Copyright 2005 Pearson Education Inc Pricing Chapter 12

Copyright © 2005 Pearson Education Inc. Pricing • Chapter 12 • Power. Point slides • Express version • Instructor name • Course name • School name • Date Principles of of Marketing, Sixth Canadian Edition

Learning Objectives 2 Copyright © 2005 Pearson Education Inc. • 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 Principles of Marketing, Sixth Canadian Edition

What is a Price? 3 Copyright © 2005 Pearson Education Inc. • 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 Principles of Marketing, Sixth Canadian Edition

Factors Affecting Pricing Decisions Copyright © 2005 Pearson Education Inc. • Marketing objectives: – – Survival Current profit maximization Market share leadership Product quality leadership 4 • Marketing mix strategy: – Price should be consistent with other mix elements – Target costing – Non-price positions Figure 12. 1 Principles of Marketing, Sixth Canadian Edition

5 Copyright © 2005 Pearson Education Inc. 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 Principles of Marketing, Sixth Canadian Edition

Cost Per Unit/Accumulated Production 6 • Experience (learning) curve: the drop in the average per-unit Copyright © 2005 Pearson Education Inc. production cost that comes with accumulated production experience Figure 12. 3 Principles of Marketing, Sixth Canadian Edition

7 New-Product Pricing Copyright © 2005 Pearson Education Inc. • 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 Skimming price drops in steps low price for a new product to attract a large number of buyers and achieve a large market share Figure 7. 7 Principles of Marketing, Sixth Canadian Edition

External Factors Affecting Pricing Decisions Copyright © 2005 Pearson Education Inc. • Types of markets: – – 8 • Competition: Pure competition Monopolistic competition Oligopolistic competition Pure monopoly – Consumers will compare – High margins attract competition – Benchmarking costs Figure 12. 1 Principles of Marketing, Sixth Canadian Edition

9 The Price-Demand Relationship Copyright © 2005 Pearson Education Inc. • 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 Principles of Marketing, Sixth Canadian Edition

10 General Pricing Approaches Copyright © 2005 Pearson Education Inc. • 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 • Note: multiplying $16 by 1. 2 equals a selling price of $19. 20, and a profit margin of only 17% Figure 12. 5 Principles of Marketing, Sixth Canadian Edition

11 Break-even Chart Copyright © 2005 Pearson Education Inc. • 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 Principles of Marketing, Sixth Canadian Edition

12 Cost Versus Value Pricing • Value-based pricing: setting price based on buyers’ perceptions Copyright © 2005 Pearson Education Inc. 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 Principles of Marketing, Sixth Canadian Edition

13 Copyright © 2005 Pearson Education Inc. Price Adjustment Strategies Discount and Allowance pricing Reducing prices to reward customer responses such as paying early Segmented pricing Adjusting prices to allow for differences in customers, products, or locations Psychological pricing Adjusting prices for psychological effect Promotional pricing Temporarily reducing prices to increase short-run sales Geographical pricing Adjusting prices to account for geographic location of customers International pricing Adjusting prices for international markets Table 12. 2 Principles of Marketing, Sixth Canadian Edition

Geographical Pricing 14 Copyright © 2005 Pearson Education Inc. • 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 Principles of Marketing, Sixth Canadian Edition

Copyright © 2005 Pearson Education Inc. Responding to Price Changes 15 • Note to user: this figure is from the U. S. edition of this text Principles of Marketing, Sixth Canadian Edition

16 Public Policy and Pricing Copyright © 2005 Pearson Education Inc. • 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 Principles of Marketing, Sixth Canadian Edition

In Conclusion… 17 Copyright © 2005 Pearson Education Inc. • 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 Principles of Marketing, Sixth Canadian Edition