Chapter 12 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 12-1 Pricing...

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Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 12- 1

Pricing Strategies

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 2Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 12-

CHAPTER OBJECTIVES

1. What are the roles of price and value in the marketing mix? How do market structures, costs, and demand affect prices?

2. What are the most important market factors influencing pricing decisions?

3. How do marketers use pricing strategy and pricing objectives to achieve their goals?

4. What procedures and strategies do marketers use when making pricing decisions?


Objective 1

What are the roles of price and value in

the marketing mix? How do market

structures, costs, and demand affect

prices?

DEFINED


A Price is the exchange value of a

product or service in the

marketplace.

EXPLAINED


Value

Value = Benefits - Costs

Service Benefits

Brand Benefits

Product Benefits

Price &OtherCosts

Value

EXPLAINED


APPLIED


Establishing Prices

Price

ProductPlace

Promotion

APPLIED


Market Structure

Pure Competition

Oligopoly

Monopolistic Competition

Monopoly

APPLIED


Monopoly: A single firm has the power to set and control price in a market.

Drug and software manufacturers, due to patent protections, are examples.

Market Structure

Monopoly

APPLIED


Oligopoly: Few sellers, fairly large, requires sizable investment to enter market

Where several firms share price power by being able to control supply.

Airlines, Farm Implement Industries

Competition is more through product differentiation than price

Market Structure

Oligopoly

APPLIED


Monopolistic: Relatively large number of sellers, each seller tries to differentiate their products from the competition

Clothing, Shoes

Product Differentiation: Developing and promoting differences between one’s products and similar products.

Market Structure

Monopolistic Competition

APPLIED


Monopolistic competition

Copyright © Cengage Learning. All rights reserved. 1 | 12

$5.00 $30.00

APPLIED


Pure Competition: Numerous producers selling undifferentiated products.

Agricultural Products: Corn, Wheat, Milk

Market Structure

Pure Competition

APPLIED


Perfect (or pure) competition

The market situation in which there are many buyers and sellers of a product, and no single buyer or seller is powerful enough to affect the price of that product Supply: The quantity of a product that producers are willing to

sell at each of various prices

Demand: The quantity of a product that buyers are willing to purchase at each of various prices

Market Price (Equilibrium): The price at which the quantity demanded is exactly equal to the quantity supplied

Types of Competition: Perfect

1 | 14

APPLIED


Supply Curve and Demand Curve

1 | 15

APPLIED


Cost-Based Pricing

Profit Revenue Costs

Price x units sold

Fixed Costs + Variable Costs

APPLIED


Add a fixed amount, called a margin, to the cost of each item sufficient enough to earn a desired profit.

Margin

Price

Cost

Margin

APPLIED


Contribution Margin = Price – Variable Costs

Contribution Margin

$10

Price

$7

Variable Costs

$3Contribution Margin

APPLIED


Profit Margin = Price – Total Cost of the Product

Profit Margin

$10

Price

$7

Variable Costs

$2 Profit Margin

$1

APPLIED


Recognize the need to establish a price that offsets costs and results in a reasonable profit margin.

Cost-Based Pricing

$10

Price

$7Variable Costs

$2 Profit Margin

$1 Fixed Costs

APPLIED


Margin is the percentage of the final selling price that is profit.

Take the variable cost of a product and adding a fixed percentage to arrive at a selling price.

To calculate the selling price of a $12 product, and a desired margin of 10% the formula would be:

$12 /(1-.10) or $12 / .9 =

Profit = $1.33 or 10% of the selling price.

Cost-Plus Pricing: MARGIN

$13.33.

APPLIED


To calculate the selling price of a $12 product, and a desired margin of 10% the formula would be:

$12 /(1-.10) or $12 / .9 =

Calculate the selling price of a product that costs $14 to produce and has a margin of 15%

$14 /(1-.15) or $14 / .85 =

Calculate the selling price of a product that costs $25 to produce and has a margin of 18%

$25 /(1-.82) or $25 / .82 =

Group Activity

$16.47.

$13.33.

$30.49

APPLIED


Markup is the percentage difference between the actual cost and the selling price

The margin is determined by dividing the contribution per unit by the unit cost.

Cost = $12

Contribution per unit = $1.33

Selling price = 13.33

The margin is: $1.33 / $12 =

There difference between the cost and the selling price is 11%.

Cost-Plus Pricing

11%

APPLIED


The markup is determined by dividing the contribution per unit by the unit cost.

Find the margin for the following:

Cost = $14


Selling price = $16.47

the margin is: $2.47/ $16.47 =

Problem 2

Cost = $25


Selling price = $30.49

the margin is: $5.49 / $30.49 =

Cost-Plus Pricing

15%

18%

APPLIED


Cost-Plus Pricing

Markup % Margin Selling Price

10% 11.0% $13.33

15%

20%

25%

30%

Determine the Margin and Selling Price for a product costing $12.00.

17.6%

25.0%

42.8%

33%

$14.12

$15.00

$16.00

$17.14

APPLIED


Break-even Point

Fixed cost = $40k; Variable Cost = $5; Selling Price = $10

Break-EvenIn Units

= Fixed Costs

Price - Variable Costs

Break-Even = $40,000

$10 - $5

Break-Even 8,000 units=

Calculate the break even point in number of units

APPLIED


Break-even PointFixed cost = $40k; Variable Cost = $5; Selling Price = $10

APPLIED


Elastic vs. Inelastic

Determination of Demand

100K 200K 300K

Quantity

$0.50P

rice

$0.25

$0.10


Objective 3 & 4

How do marketers use pricing strategy and

pricing objectives to achieve their goals?

What procedures and strategies do

marketers use when making pricing

decisions?

DEFINED


A Pricing Strategy identifies what a business will

charge for its products or

services.

EXPLAINED


Pricing Objectives

Profitability$

$

$

$

APPLIED


New Product Pricing

Skimming

APPLIED


New Product Pricing

Penetration

APPLIED


Pricing Strategies

Storefront Pricing

Online Pricing

Tiered Pricing

Dynamic Pricing

Carnival Cruise

Verizon Wireless

Priceline

APPLIED


Portfolio Pricing

Customer’s willingness to pay

Price ceiling $$$

Price floor $

Product 1

Product 2

Product 3

Pric

e ra

nge

for

bran

d/pr

oduc

t lin

e

APPLIED


Price Adjustment Strategies


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