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Pricing

•Chapter 12

•PowerPoint slides

•Express version

•Instructor name

•Course name

•School name

•Date

Principles of Marketing, Sixth Canadian Edition

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Learning Objectives

• After studying this chapter, you should be able to:– Identify and define the internal factors affecting a firm’s pricing

decisions

– Identify and define the external factors affecting pricing decisions, including the impact of consumer perceptions of price and value

– Contrast the two general approaches to setting prices

– 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

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What is a Price?

• Price: the amount of money charged for a product or service, or the sum of values exchanged for the benefits of having or using the product or service

– Fixed pricing

– Dynamic pricing

– Only marketing mix element that produces revenue

• Pricing best practices:– Develop a 1% pricing

mindset

– Consistently deliver more value

– Price strategically, not opportunistically

– Know your competition

– Make pricing a process

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Factors Affecting Pricing Decisions

• Marketing objectives: – Survival

– Current profit maximization

– Market share leadership

– Product quality leadership

Figure 12.1

• Marketing mix strategy: – Price should be consistent

with other mix elements

– Target costing

– Non-price positions

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Costs

• Fixed costs: costs that do not vary with production

• Variable costs: costs that vary directly with the level of production

• Total costs: sum of fixed and variable costs

Figure 12.2

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Cost Per Unit/Accumulated Production

• Experience (learning) curve: the drop in the average per-unit production cost that comes with accumulated production experience

Figure 12.3

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New-Product Pricing

• Market skimming pricing: setting a high price to skim maximum revenues layer by layer from the segments willing to pay the high price

• Market penetration pricing: setting a low price for a new product to attract a large number of buyers and achieve a large market share

Figure 7.7

Skimming price drops in steps

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External Factors Affecting Pricing Decisions

• Types of markets: – Pure competition

– Monopolistic competition

– Oligopolistic competition

– Pure monopoly

Figure 12.1

• Competition: – Consumers will compare

– High margins attract competition

– Benchmarking costs

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The Price-Demand Relationship

• Demand curve: a curve that shows the number of units the market will buy at different possible prices in a given time period

• Calculated as the % change in quantity demanded divided by the % change in price; values >1 and <-1 are elastic

• Elastic products: lower price to maximize revenue

• Inelastic products: raise price to maximize revenue

• Prestige goods behave in a contrary fashion

Figure 12.4

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General Pricing Approaches

• Cost-based pricing: adding a standard markup to the cost of the product; using formula:

– Average unit cost equals variable cost plus (fixed cost/unit sales)

– Markup price equals Unit cost/(1 minus desired return on sales)

– Example: $10 + ($300,000/50,000) = $16

– Selling price based on 20%: $16/(1 - .20) = $20

– Double-check: $4 profit/selling price = 20% profit margin

Figure 12.5• Note: multiplying

$16 by 1.2 equals a selling price of $19.20, and a profit margin of only 17%

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Break-even Chart

• Break-even (target profit) pricing: setting price to break even (or make a target profit) on the costs of making and marketing a product

• Break-even equals fixed cost divided by (price minus variable cost)

• Example (a):

• B/E = $300,000/($20 - $10)

• B/E = 30,000 units

• Example (b):

• B/E = ($300,000 + $75,000 profit)/($20 - $10)

• B/E = 37,500 units

Figure 12.6

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Cost Versus Value Pricing

• Value-based pricing: setting price based on buyers’ perceptions of value rather than on the seller’s cost

• Everyday low pricing (EDLP): charging a constant low price with few discounts or promotional sales; used successfully by Wal-Mart, suits busy consumers, encourages impulse buying due to trust

Figure 12.7

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Price Adjustment Strategies

Table 12.2

Discount andAllowance pricing

Segmentedpricing

Psychologicalpricing

Promotionalpricing

Geographicalpricing

Internationalpricing

Reducing prices to reward customerresponses such as paying early

Adjusting prices to allow for differencesin customers, products, or locations

Adjusting prices forpsychological effect

Temporarily reducing pricesto increase short-run sales

Adjusting prices to account forgeographic location of customers

Adjusting prices forinternational markets

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Geographical Pricing

• FOB-origin pricing: goods are placed “free on board” a carrier; the customer pays the freight from the factory to the destination

• Uniform-delivered price: the company charges the same price including freight to all customers, regardless of their location

• Zone pricing: the company sets up two or more zones, all customers within a zone pay the same price, the more distant the zone, the higher the price

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Responding to Price Changes

• Note to user: this figure is from the U.S. edition of this text

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Public Policy and Pricing

• The Competition Act: Sections 34, 36, and 38

– Price fixing: cannot collude to restrict pricing competition

– Price discrimination: customers must be given proportionally equal discounts when used

– Deceptive pricing: cannot mislead customers as to value received

Figure 12.9

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In Conclusion…

• The learning objectives for this chapter were:– Identify and define the internal factors affecting a firm’s pricing

decisions

– Identify and define the external factors affecting pricing decisions, including the impact of consumer perceptions of price and value

– Contrast the two general approaches to setting prices

– 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