Chapter 11: Pricing Products and Services

Legal and ethical considerations

price fixing, price discrimination, deceptive pricing, predatory pricing

Pricing Objectives

profit, sales revenue, market share, unit volume, survival, social responsibility

Survival

pursued by firms seeking to raised cash and avoid bankruptcy

Social Responsibility

pursued by firms seeking to serve its customers and society

break-even point (BEP)

quantity at which total revenue and cost are equal profit then comes from units sold beyond BEP

Unit Volume

quantity produced or sold

Market share

ratio of a firm's sales revenues to the industry, pursued when industry sales are flat or declining

Break-Even Analysis

relationship between total revenue and total cost to determine profitability at various levels of output

Penetration

setting a low initial price on a new product to appeal to the mass market

above-, at-, or below-market

setting a market price for a product on a subjective feel for the competitors' price or market price as the benchmark

Skimming

setting a price at the highest level the market will bear

Target return-on-sales

setting a price to achieve a profit that is a specified % of the sales volume

Target Profit

setting an annual target of a specific dollar volume of profit

dynamic pricing policy

setting different prices for products and services in real time in response to supply and demand conditions

One-price policy (fixed pricing)

setting one price for all buyers of a product/service

Odd-Even

setting prices a few dollars or cents under an even number

Target return on investment

setting prices to achieve an annual target ROI

Elastic Demand

slight increase in price produces large decrease in demand

Inelastic Demand

slight increase in price produces minor decrease in demand

Cost-Plus

summing the total unit cost of providing a product/service and adding a specific amount to arrive at a price

Profit-oriented approaches

target profit, target return on sales, target return on investment

Bundle

the marketing of two or more products in a single package price

price elasticity of demand

the percentage change in quantity demanded relative to a percentage change in price

Barter

the practice of exchanging products and services for other products and services rather than for money

Cost-oriented approaches

emphasize costs standard markup, cost-plus

Price Equation

final price = list price - (incentives + allowances) + extra fees

Total Cost Equation

fixed cost + variable cost

Deceptive pricing

price deals that mislead consumers

Price Elasticity of demand equation

% change in quantity demanded / % change in price

Price Premium Equation

(dollar sales market share for a brand / unit volume market share for a brand) - 1

Setting a Final Price

1. select an approximate price level 2. set the list or quoted price 3. make special adjustments to the list or quoted price

BEP Quantity equation

= Fixed Cost / (Unit price - Unit variable cost)

Demand Curve

A graph that relates the quantity sold and the price, showing the maximum number of units that will be sold at a given price

Predatory pricing

charging very low price for product with intent of driving competitors out of business then raising prices

Competition-oriented approaches

Focuses on the marketplace customary, above at or below market, loss leader

Fixed Costs

Costs independent of output (Rent, Insurance, Machinery)

Variable Costs

Costs that vary with output (sales, labor, materials)

4 common pricing approaches

Demand-oriented, Cost-oriented, Profit-oriented, Competition-oriented

Step 3: Make special adjustments

Discounts and Allowances

Promotional Allowance

Extra amount of free goods, cash payments, etc.

pricing constraints

Factors that limit the range of prices a firm may set

Importance of Price

Has direct effect on firm's profits Price too high, risk reducing total quantity sold Price too low, risk reducing total profit

Trade-In Allowance

Often used in automobile industry

Value

Perceived Benefits / Price Value increases as perceived benefits increases

Total Revenue Equation

Price x Quantity

Profit Equation

Profit = Total Revenue - Total Cost

Allowances

Reductions from list or quoted prices to buyers for performing some activity Trade-in or Promotional

Discounts

Reductions from list price that a seller gives a buyer as a reward for some activity of the buyer that is favorable to the seller

Loss-Leader

Selling a product below its customary price to attract, not to increase sales

PrestigeOdd-EvenBundle

Setting a high price to attract that quality of status-conscious customers

Customary

Setting a price that is dictated by tradition

Standard Markup

adding a fixed percentage to the cost of all items in a specific product class

Price-fixing

an agreement among firms to charge one price for the same good

Cost Plus Fixed Fee pricing

business products

Sales Revenue

can lead to increase in market share and profit

price discrimination

charging different prices to different buyers for goods of similar grade and quality

Reference Value

comparing the costs and benefits of substitute items

Demand Factors

consumer tastes, price and availability of similar products, consumer income

Demand-oriented approach

customer preference based skimming, penetration, prestige, prestigeOdd-evenBundle, Odd-even, Bundle

Value Pricing

increasing product or service benefits while maintaining or decreasing price

Consumer Income

influences ability to buy

Availability of similar products

influences desire to buy

Consumer tastes

influences desire to buy

Profit

long-run profits: products @ low prices maximize current profit: short-term target return (ROI): sets profit goal

Step 1: Select an Approximate Price Level

marketing manager must understand the market environment, the features and customer benefits on a particular product, and the goals of the firm

Step 2: Set the list or quoted price

must decide whether to follow a one-price or flexible-price policy

cost-plus percentage-of-cost pricing

one of a kind items