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PricePrice is the sum of all the values that consumers exchange for the benefits of having or using the product or service.Price has been the major factor affecting buyer choice; nonprice factors have become increasingly important in buyer-choice behavior.Price is the only element in the marketing mix that produces revenues; all others represent costs.
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Factors Affecting Price Decisions ( Fig. 10.1)
Internal Factors
Marketing ObjectivesMarketing Mix StrategyCostsOrganizational considerations
Internal Factors
Marketing ObjectivesMarketing Mix StrategyCostsOrganizational considerations
External Factors
Nature of the market and demandCompetitionOther environmental factors (economy, resellers, government)
External Factors
Nature of the market and demandCompetitionOther environmental factors (economy, resellers, government)
PricingDecisions
PricingDecisions
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Marketing
Objectives
SurvivalLow Prices to Cover Variable Costs
andSome Fixed Costs to Stay in
Business.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
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Internal Factors Affecting Pricing Decisions: Marketing Objectives
Other specific objectives include: Set prices low to prevent competition from
entering the market, Prices might be reduced temporarily to create
excitement or draw more customers.
Nonprofit and public organization may have other pricing objectives such as: University aims for partial cost recovery, Hospital may aim for full cost recovery, Theater may price to fill maximum number of
seats.
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Price
Product Design
Distribution
Promotion
NonpricePositions
Internal Factors Affecting Pricing Decisions: Marketing Mix
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Types of Cost Factors that
Affect Pricing Decisions
Total CostsSum of the Fixed and Variable Costs for a Given
Level of Production
Total CostsSum of the Fixed and Variable Costs for a Given
Level of Production
Variable Costs
Costs that do varydirectly with the
level of production.
Raw materials
Fixed Costs(Overhead)
Costs that don’tvary with sales or production levels.
Executive Salaries, Rent
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Costs ConsiderationsC
ost
per
un
it 12
3 4SRAC
LRAC
Quantity Produced per Day
1,0
00
2,0
00
3,0
00
4,0
00
Cost Per Unit at Different Levels of Production Per Period
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Types of Cost Factors that
Affect Pricing DecisionsAs a firm gains experience in production, it learns how to do it better.The experience curve (or the learning curve) indicates that average cost drops with accumulated production experience.Strategy: company should price products low; sales increases; costs continue to decrease; and then lower prices further. Risks are present with this strategy.
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Market andDemand
Competitors’ Costs, Prices, and Offers
Other External FactorsEconomic Conditions
Reseller NeedsGovernment Actions
Social Concerns
External Factors Affecting Pricing Decisions
Competitor Costs
This ad by LCI International accuses its competitors of using unfair practices in pricing, hiding fees incurred by rounding up.
Hidden fees, defined as“cramming” by theFCC, are the numberone source of billingcomplaints amonglong-distancecustomers.
Why is LCI focusing onthis practice?
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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
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Demand Curves and Price Elasticity of Demand
A Demand Curve is a Curve that Shows the Number of Units the Market Will Buy in a Given Time Period at Different Prices that
Might be Charged.
Price Elasticity Refers to How Responsive Demand Will be to a Change in Price.
Price Elasticity of Demand = % Change in Quantity Demanded
% Change in Price
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Price Elasticity of DemandPri
ce
Quantity Demanded per Period
A. Inelastic Demand - Demand Hardly Changes Witha Small Change in Price.
P2
P1
Q1Q2
Pri
ce
Quantity Demanded per Period
P’2P’1
Q1Q2
B. Elastic Demand -Demand Changes Greatly Witha Small Change in Price.
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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
Much Fairer to Buyers & Sellers
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Breakeven Analysis or Target Profit Pricing
2
4
6
8
10
12
200 400 600 800 1,000
Total Revenue
Total Cost
Fixed Cost
Target Profit($2 million)
Sales Volume in Units (thousands)Cost
in
Dolla
rs (
mill
ion
s)
Tries to Determine the Price at Which a Firm Will Break Even or Make a Certain Target
Profit.
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ProductProduct
CostCost
PricePrice
ValueValue
CustomersCustomers
CustomerCustomer
ValueValue
PricePrice
CostCost
ProductProduct
Cost-Based Pricing Value-Based Pricing
Cost-Based Versus Value-Based Pricing (Fig. 10.7)
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Discussion Connections
Pick two competing brands from a familiar product category (watches, perfume, etc) - one low priced and the other high priced. Which, if either, offers the greatest value?Does “value” mean the same thing as “low price”? How do these concepts differ?
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Setting Prices
Sealed-BidCompany Sets Prices Based on What They Think Competitors
Will Charge.
Going-Rate Company Sets Prices Based on What
Competitors Are Charging.
??
Competition-Based Pricing
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Review of Concept Connections
Identify and define the internal factors affecting a firm's pricing decisions.Identify and define the external factors affecting pricing.Contrast the three general approaches to setting prices.
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New Product Pricing Strategies
Market Skimming
Setting a High Price for a New Product to “Skim” Maximum Revenues from the Target Market.
Results in Fewer, But More Profitable Sales.
Market Skimming
Setting a High Price for a New Product to “Skim” Maximum Revenues from the Target Market.
Results in Fewer, But More Profitable Sales.
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.
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New Product Pricing Strategies
Market 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.
Market 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.
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.
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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.
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Product Mix- Pricing Strategies
Optional-Product Pricing optional or
accessory products sold with the main product. i.e camera bag.
Captive-Product Pricing products that
must be used with the main product. i.e. film.
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Product Mix- Pricing Strategies
By-Product Pricing low-
value by-products to get rid of them and make the main product’s price more competitive.
Product-Bundling Combining
several products and offering the bundle at a reduced price.
i.e. theater season tickets.
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Discount and Allowance Pricing
Cash Discount Seasonal Discount
Quantity Discount T rade-In Allow ance
Functional Discount Prom otional Allow ance
A djus ting Bas ic Price to Rew ard C ustom ersF or C erta in Responses
Cash Discount Seasonal Discount
Quantity Discount T rade-In Allow ance
Functional Discount Prom otional Allow ance
A djus ting Bas ic Price to Rew ard C ustom ersF or C erta in Responses
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Segmented Pricing
Custom er - Segm ent Location Pricing
Product - Form T im e Pricing
S e ll ing Products A t D iffe rent Pr ices 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 D iffe rent Pr ices E venT hough T here is No D iffe rence in C ost
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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.
Value $22.00Sale $14.99
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Special-Event PricingSpecial-Event Pricing
Cash RebatesCash Rebates
Low-Interest FinancingLow-Interest Financing
Longer WarrantiesLonger Warranties
Free MerchandiseFree Merchandise
DiscountsDiscounts
Loss LeadersLoss Leaders Temporarily Pricing Products Below List Price
to Increase Short-Term Sales
Through:
Promotional Pricing
This Sprint ad offers f ree long distance on Fridays.
Why can Sprint afford t o offer this promotion on Fridays rat her than on another day (like Monday)?
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Discussion ConnectionsMany other industries have created “deal-prone” consumers through the heavy use of promotional pricing - fast foods, airlines, tires, furniture, and others.Pick a company in one of these industries and suggest ways that it might deal with this problem.How does the concept of value relate to promotional pricing? Does promotional pricing add to or detract from customer value?
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• Adjusting Prices to Account for the Geographical Location of Customers.• i.e. FOB-Origin, Uniform- Delivery, Zone Pricing, Basing Point, & Freight-Absorption.
• Adjusting Prices for International Markets.• Price Depends on Costs, Consumers, Economic Conditions, Competitive Situations & Other Factors.
Geographical Pricing
International Pricing
Other Price Adjustment Strategies
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Initiating Price Changes
Why?
Excess Capacity
Falling Market Share
Dominate Market Through Lower
Costs
Why?
Cost Inflation
Overdemand: Company Can’t
Supply All Customer’s Needs
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Being Replaced by Newer Models
Being Replaced by Newer Models
Current Models Are Not Selling Well
Current Models Are Not Selling Well
Company is in Financial TroubleCompany is in
Financial Trouble
Quality Has Been Reduced
Quality Has Been Reduced
Price Comes Down Further
Price Comes Down Further
Price Cuts Are Seen by Buyers As:
Reactions to Price Changes
Number of Firms is Small
Number of Firms is Small
Product is UniformProduct is Uniform
Buyers are Well Informed
Buyers are Well Informed
Competitors Reactions When:
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Public Policy Issues in Pricing (Fig. 11.2)
Manufacturer A
Price-fixingPredatory pricing
Manufacturer B
Manufacturer A
Price-fixingPredatory pricing
Manufacturer B
Retail pricemaintenance.DiscriminatoryPricing
Retailer 1
Price-fixingPredatory Pricing
Retailer 2
Retailer 1
Price-fixingPredatory Pricing
Retailer 2
DeceptivePricing ConsumersConsumers
DeceptivePricing
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Price FixingPrice Fixing
Pricing Within Channel LevelsPricing Within Channel Levels
Predatory Pricing
Predatory Pricing
Public Policy Issues in Pricing
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PriceDiscrimination
Ensure Sellers Offers the Same PriceTerms to a Given Level
Of Trade
PriceDiscrimination
Ensure Sellers Offers the Same PriceTerms to a Given Level
Of Trade
Resale PriceMaintenance
Manufacturer Can’t Require
Dealers to Charge a
Specified RetailPrice for Its
Product
Resale PriceMaintenance
Manufacturer Can’t Require
Dealers to Charge a
Specified RetailPrice for Its
Product
DeceptivePricing
Occurs When a Seller States
Prices or PricesSavings that
Available To Consumers
DeceptivePricing
Occurs When a Seller States
Prices or PricesSavings that
Available To Consumers
Pricing Across Channel Levels
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Review of Concept Connections
Describe the major strategies for pricing imitative and new products.Explain how companies find a set of prices that maximizes the profits from the total product mix.Discuss how companies adjust their prices to take into account different types of customers and situations.Discuss the key issues related to initiating and responding to price changes.