10-1

Pricing

10-2

Factors Affecting Price Decisions

10-3

Marketing

Objectives

SurvivalLow Prices Hoping to Increase

Demand.

Current Profit Maximization Choose the Price that Produces the Maximum Current Profit, Etc.

Market Share LeadershipLow as Possible Prices to Become

the Market Share Leader.

Product Quality LeadershipHigh Prices to Cover Higher

Performance Quality and R&D.

Internal Factors Affecting Pricing Decisions: Marketing Objectives

10-4

Types of Cost Factors that Affect Pricing Decisions

Total CostsSum of the Fixed and Variable Costs for Any Given

Level of Production

Total CostsSum of the Fixed and Variable Costs for Any Given

Level of Production

Variable Costs

Costs that do varydirectly with the

level of productionRaw materials

Fixed Costs(Overhead)

Costs that don’tvary with sales or production levels

Executive Salaries, Rent

10-5

Pure CompetitionPure CompetitionMany Buyers and Sellers

Who Have Little Effect on the Price

Pure CompetitionPure CompetitionMany Buyers and Sellers

Who Have Little Effect on the Price

Monopolistic Monopolistic CompetitionCompetition

Many Buyers and Sellers Who Trade Over a

Range of Prices

Monopolistic Monopolistic CompetitionCompetition

Many Buyers and Sellers Who Trade Over a

Range of Prices

Pricing in Different Types of Markets

Market and Demand Factors Affecting Pricing Decisions

Oligopolistic Oligopolistic CompetitionCompetition

Few Sellers Who AreSensitive to Each Other’s

Pricing/ Marketing Strategies

Oligopolistic Oligopolistic CompetitionCompetition

Few Sellers Who AreSensitive to Each Other’s

Pricing/ Marketing Strategies

Pure MonopolyPure MonopolySingle Seller

Pure MonopolyPure MonopolySingle Seller

10-6

Cost-Based PricingCertainty About Costs

Pricing is Simplified

Price Competition Is Minimized

UnexpectedSituational

Factors

Attitudes of

Others

Ethical

Ignores Current

Demand & Competitio

n

Cost-Plus Pricing is an

Approach That Adds a

Standard Markup to the

Cost of the Product

Simplest Pricing Method

Fairer to Buyers & Sellers

10-7

Cost-Based Versus Value-Based Pricing (Fig. 10-5)

10-8

Methods for Setting Prices

Going-Rate Company Sets Prices Based on

WhatCompetitors Are Charging

Sealed-BidCompany Sets Prices Based on What They Think Competitors

Will Charge??

Competition-Based Pricing

10-9

New-Product Pricing StrategiesMarket-Skimming

Setting a High Price for a New Product to “Skim” Maximum Revenues from the Target Market.

Results in Fewer, But More Profitable Sales.

I.e. Intel

Use Under These Conditions:

Product’s Quality and Image Must Support Its Higher Price.

Costs Can’t be so High that They Cancel the Advantage of Charging More.

Competitors Shouldn’t be Able to Enter Market Easily and Undercut the High Price.

10-10

New-Product Pricing StrategiesMarket Penetration

Setting a Low Price for a New Product in Order to “Penetrate” the Market Quickly and Deeply.

Attract a Large Number of Buyers and Win a Larger Market Share.

I.e. Dell

Use Under These Conditions:

Market Must be Highly Price-Sensitive so a Low Price Produces More Market Growth.

Production/Distribution Costs Must Fall as Sales Volume Increases.

Must Keep Out Competition & Maintain Its Low Price Position or Benefits May Only be Temporary.

10-11

Product Mix-Pricing Strategies:Product Line Pricing

Involves setting price steps between various products in a product line based on:

Cost differences between products,Customer evaluations of different features, and Competitors’ prices.

10-12

Product Mix-Pricing StrategiesOptional-Product

Pricing optional or accessory products sold with the main product. i.e camera bag.

Captive-ProductPricing products that must be used with the main product. i.e. film.

10-13

Product Mix-Pricing Strategies

By-ProductPricing low-value by-products to get rid of them and make the main product’s price more competitive.I.e. sawdust, Zoo Doo

Product-Bundling

Combining several products and offering the bundle at a reduced price.I.e. theater season tickets.

10-14

Discount and Allowance Pricing

Cash Discount Seasonal Discount

Quantity Discount Trade-In Allow ance

Functional Discount Prom otional Allow ance

A djus ting Bas ic Pr ice to Rew ard C us tom ersF or C erta in Responses

Cash Discount Seasonal Discount

Quantity Discount Trade-In Allow ance

Functional Discount Prom otional Allow ance

A djus ting Bas ic Pr ice to Rew ard C us tom ersF or C erta in Responses

10-15

Segmented Pricing

Custom er - Segm ent Location Pricing

Product - Form T im e Pricing

S e ll ing Products A t 2 or M ore Prices E venT hough T here is No D iffe rence in C ost

Custom er - Segm ent Location Pricing

Product - Form T im e Pricing

S e ll ing Products A t 2 or M ore Prices E venT hough T here is No D iffe rence in C ost

10-16

Psychological PricingConsiders the psychology of prices and not simply the economics.Customers use price less when they can judge quality of a product.Price becomes an important quality signal when customers can’t judge quality; price is used to say something about a product.

Retail $100.00Cost $3.00

10-17

Temporarily Pricing Products Below List Price

Through:

Promotional Pricing

Special-Event PricingSpecial-Event Pricing

Cash RebatesCash Rebates

Low-Interest FinancingLow-Interest Financing

Longer WarrantiesLonger Warranties

Free MaintenanceFree Maintenance

DiscountsDiscounts

Loss LeadersLoss Leaders

10-18

•Pricing products for customers located in different parts of the country or world.• i.e. FOB-Origin, Uniform- Delivered, Zone, Basing- Point, & Freight-Absorption.

• Adjusting prices for customers in different counties.• Price Depends on Costs, Consumers, Economic Conditions, Competitive Situations, & Other Factors.

Geographical Pricing

International Pricing

Other Price Adjustment Strategies

10-19

Why?

Excess Capacity

Falling Market Share

Dominate Market Through Lower

Costs

Initiating Price Changes

Why?

Cost Inflation

Overdemand: Company Can’t

Supply All Customers’ Needs

10-20

Public Policy Issues in Pricing

10-21

Pricing to build trust with your customers

Pricing should:

Be straightforward and easy to understand.

Be complete.

Give the customer reasonable control over the transaction

10-22

Make pricing straightforward and easy to understand.

Do not confuse or mislead customers.

Many potential customers shy away from a business because they don’t understand the pricing and are too shy to ask.

10-23

Pricing should be complete, including everything a customer expects.

AVOID:o “Package” fees that don’t include

everythingoe.g., computers without keyboards

o “Package” fees that force customers to pay for unwanted/unneeded items

o Charge for items that are poor quality or unusable.

10-24

Give the customer reasonable control over the transaction

Examples:

Phone customer with estimate before doing work

Selling by each and by bulk price

Credit for recycling certain items

Allow customers to do some of their own work (construction, legal, bike repair).