Chapter Fourteen

Creating and Pricing Products

that Satisfy Customers

Pricing Products• How Firms Set Their Prices

– Supply• The quantity of a product that producers are willing to sell

at each of various prices• Quantity supplied by producers increases as the price

increases

– Demand• The quantity of a product that buyers are willing to

purchase at each of various prices• Quantity demanded increases as the price decreases

– Equilibrium• Where the supply and demand curves intersect and

quantity and price for buyers and sellers are equal

Supply and Demand Curves

Assumption is that all competing products are indistinguishable

Elasticity of Demand

Elastic Elastic Demand Demand

Consumers buy more or lessof a product when the price changes

InelasticInelasticDemandDemand

An increase or decrease in price will not significantly affect demand

Consumers’ sensitivity to changes in price.

Factors that Affect Elasticity of Demand

Availability of Substitutes

Price relative topurchasing power

Product durability

Pricing Products in the Real Economy

1) Producers gain control over price by differentiating products

• Differentiation - The process of developing and promoting differences between one’s product and all similar products

2) Producers also gain control over price through advertising. The idea is to increase demand so you can raise prices.

3) Producers can also reduce prices to obtain a competitive edge. Lower the price to increase purchase volume and thus achieve more profit

Pricing Objectives

Profit-Oriented Pricing Objectives-Profit-Oriented Pricing Objectives-

Sales-Oriented Pricing Objectives-Sales-Oriented Pricing Objectives-

Status Quo Pricing Objectives-Status Quo Pricing Objectives-

Profit-Oriented Pricing Objectives

Profit-Oriented Pricing ObjectivesProfit-Oriented Pricing Objectives

ProfitMaximization

SatisfactoryProfits

Target Return on

Investment

Sales-Oriented Pricing Objectives

MarketShare

SalesMaximization

Sales-Oriented Pricing ObjectivesSales-Oriented Pricing Objectives

A company’s sales as apercentage of total salesfor that industry

Sales Maximization

• Short-term objective to maximize sales

• Ignores profits, competition, and the marketing environment

• May be used to sell off excess inventory

Status Quo Pricing Objectives

Maintainexistingprices

Meetcompetition’s

prices

Status Quo Pricing ObjectivesStatus Quo Pricing Objectives

Pricing Strategies

• New-Product Strategies– Price Skimming

• Charging the highest possible price for a product during the introduction stage of its life cycle

– Penetration Pricing• Setting a low price for a new product to quickly

build market share and discourage competitors

Breakeven analysis– Fixed cost

• A cost incurred no matter how many units are sold-rent

– Variable cost• A cost that depends on the number of units produced-raw

materials– Total cost

• The sum of the fixed costs and the variable costs

– Breakeven quantity• The number of units that must be sold for total revenue

(total sales) to equal total cost

Pricing Methods• Cost-Based Pricing

– the total cost of producing one unit product then adds an amount to cover overhead and profit.

• i.e.-$10(costs)+$2(markup)=$12/shirt =selling price

– Markup is calculated as a percentage of total costs. • i.e.-20% markup yields a $12/shirt price

– Easy to apply and commonly used by retailers and wholesalers, but it ignores demand and pricing inputs from other business functions

Pricing Methods

• Demand-Based Pricing– Based on the level of customer demand for

the product– Product prices are high when demand is high

and low when demand is weak

• Competition-Based Pricing– Meet competitors’ prices in markets. Used

when products are very similar like produce

Some Pricing “Buzzwords”– Captive pricing

• Pricing the basic product low, but pricing related items at a higher profit level – like printers and ink

– Price leaders (loss leaders)• Selected products priced below the usual markup,

near cost, or below cost

– Price lining• Setting a limited number of prices for selected

groups or lines of merchandise

More Pricing “Buzzwords”

– Comparison discounting• Setting a price at a specific level and comparing it

with a higher price-like a Marshall’s price tag– Periodic discounting

• Temporary reduction of prices on a patterned or systematic basis