Chapter 11

Pricing Products: Pricing Considerations, Approaches, and

Strategies

Price• Price = amount of money charged for a good or

service

The only marketing mix element that produces revenue– Charging too much chases away potential

customers– Charging too little cuts revenue

• http://www.youtube.com/watch?v=3DFHOZu0z5c

Factors to Consider when Setting Prices

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MarketingObjectives

SurvivalLow Prices to Cover Variable Costs andSome Fixed Costs to Stay in Business.

Current Profit MaximizationChoose the Price that Produces the

Maximum Current Profit, Cash Flow or ROI.

Market Share Leadership

Low as Possible Prices to Becomethe Market Share Leader.

Other ObjectivesPrevent competition, attracting attention,

etc.

Internal Factors

Product Quality LeadershipHigh Prices to Cover Higher

Quality and Guest Service Levels

Internal Factors• Marketing Mix Strategy

– Must consider all P’s when pricing

• Costs– Fixed vs. Variable Costs

• Organizational Considerations– Who decides the price?– Revenue Managers

• Inventory, advertising and reservations management

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Total CostsSum of the Fixed and Variable Costs for a Given

Level of Production

Fixed Costs(Overhead)

Costs that don’tvary with sales or production levels.

Executive salaries,Rent, Contracted

advertising

Variable Costs

Costs that do varydirectly with the

level of production.

Raw materials, Hourly

employees

Types of Cost Factors that Effect Pricing Decisions

External Factors• Market and Demand

– Costs set the lower limit, market/demand sets upper limit

• Cross Selling and Up selling

• Consumer Perceptions of Price and Value– Based on consumers motivations for buying the product– Set the price based on value perception– Based on the entire experience

• Price Elasticity of Demand • If $ increases and demand changes greatly = elastic• If $ increases and demand does not change = inelastic

• Competitors’ Prices and Offers

8

Price-Demand Relationship

9

Pric

e

Quantity Demanded per Period

A. Inelastic Demand - Demand Hardly Changes Witha Small Change in Price.

P2P1

Q1Q2

Pric

e

Quantity Demanded per Period

P’2P’1

Q1Q2

B. Elastic Demand -Demand Changes Greatly Witha Small Change in Price.

Price Elasticity of Demand

General Pricing Approaches• Cost-Based Pricing Overview

1. Cost-Plus Pricing

2. Break-Even Analysis

3. Value-Based Pricing

4. Competition-Based PricingExample: Hotel pricing game http://www.youtube.com/watch?v=b2zg81CSZ64

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Cost Based Pricing

• Cost-plus: adding a standard markup. For example using markup rules of thumb such two and one-half times cost.

• Markup is often based on food cost or beverage cost• Markup is sometimes based on food cost and labor

cost and may even have a percent of overhead applied (full-cost pricing)

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Markup

• Example: divide the dollar cost by the target cost percentage

• So, you want a 40% food cost and your good cost is $5. What would be your selling price?

13

Markup

$5.00 = $12.50.4

Simple, but not make logical sense.

• Need to look at the relationship of cost and demand for each menu item and how the items blend together.

Break-even Analysis or Target Profit Pricing

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• BE= Fixed Costs/Contribution (SP-VC)• Example - Meal - SP = $20, VC = $8• Fixed costs are $2400 a day• BE=$2400/$12 = 200• Need to sell 200 meals @ $20 to break-even• BE = $4000

Break-even Pricing

Pricing Strategies• 5. New-Product Pricing Strategies

– Prestige Pricing

– Market-Skimming Pricing

– Market-Penetration Pricing

Pricing Strategies (cont’d)

• 6. Existing-Product Pricing Strategies– Product-Bundle Pricing

– Price-Adjustment Strategies

• Volume Discounts; Discounts Based on Time of Purchase; Discriminatory Pricing; Revenue Management

– BAR pricing– Non-Use of Revenue Management

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Product-Bundling Pricing

• Transfer surplus reservation price (the maximum price a customer will pay for a product)– Customer A will pay $60 for a Disney pass and and $120 for a

hotel room,Customer B will pay $95 for the Disney pass and $80 for the hotel room – A hotel selling a two night package with pass for $350 will get both customer

• Price-bundling also reduces price competition – by making it hard to figure price of components – In an airline and hotel package it is difficult to determine the

price of the room

http://www.youtube.com/watch?v=oZwLW4CBdBY

Pricing Strategies (cont’d)• 7. Psychological Pricing

– Reference prices, rounding, length of the field • Past vs. present

– Promotional Pricing • Loss leaders to sell other items• Hotel rooms in Vegas

– Value Pricing

Psychological Pricing• Price-quality relationship

• Reference prices

• Rounding (Which price increase below looks bigger to you?)

$1.45 to 1.79 =________$1.75 to 2.09 = ________

• Length of the field9.99 vs. 10.00

Conclusion

• Price needs to reflect– Value– Market Changes– Marketing Mix– Variability in Prices

• Sell value not price• No good pricing strategy for everyone