Pricing Considerations Pricing Considerations and Approachesand Approaches

Topic 7Topic 7

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Objectives

Understand the internal factors Understand the internal factors affecting a firm’s pricing decisions.affecting a firm’s pricing decisions.Understand the external factors Understand the external factors affecting pricing decisions, affecting pricing decisions, including the impact of consumer including the impact of consumer perceptions of price and value.perceptions of price and value.Be able to contrast the three Be able to contrast the three general approaches to setting general approaches to setting prices.prices.

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What is Price?

Price Has Many NamesPrice Has Many Names

RentRentFeeFeeRateRateCommissionCommissionAssessmentAssessment

TuitionTuitionFareFareTollTollPremiumPremiumRetainerRetainer

BribeBribeSalarySalaryWageWageInterestInterestTaxTax

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Definition

PricePrice The amount of money charged for The amount of money charged for

a product or service, or the sum a product or service, or the sum of the values that consumers of the values that consumers exchange for the benefits exchange for the benefits of having or using the of having or using the product or service.product or service.

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Price and the Marketing Mix:Price and the Marketing Mix: Only element to produce revenuesOnly element to produce revenues Most flexible elementMost flexible element Can be changed quicklyCan be changed quickly

Price Competition Price Competition

Common Pricing Common Pricing MistakesMistakes

What is Price?

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Figure 11-1:

Factors Affecting Price Decisions

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Factors to Consider When Setting Price

Market positioning Market positioning influences strategyinfluences strategyOther pricing objectives:Other pricing objectives: SurvivalSurvival Current profit Current profit

maximizationmaximization Market share leadershipMarket share leadership Product quality Product quality

leadershipleadership

Not-for-profit objectives:Not-for-profit objectives: Partial or full cost Partial or full cost

recoveryrecovery Social pricingSocial pricing

Marketing Marketing objectivesobjectivesMarketing mix Marketing mix strategiesstrategiesCostsCostsOrganizational Organizational considerationsconsiderations

Internal FactorsInternal Factors

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Factors to Consider When Setting Price

Pricing must be Pricing must be carefully coordinated carefully coordinated with the other with the other marketing mix marketing mix elementselementsTarget costing is often Target costing is often used to support used to support product positioning product positioning strategies based on strategies based on pricepriceNonprice positioning Nonprice positioning can also be usedcan also be used

Marketing Marketing objectivesobjectivesMarketing mix Marketing mix strategiesstrategiesCostsCostsOrganizational Organizational considerationsconsiderations

Internal FactorsInternal Factors

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Factors to Consider When Setting Price

Types of costs:Types of costs: VariableVariable FixedFixed Total costsTotal costs

How costs vary at How costs vary at different production different production levels will influence levels will influence price-settingprice-setting

Experience (learning) Experience (learning) curve effects on pricecurve effects on price

Marketing Marketing objectivesobjectivesMarketing mix Marketing mix strategiesstrategiesCostsCostsOrganizational Organizational considerationsconsiderations

Internal FactorsInternal Factors

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Figure 11-2:

Cost Per Unit at Different Production Levels

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Figure 11-3:

Cost Per Unit As a Function of Accumulated Production

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Factors to Consider When Setting Price

Who sets the price?Who sets the price? Small companies: CEO Small companies: CEO

or top managementor top management Large companies: Large companies:

Divisional or product Divisional or product line managersline managers

Price negotiation is Price negotiation is common in industrial common in industrial settingssettings

Some industries have Some industries have pricing departmentspricing departments

Marketing Marketing objectivesobjectivesMarketing mix Marketing mix strategiesstrategiesCostsCostsOrganizational Organizational considerationsconsiderations

Internal FactorsInternal Factors

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Factors to Consider When Setting Price

Types of marketsTypes of markets Pure competitionPure competition Monopolistic competitionMonopolistic competition Oligopolistic competitionOligopolistic competition Pure monopolyPure monopoly

Consumer perceptions Consumer perceptions of price and valueof price and value

Price-demand Price-demand relationshiprelationship Demand curveDemand curve Price elasticity of demandPrice elasticity of demand

Nature of market Nature of market and demandand demandCompetitors’ Competitors’ costs, prices, costs, prices, and offersand offersOther Other environmental environmental elementselements

External FactorsExternal Factors

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Figure 11-4:

Demand Curves

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Factors to Consider When Setting Price

Consider competitors’ costs, Consider competitors’ costs, prices, and possible prices, and possible reactions when developing a reactions when developing a pricing strategy pricing strategy Pricing strategy influences Pricing strategy influences the nature of competitionthe nature of competition Low-price low-margin Low-price low-margin

strategies inhibit strategies inhibit competitioncompetition

High-price high-margin High-price high-margin strategies attract strategies attract competitioncompetition

Benchmarking costs against Benchmarking costs against the competition is the competition is recommendedrecommended

Nature of market Nature of market and demandand demandCompetitors’ Competitors’ costs, prices, costs, prices, and offersand offersOther Other environmental environmental elementselements

External FactorsExternal Factors

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Factors to Consider When Setting Price

Economic conditionsEconomic conditions Affect production costs Affect production costs Affect buyer perceptions Affect buyer perceptions

of price and valueof price and value

Reseller reactions to Reseller reactions to prices must be prices must be consideredconsideredGovernment may limit or Government may limit or restrict pricing optionsrestrict pricing optionsSocial considerations Social considerations may be taken into may be taken into accountaccount

Nature of market Nature of market and demandand demandCompetitors’ Competitors’ costs, prices, costs, prices, and offersand offersOther Other environmental environmental elementselements

External FactorsExternal Factors

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Figure 11-5:

Major Considerations in Setting Price

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Cost-Based Pricing: Cost-Based Pricing: Cost-Plus PricingCost-Plus Pricing Adding a standard markup to costAdding a standard markup to cost Ignores demand and competitionIgnores demand and competition Popular pricing technique because:Popular pricing technique because:

It simplifies the pricing processIt simplifies the pricing process Price competition may be minimizedPrice competition may be minimized It is perceived as fairer to both buyers It is perceived as fairer to both buyers

and sellers and sellers

General Pricing Approaches

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Cost-Based Pricing ExampleCost-Based Pricing Example

Variable costs: $20 Fixed costs: $ 500,000Variable costs: $20 Fixed costs: $ 500,000

Expected sales: 100,000 units Desired Sales Markup: 20%Expected sales: 100,000 units Desired Sales Markup: 20%

Variable Cost + Fixed Costs/Unit Sales = Unit CostVariable Cost + Fixed Costs/Unit Sales = Unit Cost

$20 + $500,000/100,000 = $25 per unit$20 + $500,000/100,000 = $25 per unit

Unit Cost/(1 – Desired Return on Sales) = Markup PriceUnit Cost/(1 – Desired Return on Sales) = Markup Price

$25 / (1 - .20) = $31.25$25 / (1 - .20) = $31.25

General Pricing Approaches

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Cost-Based Pricing: Cost-Based Pricing: Break-Even Analysis Break-Even Analysis and Target Profit Pricingand Target Profit Pricing Break-even charts show total cost and total Break-even charts show total cost and total

revenues at different levels of unit volume.revenues at different levels of unit volume. The intersection of the total revenue and total The intersection of the total revenue and total

cost curves is the break-even point.cost curves is the break-even point. Companies wishing to make a profit must Companies wishing to make a profit must

exceed the break-even unit volume.exceed the break-even unit volume.

General Pricing Approaches

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Figure 11-6:

Break-Even Chart for Determining Target Price

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Figure 11-7:

Cost-Based Versus Value-Based Pricing

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Value-Based Pricing:Value-Based Pricing: Uses buyers’ perceptions of value rather Uses buyers’ perceptions of value rather

than seller’s costs to set price.than seller’s costs to set price. Measuring perceived value can be difficult.Measuring perceived value can be difficult. Consumer attitudes toward price and quality Consumer attitudes toward price and quality

have shifted during the last decade.have shifted during the last decade. Introduction of less expensive versions of Introduction of less expensive versions of

established brands has become common.established brands has become common.

General Pricing Approaches

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Value-Based Pricing:Value-Based Pricing: Business-to-business firms Business-to-business firms

seek to retain pricing powerseek to retain pricing power Value-added strategies Value-added strategies

can help can help Value pricing at the retail levelValue pricing at the retail level

Everyday low pricing (EDLP) Everyday low pricing (EDLP) vs. high-low pricing vs. high-low pricing

General Pricing Approaches

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Competition-Based Pricing:Competition-Based Pricing: Also called going-rate pricingAlso called going-rate pricing May price at the same level, above, May price at the same level, above,

or below the competitionor below the competition Bidding for jobs is another variation Bidding for jobs is another variation

of competition-based pricingof competition-based pricing Sealed bid pricingSealed bid pricing

General Pricing Approaches