Yes But What Does It Cost Price is

Yes, But What Does It Cost? • Price is the value that customers give up or exchange to obtain a desired product • Payment may be in the form of money, goods, services, favors, votes, or anything else that has value to the other party 1

The Importance of Pricing Decisions • Price is the only P which represents revenue rather than an expense • Pricing and the Marketing Mix – Price and Place – Price and Product – Price and Promotion 2

Types of Pricing Objectives • • • Sales or market share objectives Profit objectives Competitive effect objectives Customer satisfaction objectives Image enhancement objectives 3

Pricing Objectives Purex’s pricing objectives focus on the competition 4

Value People may be willing to pay a premium because they believe it makes a statement about their own worth 5

Demand Curves 6

Types of Costs_1 • Variable costs - per-unit costs of production that will fluctuate depending on how many units or individual products a firm produces • Fixed costs - do not vary with the number of units produced. Costs remain the same regardless of amount produced 7

Types of Costs_2 • Average fixed cost is the fixed cost per unit produced (total fixed costs/number of units produced) • Total costs = variable costs plus fixed costs 8

Break-Even Analysis • Technique used to examine the relationship between cost and price and to determine what sales volume must be reached at a given price before the company will completely cover its total costs and past which it will begin making a profit • All costs are covered but there isn’t a penny left over 9

Break-Even Analysis 10

Evaluating the Pricing Environment • The Economy – Trimming the Fat: Pricing in a Recession – Increasing Prices: Responding to Inflation • The Competition • Consumer Trends • International Environmental Influences 11

Daffy’s When the economy is down, consumers are more interested in lower prices 12

Consumers like getting luxury goods 13

Cost-Plus Pricing • Most common cost-based approach • Marketer figures all costs for the product and then adds desired profit per unit • Straight markup pricing is the most frequently used type of cost-plus pricing – price is calculated by adding a predetermined percentage to the cost 14

Pricing Strategies Based on Cost Advantages • Simple to calculate • Relatively risk free Disadvantages • Fails to consider – target market – demand – competition – product life cycle – product’s image • Difficult to accurately estimate 15

Business purchasers try to get the supplies they need at the lowest price 16

Steps in Cost-Plus Pricing • Estimate unit cost • Calculate markup – Markup on cost – Markup on selling price - markup percentage is the seller’s gross margin • gross margin is the difference between the cost to the wholesaler or retailer and the price needed to coverhead and profit 17

Cost Plus Pricing Excerpt • • • Fixed costs = $2, 000 Number of jeans produced = 400, 000 Fixed costs per unit = $5 Variable costs per unit = $20 Markup on cost – Price = total cost + (total cost * markup percentage) – Price = $25 + ($25 *. 20) = $25 + $5 = $30 18

Markup on Cost vs. Markup on Selling Price • On Cost – Price paid = $30 – Markup = 40% – Price = total cost + (total cost * markup percentage) – Price = $30 + ($30 *. 40) = $42 • On Selling Price – Price paid = $30 – Markup = 40% – Price = cost/1. 00 markup percentage – Price = $30/ 1 -. 40 = $50 19

Pricing Strategies Based on Demand_1 • Demand-based pricing means that the selling price is based on an estimate of volume or quantity that a firm can sell in different markets at different prices – Target costing – Yield management pricing 20

Demand Pricing Dell regularly reviews sales performance and adjusts its prices 21

Communicating Competitive Pricing 22

Pricing Strategies • Value pricing (EDLP) - offers a fair value to consumers (e. g. , Kmart’s blue light specials) 23

New Product Pricing • Skimming price - firm charges a high, premium price for its new product with the intention of reducing it in future response to market pressures • Penetration pricing - new product is introduced at a very low price • Trial pricing - product carries a low price for a limited time period 24

Captive Pricing Gillette practices captive pricing. Once customers have bought the razor, they are a “captive” of the company’s blade prices. 25

Discounting for Channel Members • • Trade or functional discounts Quantity discounts Cash discounts Seasonal discounts 26

Trade Discounts • Pricing structure built around list price – List price, also called suggested retail price, is the price that the manufacturer sets as the appropriate price for the end consumer – Manufacturers offer discounts because channel members perform selling, credit, storage, and transportation services 27

Pricing with Electronic Commerce • Dynamic pricing strategies – price can be adjusted to meet changes in the marketplace – online price changes can occur quickly, easily, and at virtually no cost • Auctions – sites offer chance to bid on items – sites offer reverse-price auctions 28

Psychological Issues in Pricing • Internal Reference Prices - consumers have a set price or price range in their mind – If the actual price is higher, consumers will feel the product is overpriced – If it is too low below the internal reference price, consumers may assume its quality is inferior • Competition as Reference Price - If the price is close, the assimilation effect will encourage the customer to think the products are similar enough and choose the lower priced product 29

Price-Quality Inferences • If consumers are unable to judge the quality of a product through examination or prior experience, they usually will assume that the higher-priced product is the higher-quality product 30