how marketers use costs, demands, revenue and the pricing environment to make pricing decisions

Understand key pricing strategies and tactics Understand the opportunities for Internet pricing

strategies Describe the psychological, legal, and ethical

aspects of pricing

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What is the “Price?”

Price: The assignment of value, or the amount the consumer must exchange to receive the offering

• Includes money, goods, services, favors, votes, or anything else that has value to the other party

• Opportunity costs must also be considered (the value of something we give up to obtain somthing else)

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Figure 11.16 Steps of Price Planning

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Figure 11.2Step 1-Pricing Objectives

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Figure 11.3Factors in Price Setting

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Figure 11.4

Step 2-Estimate Demand:Demand Curves for Normal and

Prestige Products

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Figure 11.5Shift in Demand

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Figure 11.7Price Elastic and Inelastic

Demand Curves

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• Elasticity of demand is defined as the % change in unit sales that results from a % change in price

• When changes in price have large effects on the amount demanded, demand is elastic. Thus an increase in price can negatively impact revenues when the percentage increase in price cannot compensate for the revenue lost through lower unit sales.

• When changes in price have little or no effect on the amount demanded, demand is inelastic. Such situations make it much easier for marketers to change price without negatively impacting the volume of sales.

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Elastic versus Inelastic Demand

Factors affecting Elasticity-1

What factors influence the price elasticity of demand?

How would you classify the following in terms of price elasticity?

Gasoline Air travelMovie tickets Baby diapers

What alternatives to a price increase might marketers of an elastic product consider?

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Factors affecting Elasticity-2

• Whether or not the product is considered by consumers to be a necessity, and the degree to which close substitutes are available.• Non-necessities such as pizza generate elastic

demand. If pizza restaurants raise prices, we can buy frozen pizza from the store or eat elsewhere.

• However, demand for necessities such as food and electricity is generally inelastic.

• There will always be some people who view gasoline or air travel as a necessity, but a large proportion of demand is elastic. Thus when prices get TOO high, people try to use less.

• Baby diapers are likely to be price inelastic as they are viewed as necessities by new parents.

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Factors affecting Elasticity-3

• Marketers of products that are highly price elastic often disguise price increases by leaving the price of the product the same, but reducing the quantity or size of the product provided. Thus the consumer ends up paying more per ounce, for example, due to the smaller quantity.

• Another method of disguising a price increase is to eliminate something from the product something that was previously included with prior versions. For example, when the market for printers became more price competitive AND price elastic, manufacturers stopped including cables, and full in cartridges.

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Cross-Elasticity of Demand

When changes in the prices of other products affect a product’s demand• If products are substitutes, an increase

in the price of one will increase demand for the other (competing brands)

• If one product is essential for use of second, an increase in the price of one decreases demand for another

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Figure 11.8Step 3-Setting Costs: Variable

Costs at Different Levels of Production

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Figure 11.9Break-Even Analysis (Assuming

a Price of $100)

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Calculating Break-Even

total fixed costsBreak-even point (units) --------------------------------

contribution per unit to fixed costs

total fixed costsBreak-even point ($) --------------------------------

variable cost per unit 1 - ------------------------------

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( )

Figure 11.10Marginal Analysis

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Markups and Margins: Pricing Through the Channel

MarkupAn amount added to the cost of the product to create a price at which the channel member will sell the product

• Gross margin• Retailer margin• Wholesaler margin• List price

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Steps in Price Planning Step 4: Evaluate the Pricing

Environment

The Economy• Economic

trends • Recession • Inflation

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Competition Government

regulation Consumer

trends International

environment

Figure 11.11Pricing Strategies and Tactics

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Steps in Price Planning Step 5: Choose a Price

Strategy Pricing strategies based on the

competition (Domino’s, Pizza Hut) Pricing strategies based on customers’

needs (gasoline) New product pricing (iPhone) Based on demand (UGGs) Based on your cost (Hangables)

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Wal-Mart

Wal-Mart is well known for its everyday low pricing strategy. How do they do it?

Wal-Mart achieves discounts through volume purchasing Wal-Mart squeezes profits and concessions from suppliers in an attempt to lower prices year after year Consumers want low prices-but… Critics feel that the costs to suppliers are too high Suppliers end up closing plants and laying off workers Jobs are sent overseas to lower costs What do you think about Wal-Mart’s pricing strategy?

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Steps in Price Planning Step 6: Develop Pricing Tactics

Pricing for individual products• Two-part pricing• Payment pricing

Pricing for multiple products• Price bundling• Captive pricing

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Steps in Price Planning Step 6: Develop Pricing Tactics

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

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Steps in Price Planning Step 6: Develop Pricing Tactics

Discounting for channel members• Trade or functional discounts • Quantity discounts• Cash discounts• Seasonal discounts

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Figure 11.13Internet Pricing Strategies

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Ticketmaster and Dynamic Pricing

Visit skoreit.com

Visit Wired.com

Figure 11.14Psychological Pricing

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Psychological Issues in Pricing

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Psychological Issues in Pricing

Buyers Expectations International Reference PricesPrice-Quality inferences

Psychological Pricing Strategies

Odd-Even PricingPrice LiningPrestige Pricing

Legal and Ethical Issues: B2C

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Legal and Ethical Issues: B2B

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In Conclusion:Legal and Ethical Issues in

Pricing Legal issues in business-to-business

pricing• Price discrimination• Price fixing:

Two or more companies conspire to keep prices at a certain levelHorizontal vs. vertical price fixing

• Predatory pricing: Firm sets a very low price for purpose of driving competitors out of business

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