Chapter 10: Pricing the product

Step 1: Develop pricing objectives

- Sales or market share - Profit - Competitive effect - Customer satisfaction - Image enhancement

Steps in price planning

1. Develop pricing objectives 2. Estimate demand 3. Determine cost 4. Evaluate the pricing environment 5. Choose a pricing strategy 6. Develop pricing tactics

Estimating demand

1. Total demand: number of buyers * average amount of each buyers purchases 2. Firms demand: total demand * firms estimated share of the market (demand estimate should be adjusted to competition)

Break-even analysis

A 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 post which it will begin making a profit

Yield management pricing

Another type of demand-based pricing. Businesses charge different prices to different customers in order to manage capacity and maximise revenue

Cross-elasticity of demand

Changes in prices for an other product affect demand for an item - when product are substitutes for each other an increase of the price for one will increase the demand for the other

Inelastic demand

Changes in prices have little or no effect on the quantity that customers are willing to buy If the outcome < -1 = inelastic

Elastic demand

Customer are very sensitive to changes in prices, may result in a substantial change in the quantity demanded If the outcome is > -1 = elastic

Step 2: Estimate demand

Demand refers to customer's desires for a product; how much of a product are customers willing to buy as the price goes up or down?

Skimming price

Firm charges a high premium price for its new product with the intention of reducing it in the future in response to market pressures

Target costing

Firm first determines the price which consumers are willing to pay and then design the product consequently

Break even formula

Fixed costs --------------------------- Price - variable cost

Law of demand:

For most product, as prices increase -> demand decreases and while prices decrease -> demand increases For prestige products: a price increase may actually result in increase of demand

Value pricing or everyday low pricing (EDLP)

Is a strategy in which firms promise ultimate value to customers

FOB origin pricing

Means that the cost of transporting the product from the factory to the location of the customer is the responsibility of the customer

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

Distribution-based pricing

Pricing tactic that establishes how firms handle the cost of shipping products to customers near, far and wide

Trial pricing

Product carries a low price for a limited time period

Marginal analysis

Provides a way for marketers to look at cost and demand at the same time and to identify the output and the price that will generate the maximum profit

Turnover / revenue

Quantities sold * price

Price bundling

Selling two or more goods or services as a single package for one price

Demand curve

Shows the quantity of a product that the customers will buy in a market during a period of time at various prices if all other factors remain the same

Marginal costs

The increase in total costs from producing one additional unit of a product

Marginal revenue

The increase in total income or revenue that results from selling one additional unit of a product

Cost-plus pricing

The most common cost-based approach and refers to a pricing method in which the marketer figures all costs for the product and then adds the desired profit per unit

Straight mark-up pricing

The most frequently used type of cost-plus pricing; price is calculated by adding a pre-determined percentage to the cost

Price elasticity of demand

The percentage chanced in unit sales that results from a particular change in price % change in quantity demanded ------------------------------------------------ % change in price

Break-even-point

The point at which the company doesn't lose any money and doesn't make any profit

Price leadership

The rule in an oligopolistic industry ( other players fell into line )

Payment pricing

Total price will be divided into more smaller amounts ( leasing a car

Upward shift

Upward shift in the demand curve means that at any given price, demand is greater than before the shift occurs e.g. a great advertising can shift the demand curve upward

Captive pricing

Used when two products only work together

Total costs

Variable costs + Fixed costs

Types of costs

Variable costs, fixed costs, average fixed costs

Internal reference prices

consumers have a set price or a price range in their mind - Competition as reference price

FOB delivered pricing

cost of loading the product and transportation is included in the selling price

Fixed costs

do not vary with the number of units produced. Costs remain the same regardless of amount produced

Prestige products

have a high price and appeal to status-conscious consumer -People may be willing to pay a premium because they believe it makes a statement about their own worth

dynamic pricing

internet offer, where the price can be adjusted to meet changes in the marketplace

Average fixed costs

is the fixed cost per unit produced (total fixed costs/number of units produced)

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, favours or anything else that has value to the other party

Price lining

items in a product line are sold at different prices

bait

lure customers into the shop

Base-point pricing

means marketers choose one or more locations to serve as base points ( Customers pay shipping cost from those base point to their destination )

Freight absorption pricing

means that the seller takes on part or all of the cost of shipping ( works well for high-ticket items when cost of shipping is a negligible part of the sales price and the profit margin

Price index

new price - old price ------------------------------ x 100% old price

Penetration pricing

new product is introduced at a very low price

online auctions

offer the chance for shoppers to bid on items

Variable costs

per-unit costs of production that will fluctuate depending on how many units or individual products a firm produces

reserve-price

price below which the item won't be sold

Odd-even pricing

prices ending with an 99 rather increases sales than 00

Opportunity cost

refers to the value of something that is given up to obtain something else,

loss leader pricing

retailers lure the customer with low prices and sell those items for that price but know that when the customer are once in the shop they will buy other items at regular price

quantity discounts

to encourage larger purchases from distribution channel partners

Two-part pricing

two separate types of payment ( e.g monthly fee and every game )

bait and switch tactic

where a retailer will advertise an item at a very low price

Uniform delivered pricing

adds an average shipping cost to the price, no matter what the distance from the manufacture's plant

a list price

also known as recommended retail price RRR ) is the price that the manufacturer sets as the appropriate price for the end consumer to pay

Downward shift

e.g if competitors enter the market